Thukten Zangpo 

Whichever party forms the government, Bhutan Tendrel Party (BTP) or People’s Democratic Party (PDP), the pledge to lower the interest rate on loans  might not happen easily. 

Currently, if a member of the National Pension and Provident Fund, civil servants among others, avails a loan of Nu 500,000 for five years, he or she is liable to pay an equated monthly installment (EMI) of about 10, 300 with an interest payable of Nu 115, 496 for the loan tenure at interest rate of 8.5 percent per annum.

If the interest rate is reduced by half to 4.25 percent per annum, he or she would be liable to pay an EMI of about Nu 9, 300 monthly with an interest payable (half) to Nu 55, 886 in his or her loan tenure.

However, officials from financial institutions (FIs) say that reduction in the interest rate is unrealistic; it is achievable only if there is financial support from the government.

BTP has pledged to lower the FIs’ interest rate, including priority sector loans (cooperatives or farmer groups) at concessional interest rates and introducing one-time home loan to the general public in rural areas. 

At the same time, the PDP has pledged to review interest rates to ease the interest burden on credits and to support the viability of businesses and projects. 

Moreover, PDP has promised that the party will support access to loans by loan-to-value (LTV) mortgage ratio from 70 percent to 95 percent at a reduced interest rate of 4 percent for first time home construction or apartment purchase.

An official from the Bhutan National Bank said that the reduced interest rate would be achievable only if the government gives them financial support since the banks’ interest rate is determined by the minimum lending rate (MLR) of 6.88 percent determined by the central bank, RMA. The bank would not be able to lend below MLR.

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

Adding these parameters, banks come up with an MLR the average of which is considered the national MLR. The MLR is reviewed after every six months.

The final lending rate banks charge to 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.

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.

A BNB official said that the 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 on the clients.”

He added that the interest rate on lending has to be at least 2 percent above the MLR to meet the FIs’ costs. 

Among the FIs, the lowest deposit interest rate is provided by the Bank of Bhutan at 4.5 percent per annum for the savings deposit account.

“If we have to give the loan interest rate at 4 percent, then the deposit rate has to hover around zero percent,” a BNB official said. 

He said that in countries such as Japan, if the deposits exceed the certain prescribed limits, the depositors have to pay interest to the bank.    

Another bank official said that people would not be interested if they have to pay an interest rate on deposits in Bhutan. 

Another banker said that if the savings rate is too low, at about 1 percent, to provide a loan interest rate at 4 percent, the clients would invest in some other alternatives rather than keeping their money with the banks.

On housing loans, a BNB official said that the banks are providing housing loans between 9 and 10 percent and if the interest rate is determined at 4 percent, lowering interest on loan is unrealistic. In that case, the government should take some portion of the risks, which will require a whole revamping of the financial policy.

He added that the banks are already facing a funding shortage or liquidity because of the ongoing loan deferment since last year. 

For residential housing loans up to Nu 10 million, LTV depends upon the structure, location, and market dynamics, including the individual’s repayment capability. 

Statistics from RMA shows that the loan for the housing and construction sector was the highest at Nu 57.46 billion as of October this year, comprising 28.8 percent of the total loan portfolio.