The Bhutanese Leading the way.
Namgay Dorji, is the Managing Director of the Namgay Heritage Hotel in Thimphu, Hotel Namgay in Phuentsholing and a beer factory and restaurant in Paro.
He said that the loan interest rate reductions from September 2016 has meant that he pays upto Nu 200,000 less per month to the banks in loan installments.
Namgay says that he has used the saving to give pay hikes to his around 100 employees working in the above establishments in the last two years. Namgay said that the savings has also meant the company’s books look much better than before.
Namgay said that similar and even more benefits have been seen by many of his colleagues in the Hotel Industry who are also passing on the benefits to their employees too.
Big Cola is a major manufacturer of soft drinks in Bhutan, and has been the hardest hit with India’s GST taxes that makes their soft drinks more expensive in India.
However, here too, the reduction in loan interest rates has meant that Big Cola pays around two percent lesser on its loans which means a saving of around Nu 1 mn a month.
The Big Cola CEO Thuji Yonten said that this savings has helped the company which also passes on the benefit to its 110 employees. Their monthly salary bill is around Nu 2.5 mn.
Thinley Jamtsho the President of the Construction Association of Bhutan (CAB) said that the loan interest reduction has definitely helped in more savings and making the construction sector more competitive. He said that the construction company owners have also been passing on the savings to their permanent Bhutanese employees.
The Royal Monetary Authority (RMA) in cooperation and coordination with the government introduced the Minimum Lending Rate (MLR) reform from 1st August 2016 that effectively lowered bank loan interest rates in all sectors by around an average of two percent.
According to the RMA the average reduction in interest rates has been 2.08 percent.
Given that as of December 2017 the total credit given was around Nu 103.63 bn the 2.08 percent average interest reduction means that in 2017 itself an estimated Nu 3.230 bn was saved by borrowers across the board.
This estimated saving for borrowers is only expected to increase as credit expands in the coming years.
There is broad consensus that the loan interest rate reductions have helped private businesses, individual borrowers and farmers in the countryside.
The President of the Bhutan Chamber of Commerce and Industry (BCCI), Aum Phub Zam said that everybody in the private sector is happy with the impact of the reduction.
She said that the lowering of interest rates has made both commodities and services more competitive and has helped a lot of businesses.
She said that, as a result, private companies are able to hire more people and pay existing employees better. She gave the example of the Labour Ministry making it compulsory for private companies having more than five people to have provident fund. She said that due to the benefits of the savings on the cost of finance many private companies are able to take up the PF scheme for their employees.
Conversely the reduction in loan interest rates have led to an increase in deposit rates for people, especially those keeping fixed deposits in the banks. The average deposit rate prior to MLR was around 6.92 percent which has increased to 7.03 percent.
What has also helped depositors is the removal of Personal Income Tax (PIT) by the government on interest earned from fixed deposits.
One would imagine that reduction of loan interest rates and the increase in deposit rates is bad for the banks, but the MLR reform has helped the banks to both get more deposits and also expand its loan base.
The five banks saw a seven percent increase in deposits from Nu 83 bn in June 2016 to Nu 105 bn in December 2017.
This increase in deposits improved the CD ratio of the banks, which is the banks ability to cover withdrawals made by its customers.
Non bank financial institutions like NPPF, RICBL and BIL do not take deposits.
On the lending side while the loans interest rates may have reduced for banks, but they saw an overall increase in business with an increase in the credit base.
Both the five banks and the three non bank FIs saw credit increasing from Nu 84.970 bn in September 2016 to 103.631 bn in December 2017.
The BCCI President said that earlier banks tried to earn more loan interest from a smaller pool, but now it is earning lesser interest but from a much bigger pool which is good for both the market and the banks.
How MLR came about
The MLR reform essentially happened with the government first raising the issue of high loan interest with the RMA, and formally requesting the RMA to do something about it in early 2016.
This was followed by the RMA led by Governor Dasho Penjore who drew up the reforms, implemented it and followed up to make sure it went through successfully.
Aum Phub Zam pointed out that the current government was concerned about the huge profits and bonuses of up to six months being given by banks.
The Prime Minister Lyonchhen Dasho Tshering Tobgay pointed the issue of high bank interest loans right from 2009 as the Opposition Leader in two blogs one on 31st March 2009 titled ‘Banking on our Banks,’ and another on 1st April 2009 titled “Lazy Banks.’
In both these blogs he accused the banks of making far too much profit by giving depositors less interest rates and charging very high lending rates. He said, at the time, that this is not good for the economy and said that the high interest rates combined with poor banking reach in rural areas was pushing farmers in the hands of informal money lenders who charged exorbitant rates.
After becoming Prime Minister, Dasho Tshering Tobgay kept harping on the huge profits earned by banks saying they are more profitable than hydro projects and accused the banks of ‘lazy banking’ at the expense of ordinary borrowers.
A senior official in the RMA on the condition of anonymity said that the Prime Minister personally met the RMA Governor on two occasions on the issue of reducing loan interest rates across the board before a formal request was sent by the government to RMA in early 2016.
The RMA official said that a presentation was done for the cabinet on the draft MLR and they gave their support to the reform.
The MLR reform has been successful due to the RMA not only being able to convince banks to reduce their loan interest rates and encourage competition among them, but also by using monetary tools to encourage and enable the banks to do so.
The MLR reform fixed a minimum rate below which banks cannot lend.
The MLR in August 2016 was at 6.75 percent. The MLR replaced the old base rate system which was rigid and set a much higher minimum lending rate of an average of around 11 percent encouraging banks to charge high interest rates and earn huge profits.
