Banking: The five commercial banks in the country may have to forego more than Nu 830 million (M) annually out of their income from interest as a consequence of reductions in lending rates.

However, most bankers said it was done in the interest of the country’s economy and to stimulate private sector growth. As for the loss in interest income, bankers are hoping to recover it in the long run.

Reducing the interest rates, a banker said would create more demand for credit in the economy, which expectantly will make up for the loss.

T-bank has reduced its interest rates on its loan products by an average of 2.04 percent and this is likely to cost the bank Nu 21M in the fiscal year 2016.

Likewise, Druk Punjab National Bank (Druk PNB) will be losing Nu 19.140M in the last quarter of this year and should this trend continue through the rest of quarters, the bank is likely to forgo Nu 76M from interest income. On an average, the bank has reduced it lending rates by 2.5 percent.

The Bhutan National Bank (BNB) will have to bear a reduced income of Nu 108.75M annually and the bank has slashed its lending rates by 0.5 percent to 3 percent on all products.

The Bank of Bhutan (BoB) has cut its interest rates by an average of 2.76 percent and this will cost the bank Nu 250M a year.

The Bhutan Development Bank Ltd (BDBL) will have to forego an income of Nu 94M in the last quarter of this year. It would cost the bank Nu 376M if the bank incurs similar loss in revenue from interest in the next three quarters.

Considering the loss in income from interest, in a year the five commercial banks will be losing Nu 832M from their interest earnings. This means less profit, and condensed dividends and bonuses also.

However, the entire process has stimulated a rigorous competition among the banks, meaning clients have more options to choose the interest rate on every loan product and the banks have begun introducing more products.

This, financial experts say would determine the health of individual banks because some banks can recover from their loss of revenue while others would have a difficult time.

Serving the purpose?

While clients are rejoicing, critics have pointed out the lapses.

In introducing the minimum lending rate policy, the RMA 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.

This means that banks are encouraged to charge higher rates than their average lending rate on “unproductive sectors” and the margin be used to endow loans availed for the “productive sector.”

For instance, the average final lending rate of a bank may be 10 percent. The bank can charge about 13 percent in some sectors and provide eight percent interest loans to some sectors. The banks, an observer said, can compete by playing with this margin. In the earlier system every loan product had its own fixed lending rate and every bank had a different base rate.

This, critics point out, has not been materialised. For instance, loans towards the transport sector and housing have been reduced to as low as 9.6 percent from 13 to 14 percent and loans towards Small Medium Enterprises and trading sector is higher than the latter.

This entails a different story. Loans towards sectors that translates into imports have been made cheaper than those that drive economic output.

The country imports more than 85 percent of goods and services from India resulting in a  huge INR outflow. The country’s exports to India also constitutes more than 80 percent albeit the value of trading far less. The current account balance or Bhutan’s monetary transaction in the form of INR is more than 25 percent of GDP in deficit.

Loans on sectors like transport and housing is apparently going to cause more imports and making these loans cheap would aggravate the INR situation. Critics also point out that it is the loan on sectors that drives economic growth in the long run that needs emphasis.

“If the government is concerned about the aggravating traffic situation, emission and balance of payment, transport loans should be discouraged. But it is one of the most attractive loans available,” said a former banker, pointing out the contradiction of policy and its implementation.

He said it is rather the formalities and norms that need change for productive sectors. “Although the interest rates have been lowered, the requirement remains the same,” he added.

Tshering Dorji