Bank advertisements announcing the auctioning of land, buildings and vehicles of lenders unable to pay back loans is an increasingly common occurrence.
This is because the average Non Performing Loans or NPL touched a high of Nu 4.1 bn in 2015, which is the highest till date in terms of total figures. This NPL is 6.03 percent of the total loans given.
Non Performing Loans are typically those for whom clients have not been able to pay interest and principal for more than 90 days going up to many years.
NPL is important because it is an important indicator of the health of not only banks but also the whole economy.
Comparatively, the NPL in 2014 was around 4 bn at 6.33 percent, 3.7 bn at 6.53 percent in 2013, 2.7 bn in 2012 at 5.23 percent, 1.85 bn in 2011 at 3.90 percent and 1.9 bn at 5.39 percent in 2010.
Royal Monetary Authority’s Director of Financial Regulation and Supervision Department, Karma Rinzin said that more than the amount the percentage of NPL is more important. He said the amounts would always go up as the loan base was increasing.
The NPL percentages’ reflects a story of the Bhutanese economy. The higher NPL in 2010 according to RMA officials was due to the entry of two new banks in Druk-PNB and Tashi Bank who aggressively gave out loans.
In 2011 the situation stabilized somewhat at 3.90 percent but as the rupee and credit crisis combined with austerity measures hit from 2012, the NPL percentages started going up. In 2012 it jumped to 5.23 percent reaching a high of 6.53 percent in 2013 when the economic crisis was at its height and the GDP growth rate had plummeted to 2.05 percent.
Still recovering from the 2012-2013 crises the NPL percentage in 2014 came down slightly to 6.33 percent before settling to 6.03 percent in 2015.
The matter of concern is that on the World Bank’s list of NPL rates of different countries, Bhutan is still on the slightly higher side though it is not among the highest ones.
At the regional level even with all the major concerns over Kingfisher Airline’s Vijay Mallaya fleeing away to Britain and other bigger corporate defaulters in 2015 India had a NPL of around 4.2 percent. Even at this rate there is widespread concern in India on the health of the banking sector. A smaller regional example is Sri Lanka at 4.3 percent NPL.
Here Karma Rinzin said that Bhutan’s NPL is not a matter of major concern as long as it is in the single digits.
A Banker on the condition of anonymity said that NPL even at around six percent is high compared to regional and even international examples.
The high NPL shows the poor financial practices of those taking loans, who take them and are unable to payback and also the Financial Institutions who are not careful while giving loans and also do not have a strong recovery system.
Here the Financial Institutions Association of Bhutan head and Bhutan National Bank MD Kipchu Tshering said that a major issue is in an unfriendly and at times even in-transparent judicial system that makes it difficult to get defaulters to pay. He said that there is a requirement for judicial reforms to ensure that loans are honored and due money can be collected.
RMA’s Karma Rinzin said that the RMA’s primary duty is to protect the depositors principal deposit and for that it had adequate financial measures and regulations to ensure that bank NPLs do not become too high.
He said that RMA regulations called for a strong credit committee and review committee for loans.
Another concern is that within the NPLs there are a high percentage of loans that are deemed as ‘loss’.
NPLs generally fall into three categories. The first is the 91 days to 180 days which is in the substandard category. The second is the 181 to 540 days which is in the doubtful category and finally those above 18 months which is considered to be in the loss category.
In 2013 54.92 percent of NPL was in the loss category and in 2014 it was at 54.30 percent.
Karma Rinzin said that while the loss category may seem high it was also composed of overdraft loans as companies and individuals often did not update their OD’s on time and this often got counted in the loss category.
While Bhutan is slightly on the higher side, it is not in a full blown crisis mode like in countries like Greece with 34.4 percent NPL in 2015, Ireland at 18.8 percent or Serbia at 22.2 percent, all of whom are suffering major debt issues triggered by the 2008 Wall Street Crisis.
On the other hand while recovery is important Financial Institutions were found to be violating human rights by publicly publishing the pictures of loan defaulters with their ID card numbers and address. This is in a traditional society where generally even the pictures of murderers are not published. The National Assembly put a stop on this after its Human Rights committee report around a year ago.
Also, Bhutan still lacks a Bankruptcy law that protects genuine bankruptcy cases by limiting liability. A Bankruptcy law encourages genuine risk taking that is considered good for an economy.
Ultimately the NPL figures are a cautionary tale for the increasingly loan friendly financial culture developing among ordinary Bhutanese who even go to the extent of taking loans for holidays but lack financial planning and a saving habit to pay it back.