Banking: While the central bank is discussing the possibility of lowering loan interest rates, the World Bank has recommended doing away with the present base rate system.
In its draft financial sector action plan, the World Bank suggested the establishment of a uniform national base rate system.
The current base rate system is determined by cost of fund each bank incurs and thus yields different interest rates allowing some banks to charge lower interest rates than others.
Should a uniform base rate come into force, all banks will have to offer similar interest to a certain extent.
A banker said this would prevent undercutting in interest rates. “Because all banks offer similar interest rates, the competition within the financial sector will be focused on services,” he said, adding this is a good opportunity to add value to banking services.
The World Bank’s resident representative, Genevieve Boyreau, said the financial sector action plan has been developed over the last 12 months using open and transparent consultations with the financial sector and other key stakeholders like the finance ministry and the Royal Monetary Authority (RMA).
This, she said, is expected to strengthen finance as an instrument of inclusive and broad-based economic growth. However, she said the recommendations are just a menu of options, which will have to be considered carefully and sequenced over time. “The World Bank stands ready to support implementation of priorities as selected by the Royal Government,” she said.
Until 1999, interest rates in Bhutan were administered by the RMA. The RMA deregulated the interest rates in 1999 on the condition that any revision in the interest rates shall be approved by the respective board of the credit lending institutions and subsequently by the RMA.
Given the large difference between lending and deposits rates that mirrored in high interest spread of about 5.7 percent, RMA introduced the base rate system in 2012.
The base rate is the minimum rate below which it is not viable for the credit lending institutions to lend in the domestic market.
However, the actual lending rates charged to the borrowers would be the base rate plus borrower-specific charges, which includes product-specific operating costs, credit risk premium and tenor premium.
To strengthen the financial system in the country, the World Bank has also recommended to upgrade their basel accord through the Basel Committee on banking supervision.
The Basel Committee is the global standard-setter for the prudential regulation of banks across the world through supervisory guidelines that central banks impose on banks in their respective countries.
Currently, Bhutanese banks are catagorised in the Basel-I accord and the suggestion is to move to Basel II and then to Basel III. Basel I is a set of international banking regulations focused mainly on credit risk by creating a bank asset classification system.
Unlike Basel I, Basel II enables the banks to create standards and regulations on how much capital the financial institutions must have set aside. Banks need to put aside capital to reduce the risks associated with its investing and lending practices.
Basel III builds on the other two Basels which enables the banks to improve their ability to deal with financial and economic stress, improve risk management and strengthen the banks’ transparency.
A banker said these Basel accords would enhance the banks’ ability to take risks, which is one of the factors in determining interest rates. If local banks upgrade the Basels, he said banks would be able to provide loans at lower interest rates.
The action plan also recommends the government to place its deposits in more than one bank.
Currently, Bank of Bhutan has the largest deposit base of 44 percent of market share.
It also recommends other state enterprises including the Druk Holdings and Investment (DHI) adopt competitive bidding from more than one bank to compete for deposits.
Last year, the Asian Development Bank’s study on capital market also suggested the government to explore options of distributing the government-consolidated accounts (GCA) across all the commercial banks depending on their respective assets sizes. This was to spread the short-term liquidity available from public funds.
Today, the principal account of the government or GCA is maintained in the Central Bank (RMA).