The Bhutanese Leading the way.
The Royal Monetary Authority (RMA) is currently in the process of reviewing the framework of the Minimum Lending Rate (MLR) with the main aim being to lower the lending rates.
RMA is carrying out the exercise to soften the loan repayment burden, as the loan deferral comes to an end, and many sectors, especially the hotel sector, is still struggling.
There is Nu 29.618 billion (bn) in loan deferrals, with the hotel and tourism sector accounting for the largest portion with Nu 11.724 bn in deferred loans.
The review also comes on the back of discussions in the Parliament on the issue, and recently a request by the government to look at lowering loan interest rates.
A source said the MLR exercise is already ongoing with RMA and the Financial Institutions (FIs), and a decision is expected sooner than later.
However, the MLR is not a straightforward exercise, as things like loan interest cost, income and margin needs to be taken into account. The RMA, while trying to reduce the MLR, will also have to take into account the interest of depositors as a sharp loan interest rate reduction could also result in lower deposit interest rates.
The financial viability and cost of banking of the FIs also need to be taken into account.
RMA may even look at a flexible approach of a reduced MLR for a few years until the economy recovers.
Currently, deposit rates are around 4.50 percent to 4.75 percent for savings accounts and for fixed deposits it between around 4.50 percent and 9 percent depending on the number of years and the FI rates.
The lending rates vary from around 8.13 percent for non-commercial housing loan to 13 percent for over draft loans and personal loans and everything in between.
The MLR system was introduced in the time of the second government in 2016 by the RMA, partly at the push of the then PDP government to lower interest rates. RMA also saw it as a modern system to reform the high loan interest rates.
Before the MLR, the banks followed the 2012 Base Rate (BR) System, which meant a minimum interest rate below which banks cannot lend. The BR at the time was 11 percent, which made it the highest lending rate in the region.
In August 2016, RMA introduced the MLR, whereby the minimum lending rate was set at 6.75 percent at the time. The MLR was basically a single and much lower base rate that is both flexible and calculated on a more scientific basis.
RMA had come to a MLR of 6.75 percent by taking the average of all the five banks in August 2016.
The MLR is composed of three key elements. The first is the marginal cost of funds or deposit interest rates multiplied into what percentage that type of deposit is of the total deposit.
The second is the negative carry charges which is the 10 percent of the total deposits that must be kept compulsorily with the RMA multiplied into the marginal cost of funds. The third is the operating costs calculated by finding what percentage it is of the total deposits.
The 6.75 percent was considered to be the lowest rate below which it is not possible for banks to lend, however, now on top of this 6.75 percent, each bank will add its three types of costs.
The first is the credit risk premium calculated by looking at the credit worthiness of the borrower. The second is the tenor risk premium calculated according to the maturity of each loan, and finally business strategy based on the expected profit from the business.
So, the final lending rate of the banks based on the minimum MLR will be higher and different for each bank.
The MLR today is set at 6.38 percent, but bankers have been saying it is not possible to go lower unless deposit rates are reduced.
With the Tax Reform Bill already putting a 10 percent tax on the interest from fixed deposits, which had been made tax free in 2016 to encourage a savings culture and improve bank liquidity, the RMA will have to travel a careful path.
If the deposit rates drop on top of the tax, then FIs could find themselves losing fixed deposits.
On the other hand, many in the private sector feel that the issue of the loan repayment burden is less to do with loan interest rates and more to do with policies and an enabling environment in sectors, like tourism, etc.
FIs in 2024 mostly performed poorly compared to 2023 and the year 2025 also does not look great, and so, RMA will have to take into account the health of FIs already impacted by the economic environment.
