The Bhutanese Leading the way.
The Royal Monetary Authority (RMA) has completed its report on the review of the interest rates and will be presenting it to the RMA board soon.
However, according to a senior RMA official the review report is much broader than just focusing on interest rates but also looks at other issues in the financial sector.
The RMA report proposes a policy that will ask banks to be mindful of the savings rate they offer, as the RMA wants to promote a culture of saving among Bhutanese.
However, many ordinary Bhutanese think twice about saving in banks given the relatively much lower interest rates compared to the high inflation rates and also the much higher loan interest rates.
The RMA official said that banks for too long have been comfortable with huge corporate deposits from major government companies and have not really made an effort to attract ordinary depositors.
“If the banks do not do so then RMA has the option of coming up with a minimum savings rate policy,” said the official.
In terms of loan interest the approach of the RMA will not be as simple as currently perceived by many about just lowering interest rates in general.
The concern in the Central bank is that excessive lending in consumption driven and non productive sectors like cars and housing is not good for the current account deficit in the long run.
By contrast RMA would like to encourage lower interest rates and priority lending in productive and priority sectors that can generate employment, reduce imports and generally strengthen the economy.
However, for the interest reduction and subsidy for such loans which would include agriculture among others the RMA would need help from the government on the fiscal side and also in terms of planning of the economy by agencies like the Gross National Happiness Commission.
The RMA report would also propose priority lending in areas like micro-finance in rural areas and also encouraging savings in these communities.
To take care of general interest rate issues the RMA will look at making the base rate more flexible. Base rates are the minimum rates below which banks cannot lend and it was introduced in 2012 in the middle of the Rupee crisis. It was an attempt to discourage excessive lending at a time when the RMA was trying to curb imports and rupee outflow.
The RMA official said that in terms of its objectives the base rates has failed to discourage lending in consumption driven areas. He said for that there instead needs to be a review of micro-prudential norms whereby for example a person may be asked to bring out a larger share of their own money for consumption loans. At the same time the RMA official said that the RMA cannot carry out certain ‘authoritarian’ practices of the past like completely banning certain loans.
Another long term approach that the RMA is looking at is the development of a broader Money Market that can provide funds apart from the traditional banks.
The RMA has invited two experts from the Reserve Bank of India to also look at the RMA’s interest rate review report.
The official said that RMA’s monetary policy announcements will be something which even other SAARC countries are not doing.
The RMA Governor is supposed to announce the monetary policy every summer and so these announcements are expected to be made by July.
Once the RMA Board clears the report it will then be taken by RMA and discussed with various stakeholders like Financial Institutions and also the government. The report depending on these discussions may under some more changes before a final announcement by the Governor which is expected in July.
Currently a minor hitch is that the RMA Board will not have full quorum unless the Finance Secretary also joins the meeting but the secretary has availed the one month preparatory leave given by RCSC before he finishes his Constitutional five year term by the end of June 2016. RMA will attempt to convince the outgoing secretary to attend the board meeting.
