Loan interest reduction

The loan interest rate reduction reform, carried out by the Central Bank at the request of the government from August 2016, saved an estimated Nu 3.2 bn for borrowers, just in 2017.

This is only set to increase in the coming years as the loan base increases.

According to feedback from the private sector, the savings has come as a big relief for borrowers across the board, be it big or small, and as a result, private companies and businesses are also passing down the benefits to their employees too.

Before the reform banks charged sky high loan interest rates and made spectacular profits that only made the banks shareholders richer, while bank employees got fat bonuses for essentially conducting ‘lazy banking.’

Prior to the reform there was both a structural problem and a mindset problem.

The structural problem was that the RMA, during the former government’s time, had decided to increase base rates or minimum lending rates to a high level to try and curb credit growth to deal with the Rupee crisis.

This backfired, as not only did it fail to restrict credit growth, but it increased loan interest rates and this led to a negative impact on the economy as cost of finance shot through the roof. The only beneficiary were banks who made even bigger profits.

The mindset problem was that Bhutan’s financial institutions were used to ‘lazy banking’ (as coined by the Prime Minister) for too long.

With little innovation and no competition, banks gave low deposit rates to depositors and charged very high lending rates to borrowers.

The result was that depositors did not want to deposit their money in banks, but rather invested it elsewhere like buying land or in other investments,.On the other hand borrowers struggled to pay back the high interest loans to banks, that guzzled a chunk of the income of companies and individuals.

The loan interest rate reduction today is a win-win-win for the borrowers, depositors and the banks.

The borrowers pay an average of around two percent less in loan interest rates. Deposit rates have gone up in banks coupled with the removal of PIT tax on fixed deposit interest rates.

Finally, banks are also the winners in the long run as their lower loan interest rates are attracting more customers and hence increasing the credit base while their higher deposit rates are attracting more deposits and thus improving their health.

“Banking is very good business if you don’t do anything dumb.”
Warren Buffett