February 7, 2010: The recent leading financial event in Bhutan is the opening of Druk PNB in Thimphu. There are lots of speculation about easy availability of loans, lower interest rates and convenient access to rupee. However, such hopes and speculations need to be tampered with field reality. Banks in Bhutan operate under similar privileges and constraints dictated by RMA guide lines and market forces. Therefore, it could be a wishful thinking to hope that there would be monetary-wise incentives to customers when additional banks enter the existing market. As such the opening of Druk PNB this month may not necessarily bring about positive noticeable changes especially in interest rate although any reduction in interest rates would definitely bring more relief to customers.

When it comes to impact on interest rate, more than the commercial banks the National Pension Fund (NPF) could bring actual tangible relief to the customers as and when the Institution eases its lending facilities to its members. In the past the housing loan including purchase of land for housing purpose was reduced to 10% interest rate only because the National Pension Fund introduced such a scheme for the overall benefit of its members. And because the members are quite substantial in numbers it could have caused negative impact on the lending schemes of the commercial banks. As a consequence, the Bank of Bhutan and Bhutan National Bank were obliged to reduce their interest rate for housing loans at par with National Pension Fund. It was not an act of generosity but a compulsion for survival and good business sense. NPF is in a more flexible position to play around with interest rates and different financial schemes because it has an assured monthly income source from the provident fund contributions of the members. The commercial banks on the other hand do not have such assured monthly inflow of capital.

The NPF has introduced another scheme that enables working parents (members of NPF) to avail education loan for their children at 9% interest rate. For each child, the limit of loan is Nu. 1 million. This loan is given against the Provident Fund and other collaterals. The Bank of Bhutan had introduced a variable interest rate for education loans on the occasion of the Coronation but now this facility seems to be available on selective basis. However, the NPF scheme will definitely have a positive effect upon the other commercial banks. Presently among the existing banks there is no cut throat competition. There is, however, a very marginal variation in the interest given for savings and fixed deposits. However, this has been over shadowed by the sale of bonds by Royal Insurance Corporation of Bhutan (RICB) in 2009 and it seems the corporation would again be selling bonds. In addition the Royal Monitory Authority (RMA) also floats 90 days bonds that are attractive to corporate deposits. RMA calls it corralling excess liquidity to control spending and reduce inflation. But at 4.5% simple interest it is no more an alluring incentive for individual Bhutanese to participate in RMA 90 days bonds.

Banks in Bhutan operate under such fragile and sensitive parameters that it would be very dicey for any one bank to launch schemes to under cut the others. The space to manoeuvre is very limited. And this reality obliges the financial institutions to hold each other in healthy respects and perhaps for reasons of mutual benefit.

There would always be friendly competition but not of cut throat nature. Henceforth there will be more schemes geared towards competitive friendly competitions among he banks targeted to increase customer base as well as increase income through innovative means.  Most of the time, the financial lions will not be roaring at each other but rather together. In such a limited space the sensible approach is to co-operate and manage the market in such a way to keep the cows healthy and milk flowing. This does not mean that there would not be friendly digs at each other’s expense when ever an opportunity presents itself.

In the BBS hosted panel discussion between the CEOs of three commercial banks on 2/02/2010, there were occasional digs. The CEO of Bank of Bhutan welcomed Druk PNB into the market and said that he was happy that the entry of Druk PNB would ease the rupee crunch. In reality this is not true and BOB CEO has to know it. He must have been simply referring to the public talk and perception that Druk PNB would solve the rupee crunch. The new bank will not ease rupee crunch in the sense that it has no way of contributing in  the enhancement of RMA rupee reserve. However for customer like Bhutanese students who may have accounts with PNB India, the access to rupee is facilitated provided they have the counter value ngultrum at Druk PNB Bhutan (any bank charges for such a service will be debited to the customer’s bank account by Druk PNB in addition to actual amount withdrawn by the Bhutanese customer in India through PNB branches in India).  The CEO of BNB pointed out that such easy access to rupee through banks would further aggravate the rupee crunch not ease it. And when asked about opening bank branches in rural areas, the CEO of Druk PNB stated that BNB over thirteen years have been able to open only 8-9 branches so likewise Druk PNB will also take time.

One thing is for sure, Druk PNB is in no rush to explore the rural scene of Bhutan. During the panel discussion the CEO of Druk PNB made it quite clear that unless there were subsidies and incentives from the government his bank would not make rural venture. From the commercial perspective such stand is understandable. Just like the bees the financial institutions know where the nectar is available – the urban centres of Bhutan. Actually only the tourists take delight in visiting rural Bhutan but that too only for short sojourn. There is however, good news for rural Bhutan. The CEO of Bank of Bhutan has confirmed that BOB branches in 20 Dzongkhags have now become profitable. This means that rural Bhutan will not be deprived of easy access to financial services thanks to BOB. There is also another financial institution that has always catered to rural needs. That is Bhutan Development Finance Corporation (BDFC). This financial corporation does not receive any financial subsidies or incentives yet it faithfully has been catering to the people who are in real need. BDFC has silently made tangible difference to rural livelihood and farming. May be in the next round, the employees of BDFC will be awarded a National Day gold medal for the service to people in need.