Banking on our banks

Our banks continue to make generous profits. Last year, BNB made Nu 310 million, a whopping 124% over the previous year, and BOB made Nu 168 (see Kuensel article). Not bad, considering the size of our economy. And, considering that they’ve been consistently declaring very attractive dividends.

How do banks make money? Primarily by paying depositors a certain interest rate, and charging borrowers a higher interest rate. And obviously, the larger the spread between the two rates, the bigger the profit that banks earn. But what about bad loans, loans that banks cannot recover? That’s the risk that banks take, a risk that’s minimized by lending only to reliable borrowers.

So how do our banks consistently make so much money? By paying depositors low interest rates and charging borrowers interest rates that are much higher. And by requiring that all loans are secured by full collateral.

This is very good for our banks. But not so good for our economy. And definitely not good for people who want to do business.

That’s why doing business is difficult in Bhutan (see “Doing business isn’t easy anywhere”).

And that’s why the Doing Business Report ranks Bhutan a miserable 172 out of 181 countries in terms credit access. (see ranking)

Our banks need to be less conservative and a lot more active. They need to lower interest rates so that businesses have a better chance. Access to capital is limited to a few people who have collateral – and this is what deprives the vast majority of Bhutanese of business opportunities. The financial institutions must be more proactive in making it easier for farmers and small businesses to avail of loans – on the merit of their proposals and not collateral alone. The risk factor can be minimized if loan officers not only study and analyze the proposals, but also offer guidance and other support to the borrowers.

Improving access to credit will be good for businesses. And good for our economy. And that would be good for our banks: they’ll be able to make even more profits.

 

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Comments

  1. You make an extremely important point about the collateral.

    But, I want my banks to be “conservative” in managing my money. So, calling Bhutanese Banks conservative is a praise they don’t deserve. I’d call them lazy!

    Their declared profits are no surprise. With little competition to speak of, and loans fully collateralized, heck, anybody can make money.

    And, don’t forget. A portion of banking spread between lending and deposit rates is their administrative cost. That cost is excessively high for our banks. That means they are highly inefficient in doing business.

    We all know that so well, don’t we? It takes just one visit to a reputable bank overseas to see the night and day difference in efficiency, and in how we are served as customers!

    And, thank you for remembering our farmers!

    I am thinking of starting an All Bhutan Farmers’ Cooperative, with farmers as the shareholders. Individually, we might be small in financial terms, but we can unite and empower ourselves to help ourselves. We can pool our savings, provide small loans and crop insurance, and share the risk among ourselves. What do you think?

    At the least, we will need no collateral. We farmers know how to judge the creditworthiness of fellow farmers, better than anybody else!

  2. Anonymous says:

    Iam regular visitor of your website. i love to see comments. Now coming to the point. It was surprising that my wife’s vechile loan was cleared recently. The problem i faced was that after clearing the amount i was suppose to get “clearance”. When i ask for clearance again the statement was reflecting Nu.1.00 balance credit in my wife’s account…it is amazing… I asked the same lady..she replied that “system” was wrong. Lastly the lady of the bank deposited the amount and i got the clearance.. I asked the same lady she replied system is not wrong. Who should i blame????.
    it happened to me and i think same might be happening to all clients of BNB who are having loan..

  3. Anonymous says:

    Not relevant here but we hear Dasho Ugen Tsechup has withdrawn his candidature from the BCCI presidentship. We thought he is young and dynamic and will amke a good choice BUT we hope we will not be stuck with another old outdated guy as President. Business community need to see young and dynamic leaders in the hot seat. The candidate should be less than 50 years of age if at all possible but can relax till 55.

    Dasho Tsokpon Uygen retired saying that it was time for a younger leadership and we hope that this will happen.

    It almost seem that some POLITICS is in play already which is SAD.

  4. Lobxang says:

    I agree with Zekom’s points.

    I had the opportunity to travel and bank in several locations around the globe. I see a huge difference in how our banks conduct.

    Let’s say, a small island in the Turks and Caicos Islands, much smaller than Bhutan and equally less developed, their banks are still awesome. The employees are smartly professional. From the moment I enter a bank, I am greeted and treated as an individual. They make me believe that I am a special person for banking with them. My every question is promptly answered or directed to the next level and they go the extra mile in making sure I understood everything they had to offer. They understand that I do not understand ‘The System” or ‘Their Policies” and that all I care is about my hard earned money.

    Calling a bank around the globe is easier. I am always greeted professionally with the name of the agent. My every question is answered and finally, they agent signs off repeating her name, asking if she answered my questions fully and thanking me for banking with them.
    Back in Bhutan, I have to prepare myself with the words I chose to use. I have to use all the flowery words. If I am calling form overseas, I should use minimal English as I will be criticized for my accent and often I am asked if I have become an American.
    (I wonder what gives a bank teller the right to ask me such questions) Most of all, I have to really watch that I do not sound like I am questioning their service otherwise my long expensive call will be futile. The agents mostly tell me they are “busy” and do not have the time to answer my questions. (I wonder again, what they are busy with since they cannot attend to a customers need)
    One time, I called up a bank to ask about their “Personal Loan” scheme. I got a nasty laugh filled with sarcasm. The agent rather told me how difficult it is to get a loan before I had even completed my question. She elaborated on the impossibilities and never asked me or considered my capabilities as a potential customer. I had been banking with the same institution for over 5 years with a ‘handsome’ balance at all times.
    Else where around the globe, the moment I tell a bank I need a credit, I am offered a sit and I become the most important man to that banker.

    Banking in Bhutan is harder than asking a stranger for a favor. The banks seriously need to reconsider their professional customer conduct beginning with answering telephones to meeting and greeting customers as an individual.

    Ray Kroc, the founder of McDonalds said: “Take care of the customer, and the business will take care of itself.”

    Drive that to the banks. They need it 🙂

    Thank you,

    Lobxang

  5. Anonymous says:

    BOB has launched many many aspects of Banking. It starts something and then retreives. They started the ladys plus loan and then closed. They started the sunday banking but the notice on their Thimphu door says – temporarily suspended till further notice. I was there visiting the office of the Thimphu manager and the upstairs office – it was awfully filthy and dusty and people not that friendly. The employees have no hesitation to mention that they are a government bank and that they have many restrictions to be service friendly. By the way- the girls at the information counter (two of them) where you avail the bank statements are also not friendly. They think we are there to seek a favor but I think they owe us a favor by banking with them and keeping their job afloat. Their computer was shut at 3 PM sharp and have abandoned their desk immediately.

    Some food for thought for BOB.

  6. Our “lucrative” banking system has some correlation with the sky-rocketing house rents, especially in Thimphu. Where does our house rents end up?

    Mostly in one of the banks as loan installments!

    Lets say we accept this situation. Can the government “just” request the house owners to refrain increasing the house rent when the banks are always waiting for the moment to seize their buildings?

    I really doubt so.

    We all know that the banks are enormous profit year after year. Our interest rates could be one of the highest in the world (although I don’t have any data to back this up).

    Will it not be possible for the government, through RMA, to lower the interest rates, which could eventually retard the soaring house rents. Instead of making it harsh on the banks, RMA can reduce amount of cash/security that the banks are required to deposit with RMA. I have no idea how the reduced cash deposit with RMA is going to affect the economy.

    Forgive me if you find this silly. After all, I am neither an economist nor a banker. 🙂

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