Credit crunch increased number of bank loan defaulters

Non-Performing Loans with commercial banks are increasing by the month

Commercial banks in the country still suffer the backlash of the Indian Rupee (INR) shortfall which left scars more visible than pre-empted.

The percentage of Non-Performing Loans (NPL) and Non-Performing Assets (NPA) with commercial banks in the country have rapidly increased in the last few months since the credit crunch surfaced in April 2012, when the banks stopped giving loans.

While there is no question of lending, some have difficulty even to make payments to their clients through the current accounts.

Some time ago, a prominent businessman, who also owns a night club in the capital, was denied cash withdrawal from his current account by one of the commercial banks in Thimphu simply because the bank had no funds.

He said he issued a cheque of some Nu 4.5mn to a friend who was asked by bank officials to make a formal request for the withdrawal and the amount was released a day later.

Since loans are not available, the worst hit is the construction industry which needs continuous flow of funds to carry out various projects on time. Apart from private home builders, this also includes the government’s huge ongoing developmental construction works like highway networks, bridges, schools, medical units, farm roads, electricity supply, Gewog centers etc.

A few contractors blamed their fellow contractors who they feel “took in more than they can chew”.

Wangda of Choki Construction said “some contractors in order to win bids for a government project tend to bid much lower than the reasonable limit and later face financial problems while executing the works”.

Construction business, he said has dropped but the worse hit would be private home builders.

Two weeks ago, a civil servant in the process of building his house in the capital told The Bhutanese that works are at a standstill since three months ago, as there is no way to finance his building. “Moreover, we have a labor problem,” he added.

The civil servant said he has already defaulted on the loans he had taken earlier as the incomplete building is not even ready to yield rental income for him.

This scenario is repeated across several hundred incomplete buildings in Thimphu and urban areas across the country. Contractors say it is likely that small house owners with incomplete buildings will default first, to trigger a real-estate crisis.

However, officials at one of the banks with maximum exposure in the housing sector, BNBL, said the bank has always continued to finance its clients whose loans were approved. A senior credit official at the bank said some builders start construction projects with their own money and resort to borrowing from banks halfway through the construction when they run out of money. “We cannot lend to those people,” he said.

Meanwhile, T-Bank’s credit manager Leki Tshering said the bank hardly finances the housing sector and doesn’t have much of a problem. He however said, NPLs with the bank could be caused by pending dues from government agencies.

He said the bank will be able to provide loans again if the level of deposits increases in future.

A credit analyst with BNBL said one reason behind the increasing trend in NPL is the mindset of Bhutanese clients who are irresponsible and not keen to make timely loan payments.

He said most of the clients took loans from the bank to start a business but proceeds from the business is used to finance another business instead of taking care of the loans. “That is how the funds are diverted and when the business runs into loss, one cannot make any payments”, he added.

He said the volume of money in circulation in the market is very low, which a serious concern. “All financial institutions face the same problem and unless we start giving out loans, it’s going to be very difficult,” he said.

He said the level of NPL is directly related to the loan portfolio of a financial institution. “When the loan base goes up NPL will come down but since there is no loan base now, debts are going up,” he explained.

“Even if the bank forecloses or seize collaterals from the defaulters, the bank will have to eventually sell it in the market. But if there is no money at all who will buy it,” he said.

He said land value of late has decreased because there aren’t any buyers since loans cannot be availed to buy land.

“If situation remains the same in the next two or three months, I think it will be very difficult,” he added.

A few bankers The Bhutanese spoke to said loans are an integral part of the banking business and if that is stopped, banks cannot function.

“Normally most of the clients take loans and spend it elsewhere rather than invest it in business. So when they cannot pay back the loan, the loan goes bad”, said one banker in Thimphu.

Senior corporate executive with Druk PNB (DPNB), Chandan Subba said the bank has faced many cases of irregularity in the housing sector though bank records show that NPL has increased since December 2011.

A Bank of Bhutan Limited (BoBL)’s legal department officer said the bank’s “NPL has gone up more than the other banks but that is because BoBL has maximum client base and is the largest bank in the country”.

He said the economy lacks strong fiscal policies which is prerequisite for any economy. “The only fiscal policy we see is green tax,” he said.

A veteran banker in the capital said, “No banks in the world are ready to admit that they have no money. If they are short of funds today, they will reveal it five or six years later”. This he said was to maintain the bank’s status in the market and to avoid panic among depositors.