In early 2012, Indian National Rupee shortage in Bhutan had portents of being aggravated. Royal Monetary Authority resorted by stopping housing and vehicle loans, lowering CRR, prioritizing imports which affected lending, profitability and assets of commercial banks. The paper intends to study impact of government policies on three leading banks of Bhutan including Bank of Bhutan, Bhutan National Bank, and Druk Punjab National Bank of Rupee crunch and measures adopted by banks to overcome it. Primary data were collected through 100 questionnaires with 50 from BOB, 25 from BNB and 25 from DPNB, and supplemented by internet, blogs, journals, newspapers and annual reports of RMA, Phuntsholing being study area. Data collected were analyzed with MS-Excel and SPSS. The findings and analysis have been concluded with suitable recommendations to avoid recurrence of INR crunch.