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.

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  1. Banks have been recklessly lending to the realestate sector. There are some who have taken 10-600 million ngultrum loans to finance their landcruisers/prados/hiluxes (oops buildings). I see the bubble has burst and there will be many who will suffer as a consequence of using OPM…other peoples money. Firstly Banks are to blame and secondly the borrowers who have borrowed recklessly and driven the prices of land sky high artificially. The herd mentality is also driving the prices down now. The reality lies somewhere in the middle, the equilibrium point in economics and Buddhism is a point to be noted.

    • Yeah, I too feel our reckless economy gone crazy, the land price, house rent absolutely intolerable. Look at Prado price bought at 1.5 million 5 years ago and now wants to sale at 2.5 million. if these things are no crazy then what else are!!!  now the current situation must be getting good going on long run. 
      the land price must go down by 45-65% in 6 months time. Now big fish must also suffer…

  2. Just the other day, this paper carried a story which said that funds should be made available for businesses to survive and I clearly mentioned that the reason for more credit not being available was because we did not have enough money, which this story now proves that what I said was correct.

    So now I wonder under who’s bidding did this paper actually write the earlier story or is it that this paper just writes for maximum effect and does not do their homework.

    • The earlier ‘article’ un mentioned was an editorial or opinion piece mr liar and it said the same things this article is that banks are running out of money and govt needs to do do something. 

      the monk= the liar 

    • Lama for the Monk

      seek truth. Not false

  3. The banks need to do actual studies of each project in the context of the Bhutanese economy (not economic principles only from textbooks) and assess their viability. If they just put a blanket ban on loans to all businesses, it will shut down all growth and bring to collapse those already working. 

    Is that really good for the economy? 

  4. My simple calculation where Banks make mistakes says:
    When the land lord wants to construct a building of 5 storied (10 units) he would borrow not less than Nu. 15,000,000.00 from the banks to fund his construction ( assuming about Nu. 20,000,000.00 required to complete his construction). And the banks would happily sanction the loan.

    Now lets see the facts whether he will be able to pay his monthly installment.

    Principal amount: 15,000,000.00
    Interest %: 10%
    No of years 25(25* 12) = 300 months
    monthly installments = 136,305.00

    Now lets assume that his monthly house rents = 10*10,000.00 = 100,000.00

    From the above calculation, the land lord simply has to add another 36,305 from his pocket to clear his monthly installments.

    Now WHAT do we conclude from the above facts:
    EITHER banks will on the loser end if there are 100 plus such bad loans where house owner are not able to pay they installments OR
    Land lord are playing game by borrowing more and investing in other business. if not, the Nu. 36,305 will be pass on to the tenants by increasing the house rents.

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