The Bhutanese Leading the way.
Despite all the talk of ‘Access to Finance,’ the reality of the banking system in Bhutan is that you have no chance of getting a loan unless you already have land assets in prime Thromde areas or lands next to it.
Banks not for rural land collateral
In the past, some banks accepted even remote rural lands as collateral, but as banks found it difficult to auction them, these lands are no longer accepted by banks.
This means that the majority of Bhutanese cannot get loans be it farmers or young people, and entrepreneurs wanting to start something, without having your land in prime areas.
In that sense, the National Cottage and Small Industry Development Bank Limited (CSI) came as a boon for the above people by offering collateral free loans in three categories. The first aimed at farmers was micro loans of up to Nu 500,000, then loans aimed at bigger ventures of small loans of up to Nu 1 million and finally cottage loans of up to Nu 10 mn.
The CSI Bank, even after the closure of many loan accounts, had 8,569 loan accounts as of June 2023 with Nu 2.1 billion (bn) in loans of which 2,980 loan accounts are for agriculture and 5,589 loan accounts were for others.
All of the above could change or come to an end as there are demands to close the bank and the government is considering to merge it with the Bhutan Development Bank Limited (BDBL), though a final decision is awaited.
A CSI Bank official said, “Banks faced a lot of problem in getting rid of the collateral rural land and so now these days all banks including BDBL will not accept remote rural land as collateral which means many farmers and others are not eligible for loans.”
The CSI official said that even the BDBL, which is considered to be a farmer oriented bank, has a more commercial mandate as it requires collateral assets and due to this, farmers who borrow from BDBL do so less for agricultural reasons and more to meet unscheduled expenses like school expenses, to buy something, rimdro etc.
CSI’s impact during the pandemic
The CSI official said that while a formal impact assessment had not been done the bank played an important role during the pandemic. CSI bank started in February 2020 and the pandemic hit by the very next month causing a major disruption in the economy.
At the time, CSI bank was kept very busy with 2,500 pending applications and new applications with all kinds of clients.
He said, “During the COVID time if the CSI Bank was not there it would have been a lot worse for many families. There was lack of income and people lost their livelihood. When I went to the field some villagers I talked to honestly said during COVID they could not work to feed their children children as the vegetables rotted in the fields as there were no vehicles and people to transport them, and so they used the CSI loan money to get food and feed their family and so many vulnerable families in rural areas and Dzongkhags survived on the CSI bank loans.”
Even in cases where people has used the loan for other purposes, it was done to do get an alternative livelihood. For example, a person took a poultry loan but since that failed he instead bought a bolero and supported his family with the income and also paid his loan installments.
CSI’s impact on rural enterprises
There were many who also started genuine businesses and the fund triggered a variety of news ideas to try and do something.
The CSI official said that before the CSI Bank the bulk of pork, chicken, beef and diary were imported from India but after 2020 the bank helped open up many poultry farms, piggeries, fisheries etc that led to self sufficiency with major reduction in imports.
“BDBL has been the there since the 1960’s but even it could not contribute as much,” said the official.
He said in Paro before 2020 there were only 20 or 30 poultry farms but now there are 700 and 800 farms and now Tsirang has become a poultry hub. People took money for sheep farms, cardamom, power tillers, fencing etc.
The CSI official said that based on their discussions with rural people the loans made a major impact on rural income all over Bhutan.
Also, unlike other banks the CSI Bank distributed its loan all over Bhutan with its regional offices in Gelephu, Mongar with extension offices in Kanglung and Samdrupjongkhar, Phuentsholing, Paro and Thimphu.
CSI and the rural credit demand
He said the buzzword is consolidation and that 6 banks are too much for a small country but he asked if the banks were enough then why did they fail to make an impact in the rural sector like CSI.
The CSI official said the big problem these says in the financial market is the liquidity crunch and in fact having more banks would help as they would bring in the capital and funds. CSI bank also has around Nu 900 mn with it that it can loan out to small lenders.
The presence of Micro Finance institutions like the ones started by Tarayana, Loden Foundation, BAOWE, Bhutan Micro Finance Limited show there is a huge demand for access to credit in the rural sector unmet by the traditional banks.
