RMA & Govt bank on base rate for loan interest reduction but FIAB head says not much possible

If banks refuse to play ball the govt has a plan ‘B’ that the banks won’t like

The Royal Monetary Authority (RMA) will be meeting with the Financial Institutions Association of Bhutan (FIAB) on 13th July and the main agenda will be on discussing ways to reduce loan interest rates.

The outcome of that meeting will basically decide or point to if banks will be willing to reduce their loan interest rates.

The RMA will be pitching many things, but the key will be a modified base rate system that will reduce the base rate considerably for the banks, and it may no longer even be called the base rate.

Base rate is the rate below which banks cannot lend and it was formulated on the higher end by the RMA in 2012 at the height of the rupee crisis to discourage lending and reduce imports.

After the base rate was brought in 2012 there was a noticeable spike in the loans interest rates from 2013 onwards. Just in the housing loans available at an average of 10 to 13 percent in 2012 it went up to 12.73 to 14.63 percent in 2013 and settled higher at 13 to 15.25 percent in 2015.

The basic math by the RMA in consultation with the Ministry of Finance is that once base rates are reduced considerably it would also encourage banks to reduce loan interest rates. Their calculation is based on the fact that banks themselves don’t want the base rate system as it also hampers their banking activities.

However, it may not be as simple as that as explained by the FIAB head and Bhutan National Bank (BNB) Managing Director Kipchu Tshering.

He said, “The base rate of 2012 pushed up loan interest rates but it will now be quite difficult to push them down. We are open to discussion but not drastic changes.”

The FIAB head explained that the key issue was the demand and supply in the market saying that even at higher interest rates people still came forward for the loans. Giving the example of his own bank he said that BNB had already lent out most of its money.

He said that the bank that had the highest amount of money is the Bank of Bhutan but even that would be mopped up to quite an extent in buying the Nu 5.5 bn worth of Treasury bills being sold by the RMA on behalf of the Finance Ministry.

Other financial institutions like National Pension and Provident Fund do have money lying around but they are not active lenders like the banks.

In short, since the banks are already seeing the market principle of demand and supply favoring them there is no pressing incentive to lower interest rates and even if they do, it would not be by much.

However, the banks may be in for an unpleasant surprise if they do not agree to cooperate or play ball. The senior government official said that if the banks do not see reason despite the base rate changes by the RMA then there is another more painful option for the government. That is using financial institutions owned and controlled by it to offer lower interest rate loans thereby forcing other competing banks to do the same.

There is precedence in the distant past when housing loan rates were going through the roof. At that time the National Pension and Provident Fund (NPPF) brought down housing loans to around 10 percent forcing banks to follow suit.

The government currently has control over not only over the NPPF but also the Bhutan Development Bank which is a State Owned Enterprise (SOE) under the Finance Ministry. In addition to using the considerable financial muscle of these two organizations the senior official said that the government through DHI could also encourage Bank of Bhutan to lower loan interest rates.

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