The Bhutanese Leading the way.
At the 32nd Meet-the-Press, Finance Minister Lyonpo Lekey Dorji said the government recognizes concerns over the cost of credit, particularly for small and medium enterprises (SMEs) and private sector businesses that depend on affordable financing for investment, expansion and job creation. He said the current interest rate spread in Bhutan is lower than the 6.45 percentage points cited in the concern. As of December 2025, the weighted average lending rate (WALR) stood at 9.38 percent, while the weighted average deposit rate (WADR) was 5.10 percent, resulting in an interest rate spread of approximately 4.30 percentage points.
Lyonpo said the country has made significant progress since the introduction of the Minimum Lending Rate (MLR) framework. The weighted average lending rate declined from 13.33 percent in August 2016 to 9.38 percent in December 2025, while the interest rate spread narrowed from 8.30 to 4.30 percentage points. The Government is not considering a blanket cap on lending rates, as such a measure could distort risk pricing, affect credit allocation and create implications for financial sector stability. Instead, the focus is on addressing the structural factors that determine the cost of borrowing.
Deputy Governor of the Royal Monetary Authority (RMA), Ugyen Choden, said the MLR framework has recently been strengthened through a review of its methodology to ensure that the regulatory floor better reflects the actual cost of providing credit. She said the methodology for calculating the negative carry charge on the Cash Reserve Ratio (CRR) has been revised to better reflect the cost of deposit liabilities. The operating cost component has also been refined to include only costs directly attributable to lending operations.
From April 2026, the RMA introduced an Expected Credit Loss (ECL)-based methodology, aligned with International Financial Reporting Standard 9 (IFRS 9), to determine credit and tenor risk premiums. Ugyen Choden said the new approach shifts credit risk assessment towards a more forward-looking system based on the probability of default and loss given default, rather than relying mainly on historical non-performing loan data. This is expected to help lending rates better reflect actual credit risks.
The regulatory floor has already declined, with the Single MLR falling from 6.11 percent in June 2025 to 5.72 percent in December 2025, largely due to the revised operating cost methodology. However, she said the decline in the regulatory floor has not translated into an equivalent reduction in final lending rates because the rates charged by banks also include the Bank Spread Premium (BSP). This component reflects individual banks’ profitability targets, portfolio strategies and competitive positioning, giving banks some discretion over their final lending rates.
The RMA will review the BSP to ensure that the discretionary margins applied by banks remain transparent and reasonable, while supporting competitive and sustainable access to credit. She said the reforms would take time to fully affect borrowing costs. The ECL framework was introduced during a financial year in which banks had already established their annual pricing and profitability targets. Its impact on lending rates is expected to become more evident as banks incorporate the new methodology into their pricing models.
The government, working with the RMA, will focus on strengthening competition and transparency in credit pricing, improving risk-based lending, reducing unnecessary financial intermediation costs and ensuring that regulatory and efficiency gains are reflected in borrowing costs.
Lyonpo Lekey Dorji said the objective is to make credit more affordable and accessible, particularly for SMEs and productive private sector investment, while maintaining financial sector stability. The Government will pursue structural and market-based reforms rather than impose a blanket interest rate cap that could have unintended consequences for the financial system.