High NPL in CSI not due to farmers
One misconception about the CSI Bank is that it has a high Non Performing Loan (NPL) due to rural farmers not paying back their loans.
However, the CSI official said in fact it is the small farmers who are very diligent in paying back loans and most of the NPL is actually by urban based lenders doing projects.
The NPL todays stands at Nu 780 mn or 36.78 % of which agriculture loans only account for Nu 136 mn and the Nu 643 mn are others like in manufacturing, services etc.
The CSI Bank has been under fire for its high NPL but here it is a mixed story.
The origin of the CSI Bank was first in 2013 as the Nu 1.9 bn BoIC as part of the Economic Stimulus Plan (ESP) to spur economic activities with low interest and collateral free loans.
Due to criticism the BoIC was split up into the REDCL handling Nu 400 mn for agricultural loans and Nu 1.5 bn being given to BDBL for Cottage and Small Industries financing.
CSI bank was finally started in February 2021 with Nu 2.1 bn after joining REDCL and the CSI unit kept under BDBL. It later got Nu 250 mn grant and Nu 700 mn as loan from the government at 2% interest.
The CSI official said that around 25 percent of today’s NPL is from the early days when an inexperienced team was put in place and they were not good at assessing clients and so projects that would not work got loans including some dubious characters.
The assessment problem continued into CSI with it usually being the urban lenders, however, the official said that lessons have been learnt and assessment has been really strengthened.
The official said an additional problem was also the mindset of the borrowers who had a ‘Kidu’ mindset and assumed even if they don’t pay the loan will be written off one day.
However, despite the above the official said that the majority of the NPL are due to poor business planning, unrealistic expectations and economic downturn.
The official said that the NPL in February 2020 when CSI started was 58 % but it got reduced to 5.21 % by the end of 2021. It jumped to 12% by end of 2022 and then 24% by June 2022 after which the RMA stepped in and stopped loans by putting in place a moratorium.
The moratorium has however, made the NPL woes worse as people close their loan accounts by paying the loans which means the ratio of the NPL keeps going up compared to the total credit. Some genuine businesses who could have used some extra money have also entered NPL.
The CSI official said that a lot of the NPL is also those who did not pay within 90 days or those who will pay at the end of the year.
CSI’s woes
A senior public official said that RMA made a mistake by treating the CSI bank like other banks as CSI was different because it did not have depositor’s money and secondly it did not have a commercial profit making mandate but a more social one.
The RMA’s moratorium was followed by a stinging Royal Audit Authority (RAA) report that found many deficiencies in the banks operations with the main issue being it could not meet its operational costs and was eating into the equity which would be exhausted in in another five to six years. The RAA also pointed out the duplication of its functions with BDBL.
An ACC investigation of a board member clearing a loan to his own son did not help matters.
The government looked at merging the CSI Bank with BDBL as per RAA’s recommendations but no decision was taken and in all this environment of uncertainty of the 71 original staff many resigned leaving only 42 behind.
The CSI bank is attempting to recover its NPL through the courts now, but it has only one legal officer and she is currently on maternity leave. It is unable to hire more lawyers due to a rule that requires lawyers to clear the bar council exams. This is while CSI bank has around 300 recovery cases to file in court of which 250 have not yet even been filed.
The CSI official said that people may think they can get away since there is no collateral but the legal agreement they signed holds them and their guarantors accountable and if they don’t pay up the court can order for properties and assets to be seized.
The official said that if given a chance the CSI bank can turnaround as it has 900 mn in funds and it has learnt from past mistakes.
Meanwhile, a senior BDBL official said that if the merger does take place the CSI Bank will be incorporated and have to follow BDBL practices which does not have a scope for giving collateral free loans.
In terms of total NPL in all Financial Institutions it is Nu 18.02 bn as of March 2023 and when it comes to mainstream banks just one borrower Phajo Nidup is accused of running up a Nu 800 mn NPL just for himself by using fraudulent practices.
CSI’s NPL of Nu 780 mn is spread among 1,843 loan accounts.
