Thukten Zangpo 

Bhutanese in rented houses residing in urban areas are facing an increasing rent burden.

Most of the building owners say that lowering the interest rate on housing loans could lead to reduction of the house rents.

According to the National Housing Policy 2020, 58 percent of Bhutanese reside in rented houses, paying more than 40 percent of their monthly income in house rent.

Internationally, a baseline of 30 percent of the household income is taken as the maximum proportion of income available for payment towards housing rent.

A building owner can increase the house rent by 10 percent every two years, as per the Tenancy Act of Bhutan.

At the current situation, most of the building owners in Thimphu borrow Nu 24 million (M) to Nu 30M for the period of 30 years to construct five-storied buildings.

Suppose, a building owner has borrowed Nu 30M from the Bank of Bhutan (BoB) at the lending interest rate of 8.93 percent per annum for the commercial housing loans, he or she would be paying Nu 2,39,877 as an equated monthly installment.

However, a flat with a rent of Nu 15,000 would get him or her an income of Nu 150,000 every month for 10 flats.

The lending rate for the housing loans differs from bank to bank. The BoB provides the lowest lending rate at 7.98 percent per annum for the non-commercial and 8.93 percent per annum for the commercial housing loans.

Bhutan National Bank (BNB) and Tashi Bank (T-Bank) provide a lending rate of 10 percent per annum for the commercial housing loan. BNB provides home loan at 9 percent per annum and T-Bank at 9.75 percent per annum.

Druk Punjab Bank provides the commercial housing loan at 9.5 percent and home loan at 8 percent. The Royal Insurance Corporation of Bhutan has the highest lending rate at 12 percent per annum for both the commercial and home loans.

For the commercial housing loan, all the banks provide a loan of 80 percent of building estimates and 70 percent of the building estimates that exceed Nu 50M.

For non-commercial, the banks provide 90 percent of building estimates for the non-commercial and 50 percent of the renovation cost for the renovation of the building.

An official from BoB said that the lending rates are derived from the minimum-lending rate (MLR) set by the Royal Monetary Authority (RMA).

The MLR are determined on three parameters-marginal cost of funds, negative carry charges on cash reserve ratio and operating cost of the banks.

Adding these parameters, individual banks come up with an MLR and the average of which is considered the national MLR.

Based on the figures from the banks, the current MLR is derived at 7.16 percent. This means it is not viable for any bank to lend below this rate. The MLR is reviewed after every six months.

However, the final lending rate the banks charge to its clients takes into consideration the credit risk premium, which depends on credit worthiness of the banks, tenor risk and businesses’ strategies. These factors determine the profit margin of the banks.

“We have offered the lowest lending rate, I do not think we can go lower than that because the deposit rate should equally go down,” an official from BoB said, adding that if we lower the deposit rate and the other banks do not, the BoB will not get the deposits.

The BoB provides deposit’s interest rate of 5 percent to 7.25 percent per annum for recurring interest rate depending on the loan terms from 91 days to 2 years and above. The bank also provides different deposit rates for savings and fixed deposits.

BNB’s director of banking operations, Hem Kumar Acharya, said that the banks have no plan to reduce the interest rate soon. However, in future, if only the cost of funds (interest paid on fixed deposit and savings) comes down or the bank’s performance improves.

He added that the housing loans term is for 30 years, and the bank has to look into the risk if in case the loan is not able to recover.

Hem Kumar Acharya also said that loan interest rate depends on the deposit interest rate. “Depositors expect some interest to be paid and when we pay more interest, we have to charge more interest to the loan clients.”

The difference between the interest rate a bank pays to depositors and interest rate it receives from loans reflects the efficiency of the financial system in the country.

The banks in the United States of America, Japan and Singapore, do not give interest on the deposits. “When there are no interest rates on deposits, they can also lend at much lower rates than us,” said Hem Kumar Acharya.

In Japan, he said that if the deposits exceed the certain prescribed limits, the depositors have to pay interest to the bank. Bhutan and India have similar lending rates.

Hem Kumar Acharya added that the banks were equally hit by the Covid-19 because the banks were not able to lend as much and the economy is rebounding from the impact of the Covid-19.

The BoB reduced the interest rate on savings to 4.5 percent from 5 percent earlier to meet the bank’s cost.  Other banks could follow suit on lowering the deposit rates.

Hem Kumar Acharya said that the BNB cost of funds are high compared to the BoB since the government deposits go by default to the BoB.

Statistics from RMA shows, the housing and construction sector loan was Nu 51.8 billion (B) as of September this year from Nu 45.53B as of September last year. This is an increase of 13.84 percent. The sector comprises 27 percent of the total loan portfolio.