The Case Of Bhutan’s NPLs II

Today when the government or the RMA talks of NPLs, they talk of only the lending financial institutions and the borrowers - two principal architects of the calamity that has befallen the country. The wiz kids at the helm of things will have you believe that tolling the bells of doom on the floor of the National Assembly is fulfillment of their responsibilities. Many reasons have been offered why we are in the doldrums - we are yet to hear from them when and how they intend to fix accountability on those who must assume responsibility for allowing the country to arrive at such a dangerous situation.

And, what is even more pathetic is that no assurance has yet been given as to how they hope to protect the innocent victims - the clueless depositors - whose life’s savings will be imperiled when the overexposed lenders begin to fall like ninepins.

Down playing the problem with sugar-coated glib tongues from the pulpit of the National Assembly Hall is not going to help - if we want to solve the problem we need to catch the bull by the horn. But who will do it? Not the sycophants, nor the brown-nosers. They are too busy furthering their own causes.

For many decades now, people have known that the lending agencies’ loan eligibility appraisal process was inadequate - in fact downright casual and irresponsible. I have heard of rumors that some borrowers have been able to avail loans that included a cost of a car for his mistress - what famously came to be known as the “kaanchi car”.

In some cases, I am told that the borrowed amount is far in access of the total cost of construction of the house for which the loan was obtained. It does not take an Einstein to figure out what may be at play.

There needs to be a complete shake-up. Look at the way the banks set the value of a collateral. It is atrocious - it is totally designed to over-secure themselves, only to find that they cannot - that is why they have NPLs galore.

One of the most ridiculous reasons a house owner in Thimphu will give you for high house rent that he is asking for is:

“You know, I need to recover enough to be able to pay back the monthly installment on my bank loan”.

Really? He would dare to pass on a portion of the cost of his “kaanchi car” to his tenants? What a world we live in!

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.

Bhutan’s Rotting Treasure-trove II

If some one were to ask me if Bhutan is in a state of scraping the barrel, I would say - we are not. If this question were to be repeated end next year, I wouldn’t know how to answer it. But there is no doubt that we are into tough times. And tough times call for tough decisions, and moving away from conventional logic that obviously hasn’t worked. It calls for diversification of thoughts – even more important, diversification of viewpoints.

The following Kuensel report of 10th October 2020 is indication that some diversification of thoughts had indeed come to pass. The fact that it has not been followed through in the past two years since, points to the fact that true to character, we remain Bhutanese to the core.

An encouraging Kuensel report dated October 2020 - that which remains buried and forgotten

We exported wood products worth Nu 0.35 billion in 2015 but imported over six times more wood worth Nu 2.60 billion. This for a country sitting atop a huge timber reserve is an indefensible act, almost bordering on criminal when viewed against the background of the many economic woes we face as a country and people.

An expanding and overstocked forest is a serious threat to biodiversity conservation and wildlife habitats, a cause for mega-fires, and is known to dramatically change hydrology (e.g. decrease groundwater recharge and stream flow). Further, economic impact of revenue from forestry is often felt most at the local level and is a great employment generator, thus inherently inclusive and green economy.

The hydropower revenue was Nu 20 billion (USD296 million) in 2016 which was 13.48 percent of GDP. Technically speaking, forestry has tremendous potential to be the bigger growth driver than hydropower.

Dr. Phuntsho Namgyel

Forest Analyst

April 16, 2018

Our own homegrown forest analyst Dr. Phuntsho Namgyel authored two brilliant papers in the Kuensel, related to the potential of our forests. Both the numbers and science behind his thoughts are rock solid. And yet, his brilliance remains largely ignored - although from the above Kuensel report, it appears to have triggered a “way forward” report by the Department of Forests. But indications are that the report remains shelved and gathering dust in some obscure corner of the Cabinet Secretariat.

Please read Dr. Phuntsho Namgyel’s thoughts at the following:

https://kuenselonline.com/forestry-can-be-the-bigger-growth-driver-than-hydropower/

https://kuenselonline.com/saving-bhutans-forest/

Punatsangchu Hydropower Project I is surely headed for total closure.

