The Bhutanese Leading the way.
The Member of Parliament (MP) from Nanong-Shumar constituency, Yeshey Jamtsho, confronted the Minister of Finance over the banking sector’s interest rate policies. The MP raised concerns that while lending rates have stagnated at approximately 14% over the years, deposit rates have sharply declined, leading to increased profitability for financial institutions (FIs) at the expense of economic growth.
Highlighting data that showcased a widening interest rate spread from 7.8% in 2000 to around 11% currently. He emphasized that the economy seemed to be favoring FIs rather than fostering private sector growth, savings, and investment, while also noting a rise in non-performing loans (NPLs) within banks.
MP also pointed out that while bank lending rates have remained around 14%, deposit rates have significantly declined over the past two decades, resulting in substantial profits for financial institutions (FIs).
In response, Minister of Finance Lekey Dorji shared that the interest rate regime and policies have evolved significantly to align with market dynamics and economic progress.
Minister of Finance Lekey Dorji outlined the evolution of country’s interest rate regime, pointing out significant policy changes aimed at adapting to market dynamics and promoting economic progress.
He detailed the removal of a mandated spread requirement between lending and deposit rates by the Royal Monetary Authority (RMA) in 1999, citing insufficient competition among commercial banks at the time.
Lyonpo Lekey Dorji further explained the introduction of the Base Rate System in 2012 to enhance loan pricing transparency, though challenges persisted with high interest rates and inflexible deposit rates. The subsequent implementation of the Minimum Lending Rate (MLR) in 2016 marked a pivotal shift, aiming to standardize lending rates and reduce borrowing costs across the board.
“The MLR has played a crucial role in moderating borrowing costs and stimulating domestic credit for private investment.”
He highlighted the impact of the MLR, noting a reduction in the Weighted Average Lending Rate (WALR) by 2.3% since its inception, thereby supporting various sectors such as production, tourism, housing, and services.
“Although the MLR has helped moderate borrowing costs and support the overall economy, the RMA is exploring additional policy interventions to further strengthen the financial sector. The RMA is developing a comprehensive monetary policy framework to manage economic stability and growth, ensuring financial stability, regulating the money supply, and establishing new benchmark interest rates within the financial system,” Lyonpo explained.
Regarding government pledges for interest-free and concessional loans, Lyonpo assured MPs that efforts were underway to fulfill commitments related to housing, power tillers, and Jersey cows, pending further policy developments and readiness.
