FIs to meet and discuss possibilities

 MB Subba 

Finance Minister Namgay Tshering has written a letter to financial institutions (FIs) requesting them to consider reducing interest rates to make borrowings more affordable.

“I requested FIs in writing to reduce interest rates to increase the flow of money in the economy,” he said. Lyonpo Namgay Tshering said that the credit growth rate had declined despite excess liquidity with financial institutions.

The availability of liquidity with FIs, he said, should be utilised for private sector growth and economic recovery.

According to central bank data, the liquidity position of financial institutions increased to Nu 22.79 billion (B) in September 2021 from Nu 14.73B in September 2020.

The banking sector liquidity increased significantly in recent months due to the Druk Gyalpo Royal Kidu programme and monetary measures, according to officials.

Many are of the view that the private sector and the economy at large had not been able to benefit from the availability of liquidity with banks, partly due to high lending rates.

The chairman of the Financial Institutions Association of Bhutan (FIAB), Karma, confirmed receiving a letter from the finance minister and said that the FIs would meet to discuss the minister’s proposal.

He said that the finance minister had asked FIs to come up with measures to decrease interest rates. He said he would be able to comment on the issue only after the meeting.

Officials from FIs said that the lack of adequate investment avenues has caused excess liquidity with FIs. According to bank officials, one of the main avenues of investments, the construction sector, had been affected by the pandemic.

They said the pandemic has limited full-swing execution of capital works, affecting overall economic activities and limiting domestic credit demand.

However, a bank official said that it would not make business sense for a bank to reduce lending rates at a time when their businesses have been affected by the pandemic.

He said that the cost of maintaining the liquidity (payment of interests on deposits) was high. For banks, deposits are considered liability since it has to payout interests.

An official from the central bank said that FIs could come up with some measures within the parameters of the monetary policy.

In response to the pandemic, the Royal Monetary Authority (RMA) reduced the cash reserve ratio (CRR) from 10 percent to 7 percent to ensure that more money is available for borrowers.

CRR is a certain minimum amount of cash financial institutions are required to maintain with the central bank as reserves out of their total deposits. A reduction of CRR means that more money is available with banks for lending.

According to a pre-lockdown estimate of the government, credit to the private sector was expected to increase from 6.9 percent in the fiscal year 2020-21 to 10.9 percent in the fiscal year 2021-22.

However, observers say the credit growth is likely to be affected by the ongoing lockdown.