It is unlikely that Kholongchu Hydropower Project will ever happen, given so many factors that go against it.

Hydropower as a source to generate electricity is now old hat around the world - more efficient energy sources have edged out hydropower - as being more costly and environmentally destructive.

We should now look to our abundant forests to rescue us from economic doom. They have the potential to save us, while at the same time, help improve the quality of our forest stand.

Break The Caucus!

Our Prime Minister was bold and said it with conviction - that if you cannot afford the increased price of petroleum to power your vehicles, take to walking. Ofcourse it was a politically insensitive thing to say - but if the perpetual grumblers ignore the facts of life, hard talk is what is called for. Unfortunately his Finance Minister was not as hard hitting - on the contrary he was rather limpid - in what he had to say to the Kuensel, with regard to the country’s depleting foreign currency reserves. The best he could do is hint at discouraging and restricting import of non-essential goods.

We keep saying that we may be missing the forest for the tree – I suspect that it is lot worst – I think the whole forest is on fire, let alone the tree.

Thus the Finance Minister should call for complete ban of imports of non-essential items such as quota cars destined for the black market, cigarettes, cosmetics, alcohol, Tulip blankets, prawns and fish, chips and wafers, canned food, shoes and sandals, clothing, crockery and cutlery etc. For God’s sakes, even toilet papers and facial tissues are imported from Bangkok and China. Talk of irresponsibility!!!

I have a feeling that there is a nexus between the import of these non-essential items and the huge dip in the inward remittances, and fall in import duty and sales tax collection. Dig a little deeper and I suspect that we will unearth a whole lot of dirt from under the carpet.

Come on DNT – be your usual bold self! BREAK THE CAUCUS!

If you have the guts to try and attempt to delink the inter-generational/cross generational Past from the Present, and Present from the Future, I know you can do this!

Time For Tightening The Belt

The Honorable Prime Minister Dr. Lotay Tshering is right to worry - I do too. Bhutan has been hit with a double whammy - the anticipated fall in dollar earnings from tourism as a result of tripling the SDF, and more than 50% dip in the inward remittances from the none-resident Bhutanese working and earning abroad. But just talking about it is not enough - what is called for is single-minded, bold and resolute action. If we hesitate to act now, we are doomed.

I was being cute when I wrote in my post of July 24, 2022 that I hope the RMA would throw the rule book out the window and jack up the $$ to Ngultrum currency conversion rate to Nu.100.00 per $1.00 – and hold it there for the next 2-3 years! We all know that it does not work like that. Even more important, I know for sure that this is not the route to take.

But being cute is in poor taste – particularly when the proverbial Dionysius’ sword is hanging over our heads. In all provability the single strand of horsehair that holds in place the sword that dangles perilously over Damocles’ head is at risk of snapping any moment - goring him to death.

“The world may soon be teetering on the edge of a global recession, only two years after the last one,” Pierre-Olivier Gourinchas, the I.M.F.’s chief economist, wrote. Put simply, the outlook for the global economy is “increasingly gloomy,” he added.

Such ominous predictions can only mean greater pain in the coming months and years. It is now time to tighten our belts and brace ourselves for another round of even greater hardships.

The tourism industry collectively is perhaps the biggest tax payer: at the first stage the government collects SDF from every tour sold, it collects BIT from tour operators at the end of the year. Across the tourism industry chain, it collects BIT from hotel owners, vehicle owners, handicraft outlet operators, restaurateurs etc. But with the tripling of the SDF, that well is all set to run dry.

Businesses who are supposed to bring in $$ are supposedly parking them outside.

The inward remittances from none-resident Bhutanese have apparently taken the Hawala route for greater bang for the buck. All these means our foreign exchange reserve will not get replenished – it will run dry in the next 15 months as publicly confirmed by our head of government.

So what do we do?

Two simple steps: We halt the outflow of foreign exchange. We torpedo the Hawala transections. 

