Govt. cannot lower loan interest rate: FM

Thukten Zangpo

The government cannot lower the interest rate on loans set by financial institutions (FIs) because FIs set or determine the interest rate on loans based on minimum lending rates (MLRs).

Responding to questions about high lending rates, Finance Minister Namgay Tshering told the National Assembly that the Royal Monetary Authority (RMA) has no authority in terms of setting the interest rate on loans and continuously reviews FI loan rates. depending on the evolving nature of the economy.

The RMA revised the single MLR from 7.16% in December 2021 to 6.92% in June this year. A single MLR is calculated by averaging the MLR of individual banks.

Lyonpo said FIs calculate loan interest rate based on MLR and FIs also decide to fix above MLR.

Loan rates differ from bank to bank. Bhutan Development Bank Limited’s minimum lending rate is 7% per annum and Bank of Bhutan Limited’s is 6.5%. Lyonpo said the MLR is determined on the incremental cost of FI funds, the operational cost and the cost to likely profit of the cash reserve ratio (CRR).

He added that FIs need to consider the source of funding for fixed deposit and current deposit, interest rates on savings deposit and current deposit and operational costs. He said Bhutan’s interest rate is not comparable to other countries due to the country’s small outstanding loans of Nu 165B from six FIs and limited capital adequacy of FIs.

The Ministry of Finance, the minister said, is in discussion with the FIs to have differentiated interest rates for loans depending on the economy of the country.

The current situation requires low-interest loans to strengthen local industries, which can substitute imports and save foreign exchange reserves, Lyonpo said. However, he added that construction and vehicle loans are not essential at this time.

Regarding the equivalent value of collateral, Lyonpo said the government had proposed the revised Property Assessment and Valuation Agency (PAVA) rate. The PAVA rate is the compensation basis for urban or rural land acquired by the State for public works.

Lyonpo said the previous PAVA rate could only get 40% of market value, however, the revised rate will get a land value close to 90% of market value. With the revised rate, he said rural and urban land as collateral would get higher loans.

Bartsham-Shongphu MP Passang Dorji said the RMA has the power and responsibility to decide the interest rate through tools such as CRR, statutory liquidity ratio and adequacy ratio capital.

He added that the RMA has lowered the CRR from 10% to 7% and there is an opportunity to lower the interest rate.

Opposition leader Dorji Wangdi also said banks used to charge higher interest rates earlier at 13%-15% but later reduced to 7-12%.

Sharing what is practiced in other countries, Dorji Wangdi said countries are also following the quantitative easing policy, where the lending rate is zero percent.

He also said that start-up entrepreneurs struggle to get bridging loans after setting up their business.

Drametse-Ngatsang MP Ugyen Wangdi asked if the interest rate could be revised to 5% from 6.5%.

Lyonpo said that when making loans, the biggest problem is the loan assessment system, if the loans are misused in the proposed activity.

He added that the National Cottage and Small Industry Bank provided loans at an interest rate of 5% and 2%. Most defaulters who borrowed at are those who borrowed at 2%.

Lyonpo also said Bhutan Opportunity and Information Center or Rural Enterprise Development Corporation limited in 2018 had an NPL ratio of 48%, and Bhutan Development Bank Limited at 21%.

To stock up on essential items, Lyonpo said a bridge loan worth $4.5 billion at 5% had been provided during the pandemic and the government was aware of the repayment problem.

He said the government had discussed with the central and the FIs the loan deferral and the conversion of the overdraft facility into term loans, as monetary measures.

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