After getting the banks to reduce loan interest rates the Royal Monetary Authority (RMA) and the government now want to encourage people to save through more attractive deposit rates and also tax free fixed deposits.
While the RMA is already working towards a monetary policy of encouraging banks to come out with more competitive deposit rates the government will propose a tax proposal of making Fixed Deposit rates tax free.
Tax Free deposits
The Prime Minister said that the cabinet has asked the Ministry of Finance to review and look at the implications of reviewing the tax on fixed deposits. The PM said that as of 2014-15 there was only Nu 878.96 mn as fixed deposits in banks which include even institutional depositors and he said that this was too low.
Lyonchhen said that to encourage more fixed deposits the whole thing needs to be relooked at. He said that apart from local depositors Bhutanese living abroad can also make deposits in Bhutan and get good interest rates without having to pay tax.
The Finance Minister Lyonpo Namgay Dorji said that the Finance Ministry is working on a proposal to do away with taxes on fixed deposits for individual depositors. He said that the plan is to put up the tax proposal in the winter sessions of the parliament and get it passed which would be in time for the March 2017 PIT deadline.
The Minister said that the revenue foregone would be around Nu 43 mn.
Currently any interest income from fixed time deposits is regarded as part of the total income and accordingly taxed. It is hoped that the removal of tax on fixed deposits will encourage a savings culture and also improve the liquidity of banks.
Increasing Deposit rates
The popular perception of Bhutan’s banks is that it offers very high loan interest rates and lower deposit rates. While the former issue is being corrected the RMA is now looking at the latter issue.
The RMA is working on a Financial Inclusion Policy which is aimed at encouraging people to save and for that to happen one of the key areas is for banks to offer more competitive and attractive deposit rates.
One thought currently doing the RMA rounds is to see if the deposit rates can at least be higher than the inflation rates otherwise it would not encourage people to keep money in the banks. The issue of making deposits more attractive is being looked at and RMA is expected to soon hire some experts.
A RMA official said that in a way the ball is already rolling as the Minimum Lending Rate (MLR) policy is not targeted at only opening up competition in loan interest rates but will also eventually lead to competition among banks for deposit rates. He said that in fact the RMA is expecting some competition in the deposit rates as banks get used to the MLR system.
The MLR is the rate below which a bank cannot lend and currently it is at around 6.75% percent. The MLR at a very simple level is calculated taking into account the deposit rates, the cost of operations and the 10 percent cash that banks have to keep with RMA.
The lower MLR is a huge improvement on the older Base rate system which set an average of around 11 percent minimal lending rate above which banks had to add their margin and lend leading to high interest rates. The Base rate was introduced in 2012 primarily to discourage lending but it ended up artificially pushing up loan interest rates and creating an artificial market while keeping deposit rates static. Banks could not do much with their deposit rates as higher deposit rates would have already pushed the high base rates even higher.
So since the average MLR is low at 6.75 percent and a key component of MLR is deposit rates the banks now know their status better and also have the flexibility and incentive to increase deposit rates. For example a bank whose MLR is below 6.75 percent can have the scope to increase deposit rates. Even for a bank with MLR above 6.75 percent it can still increase deposit rates to attract more depositors and improve its cash position.
One major incentive for banks to increase deposit rates is that the MLR study showed that it is far more stable and cheaper to attract individual fixed deposits rather than the more unstable and expensive corporate deposits that banks have been chasing so far. Another incentive is that in order to attract new depositor beyond the current pool the rates have to be more competitive.
In short with the MLR encouraging genuine market competition among loan interest rates the expectation now is that with market forces unleashed there will also be competition for deposit rates as banks work to improve their liquidity.
The RMA on its part does not want to tell the banks to fix the deposit rates but after the MLR it would come up with additional policy and measures encouraging banks to offer more competitive deposit rates based on market competition.
In fact during the launch of the MLR the RMA Governor had said that banks should work harder and compete under the new policy to also attract savings deposits. He said that it is not necessary to raise loan interest rates in order to give attractive deposit rates.