Loan and Deposit rates

The Royal Monetary Authority (RMA) must be commended in fulfilling an important economic and social objective of lowering loan interest rates. The government on its part apart from raising the issue early on also worked with the RMA to achieve this objective.

What has become clear from the lowering of interest rates is that the earlier era of high loan interest rates was created partly as an unintended result of the RMA’s efforts in 2012 to curb credit.

In 2012 the RMA, in essence, set a high figure or base rate below which banks could not lend and though it was hoped this would cool credit, it did not cool credit, but increased the burden for those taking loans and made spectacular profits for banks.

The most important consequence of the Minimum Lending Rate (MLR) reform of the RMA is that apart from pushing down loan interest rates it has allowed market forces to truly come into play encouraging banks to compete.

The removal of the regulatory restriction of a high base rate and the MLR reform will make banking a more dynamic financial sector that contributes to the economy. It also remove’s ‘lazy banking’ that was like a giant leech on the economy growing fat off the hard work of everyday businesses and ordinary people.

RMA’s push to provide loans in more productive sectors like Agriculture, Entrepreneurship and Cottage industries among others will also have a positive spin off on the economy. It must also be appreciated that RMA did not look only at economic issues but also social issues like individual home ownership where loan rates have been slashed by banks.

Lowered interest rates now give the ability to set up new businesses and to expand and in doing so create jobs, increase growth, increase exports and reduce imports. It is now up to the private sector to take advantage of this low interest regime and use it to strengthen a relatively weak private sector.

However, among all this positivity there is a need for caution as low interest rates cannot be interpreted by Bhutanese citizens as a license to consume blindly. Blind consumerism in the long run is bad for the economy as it will push up exports and exert pressure on our reserves.

Like wealth makes wealth, Bhutanese should use the loans to get basics like a roof over their heads and then move on to productive activities ranging from agriculture to manufacturing.

The other important aspect after reforming the loan interest rates is to now encourage Bhutanese people to save and put in deposits in banks. However, the main barrier so far has been a combination of a lack of a savings culture and low deposit rates.

Here too, it seems the RMA and the government are already working together to address the issue. The RMA on the monetary policy side is coming out with certain policy tools that will encourage more competitive deposit rates. This is imperative for the health of the banks many of which currently suffer from liquidity or to put it simply- lack of cash problem.

The government on the fiscal side is looking at making fixed deposits tax free to improve our savings culture and also ensure that there is an incentive to save. This would be a win-win for both the financial sector and ordinary people and in doing so the larger economy.

Frugality includes all the other virtues’

Cicero