High lending rates one of the impediments of credit growth

MB Subba 

A sluggish growth in lending, which has resulted in money lying idle with the financial institutions, has been a concern for the government amid efforts to revive the economy.

The laggard growth of credit, officials say, not only affects financial institutions’ profitability but also indicates lack of expansion in economic activities.

A high credit growth, on the other hand, signifies a boom although it entails some risks.

The average credit growth in 2021 slumped to 6.9 percent from 18 percent in 2020. The credit growth in 2021 was one of the lowest in a decade.




High lending rates, observers say, have been one of the impediments of credit growth in the economy. Private officials said that lending rates should be reduced.

However, financial institutions and the central bank are working on measures on the issue, according to officials. The details, however, were not available.

The finance minister in February had written to financial institutions requesting them to consider reducing interest rates to make borrowings more affordable and increase the flow of money in the economy.

The chairman of Financial Institutions Association of Bhutan (FIAB), Karma, said that meetings were held following the government’s request and that the proposed measures were being finalised. He said that announcement of the measures is expected soon.




A finance ministry official confirmed that a way forward was being worked out by the relevant agencies and that they would be communicated to the ministry. He said that the measures could come either in interest reduction or other forms.

According to the government, the availability of liquidity should be utilised for private sector growth and economic recovery.

The liquidity position of financial institutions increased to Nu 22.79 billion (B) in September 2021 from Nu 14.73B in the same month of the previous year although the latest figures were not available.

However, a bank official said that it would be difficult to reduce interest rates as financial institutions were already affected by the pandemic.

“If the lending rates have to be decreased, the deposit rates should be decreased too,” he said.




According to banks, the pandemic has led to a shrink in investment avenues for financial institutions.

The lack of full-swing execution of capital works has affected the demand for credit, according to bank officials. The pandemic has also affected one of the main avenues of investments for financial institutions, the construction sector.

The chairperson of the economic and finance committee of the National Assembly, MP Kinga Penjor, said that circulation of money was high in economies where interest rates were low.

He added that one of the causes of high non-performing loans (NPL) could be a high interest rate. “High rates add financial pressure on the borrower while returns on the business are not enough.”

Kinga Penjor said that the credit growth rate would improve if the interest rates are reduced. The economy could also benefit with an improved flow of money, he added.




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.

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