Favouring foreigners over locals

The National Assembly passed the Financial Services Bill last week. I voted against it. I did so because the Bill seems to favour foreign investors over our own people and companies.

Section 50, on restrictions on ownership of financial institution and investments by financial institutions, reads:

No person shall hold more than the following percentage of interest in shares of a financial institution:

(a) in case of an individual, 10 percent,

(b) in the case of a company not being a financial institution, 20 percent

(c) in the case of a company being a financial institution, as per the limit provided under section 53 below, and

(d) in case of a foreign financial institution, as per the RMA regulations in line with the foreign direct investment policy

According to Section 53:

No financial institution can have ownership in another financial institution exceeding 5 percent of the other financial institutions’ paid up capital.

And RMA regulations currently allow foreign financial institutions to own 51 percent of a financial institution’s paid up capital.

So, here’s what I took exception to:

Our people cannot own more than 10%, and our companies cannot own more than 20% of a financial institution. But a foreign company can own 51%.

Our financial institutions cannot own more than 5% of another financial institution. But a foreign financial institution can own 51%.

The Bill favours foreign companies over our own companies. And how did the government respond when they realized this bias? They protected government owned companies by inserting a new subsection under Section 50, one that reads:

(e)   in the case of Ministry of Finance, RGoB, 75%.

Lazy banks

My last entry provoked Zekom to exclaim: “…calling Bhutanese Banks conservative is a praise they don’t deserve. I’d call them lazy!”

She is correct.

Because our banks our lazy, money lenders are doing a thriving business throughout rural Bhutan, where our farmers are compelled to take loans at exorbitant rates. It’s common for money lenders to charge farmers interest rates of 5% per month, which works out to 60% per year!

This, of course, is illegal. The Moveable and Immoveable Property Act (1999) stipulates that “… no lender other than a registered financial institution which has been duly licensed to engage in the extension of credit, may charge interest greater than 15 percent per annum expressed as a simple annual rate.” But the complete absence of meaningful banking services in rural Bhutan means that desperate farmers are willing to accept extremely high rates, even though they are illegal. It also means that our farmers find it very difficult to repay loans. And those that can’t lose their land and, sometimes, even their houses.

But that’s not all. I’ve learnt that money lenders do brisk business even in Thimphu. And how much do they charge? Get ready for this: as much as 20 percent a month! That works out to 240% a year.

This is ridiculous. And illegal. And heartbreaking.

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.

Mobile banking

Wouldn’t you be happy if you could get your bank balance on your cell phone instead of having to go all the way to the bank?

Wouldn’t it be good if you could instruct your bank not to honour a cheque that you’d issued mistakenly?

Wouldn’t you like it if your bank informed you every time money was withdrawn from or deposited to your account?

And wouldn’t it be convenient if your bank reminded you when loan repayments were due?

All this, and more, are available with the BNB’s mobile banking service which was launched yesterday. I’m excited about this new service, so I went there yesterday afternoon to congratulate BNB staff and register for their service.

The concept seems to be quite simple: you send instructions by SMS to the bank, and they respond with the required information by return SMS. Regular rates for outgoing SMS’s apply, but incoming SMS’s from the bank are free. Plus the bank sends SMS’s to alert you when money is withdrawn from your account, deposited to your account, or when loan repayments become due.

The beauty of this service is that it is free and easy. BNB has tied up with both Tashi Cell and B-Mobile to provide this convenient service free of cost. And while I will certainly find this service very useful, it could be even more beneficial to our farmers. Almost half our population, and most farmers, now carry cell phones. So mobile banking should now be possible throughout the country. And our farmers should finally find it worthwhile to open bank accounts.

But I’m already excited about the next level of mobile banking: fund transfer. Now wouldn’t you like that? Wouldn’t you be delighted if you could transfer money to your daughter’s account just by sending an SMS? Or if you could shop, buy petrol for instance, simply by using your cell phone?

I congratulate BNB for improving their financial services. And, more importantly, I thank them for making banking that much more possible for our farmers. Go ahead. Make your services even more accessible. And empower us, your customers.

Question bank

I was shocked to read that RMA has given the Punjab National Bank approval to start preliminary work to set up a branch in Bhutan. I have many questions…

Do we know that Punjab National Bank is India’s second largest public sector lending bank? That it has more than 3850 branches? That its total business in 2007 was US$ 60 billion? That this is 56 times our GDP? Or almost 20 times the total planned outlay for our 10th Five Year Plan? That its market value of US$ 2.79 billion which almost trebles our total GDP?

Do we know why they are interested in Bhutan? Is there enough business here? Isn’t our economy too small? Or are they specifically targeting banking for the hydropower projects? If so, what will happen after these projects are over? Will we be able to regulate a giant? Will they operate in the dzongkhags where they will incur losses? Will Bhutan’s national interests be more important than corporate profits for PNB?

Will our existing banks be able to compete with PNB? Will competition be fair since PNB is more experienced, has more money, and better technologies? If not, can our banks survive after PNB enters? If not, where will competition come from?

Was our banking sector overregulated? Did that stunt the growth of our banks? Why suddenly liberalize? Why the sudden urgency? What support for national banks has the government announced? Why not give our banks five years to prepare for international-level competition?

Will the existing banks be allowed to close their loss-making dzongkhag branches so that they can become more competitive? Will they be allowed to relieve excess staff? Will these be good for Bhutan?

What’s happening with the proposals of Bhutanese investors? Why haven’t they been approved? Why shouldn’t Bhutanese be given preference to start banks? Will other Bhutanese be able to start banks once PNB enters? Will they even want to?

And what’s next? Airlines? What will happen to Druk Air? Hydropower? What will happen to DGPC? Cement? Will PCA stand a chance? Ferrosilicon? Steel? Agriculture?

Where’s GNH in all of this?