Do away with the issue of vehicle quota – Kuensel editorial of this morning says Thimphu has one vehicle for every two residents. Import of vehicles is a big drain on the foreign exchange. What benefit we derive from generation of hydroelectricity is wasted on import of fossil fuel, to power the vehicles. For decades I have been going hoarse shouting that this is not justified.

Disallow imports of goodies such as chocolates, cigarettes, alcohol, noodles, biscuits, blankets and the like – we can do without them.

Limiting or restricting import of these none-essential items will effectively control the transections between Hawaladars – thereby redirecting the flow of remittances through the traditional banking system, thus improving our foreign exchange reserve.

It is an occasion for every Bhutanese to recognize our vulnerabilities – time is now to show that we care. There can be no gain without hardship.

Finally, Some Good News: II

Second in this series, lets talk of the Kuensel news article of 18th April, 2015, headlined “To ‘meat’ a huge demand”. And, this article I want to start by offering my congratulations to the PDP government to have had the guts to do this!

The article concerns the Royal Government of Bhutan’s plans to establishment a meat processing facility along with setting up of a number of animal farms around the country. This has been long overdue!

The Kuensel reports that the government has allocated Nu.675 million to establish the facilities spread over a number of locations - Serbithang and Yusipang in Thimphu, Relangthang in Sarpang and Samrang in Samdrupjongkhar.

For a country that has the highest record of per capita meat consumption in the whole of Asia, why wasn't this thought of earlier? Kuensel reports that last year, Bhutan imported 10,336 MT of meat products worth Nu.1.37 billion from India and Thailand! For a population size of 700,000 people, that is a bellyful of meat! And we wonder why we are suffering Rupee shortage?

This makes fantastic economic sense! I hope the PDP government will stay the course and not be waylaid by some section of society with pseudo cause based on some redundant belief that has caused this country to remain, what one Japanese scholar calls - in a state of social fermentation! This decision of the government indicates that they are willing to be courageous about what they know is good for the country. Let us move away from the misconception that we are any different from others - trust me, we are as unique as anyone else!

Next, I hope the government will do something to solve the stray dogs problem - once and for all. Enough of this pussy footing around the issue and getting nowhere while spending millions, year after year. By now we ought to realize that our attempts so far have been ineffective in eradicating this dangerous problem. One day something serious will happen and, true to character, we will be drawn to offering a thousand butter lamps, while the problem will go on to persist, unabated. Let us for once ensure that the tourists visiting Bhutan remove that one critical item in their packing list - earplugs - to deafen the dog barks that go on all night long.

Talking of which, it seems like the dog problem has been going on since the past 50 years! Look at what a Chilip visitor of yore, wrote:

“ …….. Then there were all those dogs running around, and very often there was a big dog fight. All the people bring their food with them and since there is never any sort of an intermission during the day they just eat when they want to. Now, when there are a lot of loose dogs running around, some funny things happen at times. A dog will run up to some one’s dinner and grab a mouthful of food and away the dog scrams with some rocks being thrown at him, and a lot of yelling, etc., etc. This was certainly some get together. Just think, for five solid days from 8:00 AM until 5:00 PM there is one event following another with no intermission at all.  Not one moment is lost, and never any repeats. ……… " 

This is a graphic rendition of a scene from Paro Tsechu of 1965. The account was originally published in the DXers Magazine published by Gus Browning Enterprises of Cordova, SC. The deviously famous American ham radio operator named Gus Browning was a hero of sorts among the world ham radio community. His radio calls from a number of exotic destinations enthralled the ham radio enthusiasts. According to his own admissions, and those of his wife Peggy who supposedly accompanied him to Bhutan in 1965, he is supposed to have operated from Bhutan twice - once in 1963 and once in 1965. However, going through his QSL’s, there are some serious inconsistencies. Some of his supposed operations from Bhutan, Sikkim and Tibet are rather unbelievable and, at times, simply impossible. I am currently in the process of gathering information surrounding his logged but unverified operations from Bhutan. Unfortunately all his contemporaries are mostly “Silent Key” - meaning dead! He himself went SK in 1990 - aged 82 years. But for sure I will have something for you - before I myself go Silent Key :)-

DEBT - Fuel of Growth

Seems like talking DEBT has suddenly come into vogue this season. Now it is Fareed Zakaria of the CNN who has this morning announced that China is in big, big trouble - debt trouble. He says that China’s total public and private debt is upwards of 200% of its total GDP. China in such huge debt???? Unbelievable!

