The impact of the minimum lending rate (MLR) has helped moderate the consumption-oriented loans such as housing and construction. 

However, comparing the lending rates of various loan products, interest rates on consumption-oriented loans dropped more than the loans for productive sectors between 2015 and 2018.

This has happened despite the country’s priority on agriculture and other sectors that enhance domestic production, substitute import and create employment while discouraging consumption that have the potential to swell the country’s import bill. It is seen as one of the measures to narrow the trade deficit that impacts the country’s overall balance of payment.

The Royal Monetary Authority (RMA) has also cautioned the banks to go slow on loans towards sectors that drive consumption while providing attractive interest rates towards sectors that drive economic growth and generate employment.

Figures from the RMA reveal that interest rate fortransport loan, for instance, hovered between 12.15 percent and 16 percent in June 2015. This dropped to 11.73 to 14 percent in June 2016 and 9.07 to 12.5 percent in June 2018.  

On an average, interest on transport loan reduced by 3.29 percent between 2015 and 2018.

The MLR was implemented in August 2016 replacing the base rate system to compute interest rates.

Like wise, computing the maximum and minimum interest rates charged by different banks, housing loan saw a decline from 13 to 15.25 percent in 2015 to a 8.46-13.25 percent in 2018. This is a reduction of 3.27 percent on an average. Interest rates for general trade loan saw a reduction of 3.45 percent and personal loans decreased by 2.18 percent between the same period.

However, interest rates for loan towards the manufacturing sector fell by only 3 percent on an average and loan for agriculture and livestock saw a decrease of only 2.75 percent between June 2015 and June 2018.

But given the maximum and minimum range of interest rates among different banks, the highest interest charged on agriculture and livestock loan 11 percent is the least compared with loans for other sectors. The lowest interest charged on agriculture and livestock loan is 8.49 percent as of June 2018 but housing loan is slightly lower at 8.46 percent.

Some bankers Kuensel talked to said interest rates also depend on the market needs.

Following the concerns raised by the former government on banks maintaining a high lending rates and offering lower deposit rates, or keeping a high interest spread, the central bank came up with the MLR policy to set a single benchmark minimum reference rate.

But figures from the RMA revealed that deposit rates declined from 7.1 percent to 6 percent on an average, from June 2017 to June 2018. Lending Rates, on the other hand increased from 10.9 percent in 2017 to 11.5 percent in 2018 on an average.

The MLR was subject to review every six months. In the earlier base rate system, every loan product and every bank had its own base rate, the minimum interest rates below which it becomes unviable for the banks. The rate for most loan products was not lower than 9 percent.

The MLR however, was introduced to address some rigidities in the base rate and to encourage competition and develop professionalism among financial institutions to result in a balanced approach for financial intermediation.

MLR is computed adding up the marginal cost of fund, cash reserve ratio and operation cost of the banks. On the single MLR derived by averaging the MLR of all the banks, each bank is free to add its expected spread, credit risk and tenor and an item covering the bank’s business strategy cost.

This means that MLR leaves room for the banks to charge higher rates than their average lending rate on unproductive sectors and the margin be used to make up for the loans availed for the productive sector at a lower rate.

As of June 2018, the MLR is computed at 6.3 percent, a decrease by 0.2 percentage points from 6.5 percent as of June 2016.

According to the RMA’s annual report, the decrease in MLR was mainly contributed by fall in operational cost. Marginal cost and CRR cost remained constant.

Among the banks, the report stated that BoBL has the lowest marginal cost due to high current account deposits, mainly contributed by the corporate and government deposits. “The BoBL, a dominant bank continues to have a comparative advantage over smaller banks while pricing of loans and limiting level playing field in determination of interest rate in the market,” the report stated.

Tshering Dorji


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