Comprehensive monetary policy in the offing

Comprehensive monetary policy in the offing

The Ministry of Finance (MoF) and the Royal Monetary Authority (RMA) are collaborating to strengthen the Bhutanese economy through a comprehensive monetary policy for financial institutions. This initiative was highlighted by Finance Minister Lekey Dorji during the parliamentary session on June 21, in response to a query from a Member of Parliament (MP) Yeshey Jamtsho.

MP Jamtsho noted that studies have shown that bank lending rates have remained around 14% while deposit rates have declined by more than three-quarters over the past two decades, leading to substantial profits for financial institutions. The interest rate spread, which was 7.8% in 2000, has increased to about 11% now.

The MP raised concerns that the current economic situation seems to favor financial institutions rather than the broader economy, resulting in poor growth in the private sector, low savings and investment, and a high rate of non-performing loans (NPLs) in banks. He questioned the government’s plans to address these issues and ensure that financial institutions effectively serve the economy.

The Finance Minister acknowledged these concerns, reiterating that the RMA introduced a minimum lending rate (MLR) in 2016. By December 2023, the MLR had climbed to 6.91%, which helped bring down the weighted average lending rate (WALR) by 2.3%, significantly benefiting the country’s economy by facilitating private sector investment.

As of December 2023, the WALR was 9.12%, the weighted average deposit rate (WADR) was 5.17%, and the spread was 4%. The Finance Minister explained that the interest rate regime and policies have evolved significantly over the years, aligning with market dynamics and economic progress.

Initially, the RMA imposed a 6% spread requirement between lending and deposit rates in October 1997, but this was removed in April 1999 due to insufficient competition among commercial banks. To enhance transparency in loan pricing, the Base Rate System (BRS) was introduced in 2012, but it kept interest rates high and deposit rates rigid. Under this system, the benchmark reference rate ranged from 10% to 11%, with final lending rates reaching up to 14%-15% for some loan products. During this period, the WALR hovered around 14%, while the WADR was between 4.35% and 4.79%.

In response to these challenges, the RMA introduced the MLR as a single benchmark reference rate for lending in August 2016. The MLR stood at 6.91% by 2023, reducing the WALR by 2.3% and substantially contributing to the Bhutanese economy by facilitating domestic credit for private investment. As of December 2023, the WALR was 9.18% against a WADR of 5.17%, reflecting an average spread of 4%.

Lyonpo said that lower borrowing costs are evident in the interest rates charged by commercial banks. The Bank of Bhutan Limited (BoBL) charges 8.55% for personal loans, 8.93% for commercial housing loans, 7.94% for services such as hotels, resorts and restaurants, and 8.15% for education loans. The bank offers up to 8.25% for fixed deposits depending on the tenure.
The MLR has led to significant growth in domestic credit. As of March 2024, loans outstanding in sectors such as Production & Manufacturing, Hotel and Tourism, Trade & Commerce, Housing, and Services amounted to Nu 23,658.03 million, Nu 27,560.60 million, Nu 17,454.89 million, Nu 65,099.75 million, and Nu 18,088.58 million, respectively, underscoring their importance to the Bhutanese economy.

Although the MLR has moderated borrowing costs and supported economic growth, the RMA is exploring additional policy interventions to further strengthen the financial sector.
Meanwhile, a comprehensive monetary policy framework is being developed to manage economic stability and growth, ensure financial stability, regulate the money supply, and establish new benchmark interest rates within the financial system. Lyonpo Lekey Dorji informed the house that an update on this framework will be submitted to the government soon.

By Sangay Rabten, Thimphu