Seems like being in debt has become fashionable. Even if that is not true, what is becoming apparent is that all modern economic activities are fueled by DEBT - both external as well as internal.

To be debt free is to put life on hold.

Economic Crisis or Spending Fatigue?

The permeation of the Bhutanese lingua franca, sometime towards the middle of 2012, by a two-letters term - economic crisis - has me baffled completely. Talk to any Bhutanese - educated, uneducated and anyone in between and he/she will tell you that the country is going through a severe “economic crisis”.

Ask them why we have a severe Indian Rupee shortage and they will tell you it is because of our economic crisis. Ask them why the banks have stopped giving out loans and they will grimly tell you that the country’s economy is in a bad way. Ask them why the DPT government will not win the upcoming elections with the same kind of resounding victory as they did in 2008, they will give the reason that it will be because the economy did poorly under their term. Ask any Bhutanese why the government has suspended the import of vehicles and they will tell you - it is because we are going through an economic crisis.

Every Bhutanese is quite merrily blaming the “economic crisis” for all our ongoing woes. However, ask them to explain "how" our “economic crisis” is at the core of our problems and they are perplexed - they do a vigorous head scratching! They have simply no idea why they have been parroting the belief that our troubles are due to our “economic crisis”.

Do we really have an economic crisis? Nope, we MOST DEFINITELY DO NOT! On the contrary, published figures show that we are among the top performers in the region, in terms of GDP growth. Our growth rate was: 6.7% in 2009; 10.6% in 2010; 5.9% in 2011 and it is estimated that we will achieve a growth rate in access of 7% for the year 2012.

So then who is putting out this ludicrous idea that we have an economic crisis? The answer: by people who are clueless about what constitutes economic crisis and by those who wish to paint a grim picture of the country and the performance of the government! They simply have no idea what the term means or, even if they do, they are deliberately spreading the misconception.

Two of our most important economic activities are related to those of tourism and hydro-power projects. Thank you very much but both of these sectors are hail and hearty - in fact, they have been growing by leaps and bounds. Our industrial output has not fallen; no factories have failed; there has been no labor unrest that hampered production. The government of India has not reneged on their committed financial support. So then, what is our problem?

In my understanding, we have been subjected to a disorder that can best be described as: SPENDING FATIGUE!!

People seem to be totally oblivious to the fact that the country has had to undertake colossal expenditures in the short span of the last four years - expenditures that were a severe drain on our reserves and yet, those that had to be made.

We had two very expensive (uncontrolled and lavish spending) elections to the Upper and the Lower Houses of the Parliament. We had a series of local government elections. We had a Centenary Celebrations. We had to Crown a King. We had a Royal Wedding. We had to host a SAARC Submit. If all that were not enough, we suffered unprecedented natural calamities, one after the other, all year round. All these were unavoidable expenses but they certainly caused a severe and destabilizing strain on our finances.

Please do not bell the wrong cat.

How Safe Are Our Savings With Our Banks?

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I had wanted to post the following article on Sunday the 24^th June, 2012. But I stopped posting it because I thought that it was inappropriate for me to unravel another issue of national concern, while the historic Wangdue Phodrang Dzong was ablaze.

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I routinely follow the Opposition Leader’s Blog (http://www.tsheringtobgay.com). Among the most recent posts are “Responsible Government?...” and “Trowa”. These two posts continue to generate some seriously trashy and indecent comments from the blog’s numerous followers but there are also some powerfully pertinent issues being raised, particularly by the likes of Sonam, ProOL, Jamyang, Guardian and others. The discussions that pertain to the past failures of Bhutan’s central bank, RMA to control the imprudent lending practices of the banks are particularly revealing.

