The Case Of Bhutan’s NPLs I

For sure nothing is even remotely comparable to our more than half a century old howling stray dogs problem - but our problem related to the None Performing Loans or, more accurately, None Performing Loanees, is now verging on the ridiculous as well. Quite evidently the malice is spiraling out of control, and it is not difficult to guess where the problem will ultimately lead us. The festering gangrene was allowed to permeate unchecked for far too long. Quite late in the day, the doctors are now prescribing mass scale amputation.

People have been acting God with other's money - in the process imperiling every one else but the charlatans.

The case of the NPLs is an example of failure on the part of every one involved - the government, regulators, lenders and borrowers. Not one of them can claim that their hands are unstained with the blood of irresponsibility.

The issue will be discussed in greater detail later in my subsequent posts on the issue - for now let me treat you to some history on the emergence of the earliest cases of what is now infamously known as NPL.

Bhutan’s oldest bank - the venerable Bank of Bhutan, reported the earliest cases of NPL in the country. The rumblings of the problem was sounded to the government, as early as the mid 1980s.

The look and feel of the flamboyant Bhutanese loanee of a bygone era. It was known that every swashbuckling Bhutanese who donned a fedora cap, a pair of dark sunglasses and a VIP briefcase in hand, would be immediately identified as a borrower. The first step towards spending the borrowed money was to adorn oneself with these fine set of paraphernalia. 

The BoB submitted to the then Minister of Trade, Industries and Forests (MTI) - HRH Gyalsey Namgyel Wangchuk - that a sizeable number of the bank’s borrowers were defaulting in their loan repayments. The bank pleaded for urgent intervention by the MTI, to help it recover millions in loan money that remained unrecovered.

After a long and patient hearing, His Royal Highness told the bank MD thus:

“I believe that I have a fairly accurate understanding of your problem and I truly sympathize with you and your bank. I am happy that you have brought this to the notice of the government - it was timely and it certainly is a matter of grave concern.

However, going by the numbers you have presented to me, it is clear that what is owing to the bank is, in large part, compounded interest accrued on the borrowings - the problem of unpaid principal amounts do not seem to be so precarious.

I am happy to see that the Bank of Bhutan under your leadership has recorded handsome profits for the country. But my understanding is that since the largest portion of the bank’s business is made up of lending to the borrowing public, the most substantial chunk of your profit is attributed to earnings from interest on money borrowed by the people - whether collected or not.

Thus, in reality, it seems like the bank has not really lost any money - but merely some interest money that remains unrealized.

You would appreciate that an element of risk is inherent in every business transection. From my point of view, your loss of profit is nothing out of the ordinary - you lose some, you win some. It should be acceptable to your depositors and to your Board of Directors that the risk factor is an integral element of the business of banking.

I have heard that banks do provide for cases of some loans going bad – those that you call “bad loans”.

Is it possible that the Bank of Bhutan could consider writing off these outstandings, as “bad loans”? It would spare us all a whole load of trouble. After all the largest chunk of profit reflected in your Annual Balance Sheet is made up of interest from lending to the borrowing public.”

It appears that the BoB did not consider writing off the bad loans. In fact incidences of defaulting by borrowers seem to have worsened even further, so much so that consequently, some years later, a Loan Committee had to be formed by the government, to sort out the problem.

Sometime during late-1980s or mid-1990s, under the Chairmanship of Lyonpo Om Pradhan, the then Minister of MTI, representatives from BCCI, financial institutions, the RMA and number of loan defaulters met in the meeting hall of the Trade Minister, in an effort to try and resolve the problem of the burgeoning NPLs.

While waiting for everyone to gather for the meeting, the incumbent MD of the BoB and a representative of the BCCI had the following warm-up conversation:

BCCI Representative: “Mr. MD - please consider favorably - the defaulting borrowers do intend to repay the BoB in full, but there are difficulties.”

BoB MD: “See, you have to understand that if the borrowers do not pay up their dues, how will the bank survive? As much as the borrowers benefit from capital that we extend to them, we too survive on the earnings from our lendings. If borrowers continue to default, the bank will be in serious trouble. Anyway, let us discuss amicably and arrive at a solution that is acceptable to all concerned. It is import that:

“Saamp bhi nahi marna chahiyey – danda bi nahi tootna chahiyey”.

Translation: “We must ensure that the snake remains alive while the stick is unbroken”.

At the end of more than two hours of discussions, the participants emerged out of the meeting hall but it became obvious that the meeting did not resolve anything much. The BoB MD was overheard grumbling:

“Aarey, yeytoh garbar huwa – Saamp bi margaya, danda bhi tootgaya”.

Translation: This is not good - the snake is dead while the stick lies broken.