An increase or decrease in the Minimum Lending Rate (MLR) impacts the overall cost of borrowing in the economy, which in turn affects consumer spending and investment choices.
The Royal Monetary Authority (RMA) revised the single Minimum Lending Rate (MLR) from 6.91% in December to 6.80% now. This is increase by 0.05% compared to its first introductory rate of 6.75% in August 2016.
The MLR for the next six months (starting from June) will be 6.80%. The Banks use the MLR as a base rate to determine the interest rates for various loans they offer borrowers. Following the revision, each bank now has to adjust its lending rates for the next six months based on this new MLR.
The central bank calculates the single MLR by averaging the minimum lending rates of individual banks. The MLR is determined using three parameters, which are common across all financial institutions. They are operating costs, marginal cost of funds, and cash reserve requirement or CRR.
Operating cost is expenses incurred in the day-to-day operation of the business. The marginal cost of funds is the money spent to mobilize additional units of deposits and borrowings. CRR is a minimum amount of deposit, which banks need to hold as reserves with the central bank.
In its Monetary Policy Statement, 2024, the RMA noted that the implementation of MLR has supported the softening of interest rates over the period to promote access to credit. The single MLR based on the five commercial banks’ returns as of December 2023 is computed at 6.9 percent, an increase of 0.02 percentage points from 6.8 percent as of December 2022.
From the three components used in the computation of the single MLR, the Marginal Cost of Fund (MCF) remains a key driver of MLR, accounting for 80.2% of the overall MLR. The MCF for banks represents the cost incurred in mobilizing all available funds, including deposits and borrowings, increased to 5.5% in December 2023 from 5.3% in the previous year.
Notably, the report shows that the implementation of the MLR has led to a significant reduction in the Weighted Average Lending Rate (WALR), while the Weighted Average Deposit Rate (WADR) has remained stable. “Consequently, this has narrowed the interest spread and reduced the gap between lending and deposit rates. This alignment reflects a more balanced interest rate environment, fostering credit growth in the banking sector.”
According to the Monetary Policy Statement, 2024, unlike the previous practice, the RMA has carried out in-house review of MLR, and RMA is closely monitoring the methodology and assumptions used to determine the risk premium (tenor, credit, and business strategy) to arrive at final lending rates by the FIs.
Meanwhile, the initial MLR was implemented from August 2016, and will be reviewed on a semi-annual basis, based on the end of June and December months’ balance sheets. An increase or decrease in MLR is expected to influence the overall cost of borrowing in the economy and affects consumer spending and investment decisions.
By Nidup Lhamo, Thimphu