In one of his comments, Jamyang writes; “As far as I am concerned, yes, the banks themselves decided into going for a complete ban for all new loan proposals from the day the RMA’s nonresident accounts closure notification came into effect”.

I was shocked by that comment. This is something totally contrary to what I had believed. It was my belief that:

a.     The ban was only on select sectors such as housing and vehicle; and

b.     The regulatory authority (RMA) ordered the suspension of the loans.

I had no idea that the total freeze on loans of all types is/was a decision of the banks themselves. If this is really true, then I am afraid that the problems may be even grimmer than I had thus far assumed.

We have to understand that the most fundamental and principal business plan of a bank is that it will accept deposits from people and institutions and lend out a large portion of it to people and businesses. They make their profits from the interest they earn from these loans they give out. Therefore, if a bank has to suspend lending, they cannot generate profits and if they cannot do that, they cannot pay interest on the deposits they have accepted from their depositors. They cannot accept fresh deposits because those deposits will be costly. Even worst, if a large number of their depositors decide to recall their deposits, they may run into serious liquidity problem.

There can only be one reason why the banks have stopped lending, of their own accord: they may have overstretched themselves to the point that they are dangerously outside the required reserve ratio set by the central bank. Or, they may have run out of cash!

Being overstretched is not so much a problem provided that all their loans are safe and secured. That majority of their loans are serviced in time and that there are no major defaults in loan repayments. But it can be a problem - if and when extraordinary events occur - such as if unusually large withdrawals take place at short notice. Then the balance is upset.

Such an extraordinary event did take place recently - as a result of the central bank’s order requiring the closure of all accounts held by nonresidents. Consequent upon that order, few hundred, possibly even thousand million in deposits belonging to nonresidents were withdrawn in a matter of days. That caused an enormous and dangerous dip in the banks’ available reserve funds, in the process, rendering all traditional calculations and assumptions meaningless. This meant that the banks now did not meet the central bank’s minimum required reserve ratio rule. Even more dangerous, it is possible that their overall lending now far outstripped their available reserve/deposits.

Have the banks endangered our hard-earned money as a result of their indiscipline and greed? Have they tied up our small savings in bad loans? Do they have enough reserves, as required by law, to pay us our money as and when we want to withdraw them? How safe is our money in their hands?

The sudden and complete freeze on lending by the banks is bad for the country’s economic and developmental activities. This is not only bad for ongoing activities but effectively halts new ones. The RMA cannot allow this. But the central bank has a problem - a problem of their own making.

What was the need for RMA to order the closure of the nonresidents’ accounts? It not only did not help curtail Rupee outflow, it aggravated it further. Additionally, it is the main culprit that triggered the flight of extraordinarily large amount of deposits that the banks needed to offset their lending.

To be fair, I believe that the central bank ordered the closure of the nonresidents accounts for a reason. And perhaps that reason is justified, given our compulsions. But now that the end has been achieved, the onus is on the RMA to restore normalcy.

There is no denying that the banks have been very, very irresponsible. They need to be disciplined. However, it is also true that the precariousness of their current state is, to a limited extent, caused by the RMA’s order requiring the closure of the nonresidents accounts. For that, the RMA has to assume part responsibility for the mess that the banks are in.

There is no point talking about what could have been. The situation needs to be corrected before it aggravates further. I think it is fair to assume that the banks’ problems go far beyond the need to remain within the stipulated minimum required reserve ratio rule.

I think they are completely broke!

I think the only answer is to restock the banks with cash immediately. RMA has to do it or, they have to go to the source at whose behest they ordered the closure of the nonresidents’ accounts and get them to bail the banks out.

Before I close, I have to ask two more questions:

Is it legal for nonresidents to open accounts in our banks? If not, how did it happen that the banks accepted their deposits?

What was the RMA’s rationale behind committing and delivering on the promise that all amounts withdrawn from the closed accounts of the nonresidents will be paid in Indian Rupees? These accounts were local currency accounts and, therefore, it is not obligatory on the part of the banks to pay off the nonresident depositors in foreign currency.

Something fishy?