I find the Editorial (“A questionable decision”, 28/5) a little simplistic, if not self-serving. On the one hand, seems to argue – rightly – that NPLs are not good for financial institutions, but sadly stops short on what the implications are of excessive and out of control NPLs that seems to have been highlighted. Conversely, it then suggests a wider social mandate being of importance to serve the underserved and or financially illiterate, without acknowledging at what cost?
In fact, one can extend the first point that “NPL is not good for banks” and suggest NPL are not good for financial institutions, but also not good for the banking system and the wider economy. The very definition of NPL (debt unpaid for more than 90 days) statistically suggest the bank will incur a loss. Past history is scattered with many examples of poor banking practice and discipline – one only needs to recall the global financial crises that spread across the world that wiped off trillions in market value due to exactly poor banking practice. Loans lent excessively and without control or consideration to the sub-prime and those unable to repay, ergo, NPLs.
Of course NPLs are part of the risks of doing banking business – after all, banking is all about risk taking (be it credit risk, operational risk or market risk), but there needs to be an element of following prudent risk-taking principles to ensure sound banking practice is maintained.
FIs are ultimately about trust. Trust from depositors that their monies are safe. Trust from borrowers that their lenders will be there to stand behind them over the long term. That trust can extend further to the wider banking system and the faith Bhutanese know that the RMA has their wider interest at heart to ensure a strong banking system. I would challenge the writer to demonstrate any FI that has survived excessive and continuous financial hits and is still sustainable and solvent. Even those that remained, albeit, on central bank life support, were mostly inhibited from extending further loans.
As for emotional plea for the underserved or how can banks do business without lending? Would the underserved not be better served by healthy and sound organisations that will be there for the masses in the long term? Furthermore, the question should be asked, how can banks do business and continue lending if their capital is wiped out, by yes, NPLs! Meanwhile the farmer noted would similarly risk having their umbrella removed and taken away if the FI had to recall their loan due to excessive NPL forcing a retraction of business. No question has been asked of the banks’ management that oversaw and thus enabled the excessive growth of NPL – they also have accountability to their shareholders and to the banking system which they are privileged to be part of. Would the growth of NPL, well in excess of RMA guidelines, also not be a signal and show of disrespect for the RMA’s prudential policies? More specifically, the high NPL at the targeted FIs surely is a result of persistently ineffective risk management evaluation process, poor system and operational control and lack of effective corrective actions, that left unchecked, would only worsen. Therefore, as with the RMA research that credit facilities have a positive difference, I’m also sure the RMA (and central banks globally, plus noted in Basel accords) has abundant research proving that excessive NPL, above thresholds, have a conversely negative difference to people’s lives too.
Ultimately, one has to ask, how can the unserved, underserved and financially illiterate be helped at all should one or more of these institutions potentially collapse? Furthermore, how can any social mandate be achieved if the RMA, and ultimately, the Bhutanese taxpayer, be required to bail them out in the event of potential failure? This was OK for the US Federal Reserve board with their trillions available – but even they allowed the likes of Bear Stearns and Lehman Brothers go to the wall. I’m sure that BDB and CSI with their “different mandates” did not also have a “mandate” not to be sustainable or have a mandate to simply lose money without consequences. That just defies common sense and commercial reality.
If anything, the Editorial should be applauding the RMAs pre-emptive and proactive actions. Such actions, temporarily painful as they maybe, are for the long term banking system health. Whilst the wider social mandate can be sustained by forcing these FIs to tidy their act up now rather than before the proverbial horse has bolted and taxpayers are picking up the tab (or horse manure!).
Dasho Tashi Wangyal, Member, National Council of Bhutan
(Disclaimer: The views expressed here are the author’s own and does not purport to reflect those of the organization he is affiliated to.)