The govt. is of the view that the banks are making a killing
Economy: Loans are set to get cheaper in the coming months. The government is working with the Royal Monetary Authority of Bhutan (RMA) to reduce interest rates to propel private investments.
This was announced by Prime Minister Tshering Tobgay at the annual general meeting of the Bhutan Chamber of Commerce and Industry (BCCI) held in Thimphu last week.
It is not clear by how much the Central Bank and financial institutions would be ready to bring down their lending rates. But the government wants the interest rates to reach a point where it would become attractive to boost investments.
The prime minister said that the cost of borrowings from financial institutions currently is high for the private sector and that a reduction is needed.
The prime minister informed the business representatives that the Central Bank is looking into how the interest rates can be reduced.
Although the base rate is 10 percent, the prime minister said that banks charge from 12 to 16 percent. Base rate is the minimum rate below which financial institutions are not allowed to lend.
The prime minister expressed hope that a new regulation for implementation of new interest rates would be ready by May or June.
The base rate system was introduced in September 2012, and in order to make the lending rates more responsive to the RMA’s policy rates, the financial institutions are required to periodically review and announce their base rates to the public.
With the current rate of lending, the prime minister said banks are able to make profits without having to face any risks. “Even if the banks suffer some defaults, the borrowers would have mortgaged their properties,” he said. “There is no risk for banks.”
The prime minister added that one of the “easiest works, from one point of view,” is that of bankers. “That’s why banks are doing a good and profitable business,” he said.
The prime minister believes that cutting the interest rates is necessary to boost private sector development in the country. “If the business community is to benefit the interest rates should be brought down,” he said.
Newly appointed economic affairs minister Lekey Dorji, who was also present at the meeting, has been assigned to negotiate with the RMA. The prime minister said the economic affairs minister is in close contact with RMA officials.
“The RMA has to discuss with banks and find out ways to bring down the interest rates,” he said.
Bhutan National Bank (BNB) CEO Kipchu Tshering said any changes in the interest rates should come in the form of a new regulation. However, he added that it was possible to make profits even if the interest rates were slashed.
Druk Punjab National Bank CEO Mukesh Dave said Net Interest Margin (NIM) should also be reduced if the lending rates are to be slashed. NIM is a measure of the difference between the interest income generated by banks and the amount of interest paid out to their lenders and depositors, relative to the amount of their interest-earning assets.
Mukesh Dave said while NIM is below 3 percent in India, it is within 5 and 5.5 percent in Bhutan. “Higher the NIM, more the profit,” he said, adding that borrowers accordingly pay higher interests.
However, he said the risk management system in Bhutan is not yet developed. For instance, he said the lack of proper tools for implementation of differential lending rates puts banks in higher risks of default.
Otherwise, he said banks can charge lower rates for low risk lending and vice versa.
Meanwhile, he added that there is a direct correlation between lending and deposits. “If the lending rates come down, savings will also be reduced as the deposit rates will be reduced,” he said. “This means less money in people’s hand,” he said.