Finance Minister asks FIs to cut interest rates

FIs meet and discuss possibilities

MB Subba

Finance Minister Namgay Tshering has written a letter to financial institutions (FIs) asking them to consider lowering interest rates to make borrowing more affordable.

“I have asked FIs in writing to cut interest rates to increase the flow of money into the economy,” he said. Lyonpo Namgay Tshering said the rate of credit growth had declined despite excess liquidity with financial institutions.

The availability of liquidity from FIs, he said, should be used for private sector growth and economic recovery.

According to central bank data, the liquidity position of financial institutions increased to Nu(B)22.79 billion in September 2021 from Nu14.73 billion in September 2020.

Banking sector liquidity has increased significantly in recent months due to the Druk Gyalpo Royal Kidu program and monetary measures, officials said.

Many are of the view that the private sector and the economy as a whole have not been able to benefit from the availability of liquidity from banks, in part because of high lending rates.

The Chairman of the Association of Financial Institutions of Bhutan (FIAB), Karma, confirmed that he had received a letter from the Minister of Finance and said that the FIs would meet to discuss the Minister’s proposal.

He said the finance minister had asked the FIs to come up with measures to cut interest rates. He said he would only be able to comment on the matter after the meeting.

FI officials said the lack of adequate investment opportunities has led to excess liquidity with FIs. According to bank officials, one of the main avenues of investment, the construction sector, had been affected by the pandemic.

They said the pandemic has limited the full execution of capital works, affecting all economic activities and limiting domestic demand for credit.

However, a bank official said it would not make sense for a bank to cut lending rates at a time when its business has been hit by the pandemic.

He said the cost of maintaining liquidity (paying interest on deposits) was high. For banks, deposits are considered a liability because they have to pay interest.

A central bank official said the FIs could come up with some measures within the monetary policy parameters.

In response to the pandemic, the Royal Monetary Authority (RMA) reduced the Cash Reserve Ratio (CRR) from 10% to 7% to ensure more money is available for borrowers.

The CRR is a certain minimum amount of cash that financial institutions are required to keep with the central bank as reserves against their total deposits. A reduction in the CRR means that more money is available from banks for lending.

According to a pre-lockdown government estimate, credit to the private sector is expected to decline from 6.9% in FY 2020-21 to 10.9% in FY 2021-22.

However, observers say credit growth will likely be affected by the ongoing lockdown.

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