The new in­ter­est rate pol­icy re­places the cur­rent base rate sys­tem: RMA

Bhutan Times - - Front Page - Lhakpa Tsh­er­ing

The Royal Mon­e­tary Au­thor­ity of Bhutan (RMA) has in­tro­duced a new in­ter­est rate pol­icy, called the Min­i­mum Lend­ing Rate (MLR) to re­place the cur­rent base rate pol­icy.

The new pol­icy of MLR is to en­cour­age com­pe­ti­tion and pro­fes­sion­al­ism among the fi­nan­cial in­sti­tu­tions to result in a bal­anced ap­proach of en­gag­ing in fi­nan­cial in­ter­me­di­a­tion.

The MLR will be a uni­form bench­mark or min­i­mum ref­er­ence rate for lend­ing to ap­ply across all the fi­nan­cial in­sti­tu­tions.

The new pol­icy is ex­pected to gen­er­ate more com­pe­ti­tion among fi­nan­cial in­sti­tu­tions to of­fer in­ter­est rates in pro- duc­tive ar­eas that drive eco­nomic growth and gen­er­ate em­ploy­ment. Banks can en­cour­age charg­ing high rates than their aver­age lend­ing rates on un­pro­duc­tive ar­eas and low on pro­duc­tive ar­eas.

The of­fi­cial from RMA said banks must pro­vide fa­vor­able lend­ing rates to­wards pro­duc­tive ar­eas and limit credit to the un­pro­duc­tive sec­tors that drive con­sump­tion.

While the un­der­ly­ing fo­cus may be di­rectly on lend­ing rates, equal em­pha­sis will also be placed on de­posit rates – with the ob­jec­tive of gen­er­at­ing pos­i­tive real in­ter­est rates that can stim­u­late more sav­ings. The huge gap in sav­ing and in­vest­ments in the coun­try in­di­cate that we are net spenders, and there­fore, in­cen­tives and new ap­proaches have to be ini­ti­ated to en­cour­age sav­ings both through at­trac­tive de­posit rates and fis­cal in­cen­tives.

Other ob­jec­tives such as chan­nel­ing credit to pro­duc­tive sec­tors and curb­ing credit for con­sump­tion will be tack­led by sup­ple­men­tary tools and poli­cies such as pru­den­tial reg­u­la­tions (both mi­cro and macro) and strate­gic/pri­or­ity sec­tor

lend­ing strate­gies.

The pol­icy im­per­a­tive for the RMA is to sup­port growth by chan­nel­ing credit to growth driv­ers and con­tain­ing credit for im­port-heavy con­sump­tion. This is be­cause the high cur­rent ac­count deficit re­mains one of the big­gest chal­lenges for the econ­omy in the medium-term. Ad­dress­ing this chal­lenge will re­quire both mon­e­tary and fis­cal pol­icy mea­sures as well as other sec­tor-spe­cific re­forms. The cen­tral bank’s mon­e­tary pol­icy mea­sures will be chan­neled through the pru­dent man­age­ment of re­serves

The re­view of in­ter­est rates and in­tro­duc­tion of an in­te­grated MLR ap­proach is one of many pol­icy strate­gies that RMA will be un­der­tak­ing.

On the re­serves front, main­tain­ing the sta­bil­ity of the ex­change rate peg of the Ngul­trum to the In­dian Ru­pee re­mains one of the cor­ner­stones of RMA’s mon­e­tary and re­serve man­age­ment pol­icy. The re­newed fo­cus on re­serve man­age­ment is based on a twin ap­proach of ef­fi­ciently and ef­fec­tively man­ag­ing ex­ist­ing re­serves as well as pro­vid­ing in­cen­tives to en­cour­age in­flows, tar­get­ing in par­tic­u­lar, in­ward remit­tances from non­res­i­dent Bhutanese as well as the earn­ings of ex­porters and FDI com­pa­nies.

On the credit front, mind­ful of the im­por­tant role of fi­nance in pro­mot- ing in­vest­ment, ini­tia­tives in­clude in­ter­est rate pol­icy re­form, di­rec­tion of do­mes­tic credit to pro­duc­tive sec­tors, and strength­en­ing the in­sti­tu­tional and reg­u­la­tory ca­pac­ity of the fi­nan­cial sec­tor.

The Gover­nor with the Royal Mon­e­tary Au­thor­ity Dasho Pen­jor said that the ear­lier base rate pol­icy was in­tro­duced in 2012 to pro­mote trans­parency in the pric­ing of loans. The re­view of base rate sys­tem has re­vealed that al­though the base rate was rel­e­vant to the sit­u­a­tion of ex­ces­sive credit growth in 2012-2013. How­ever, the sys­tem has sev­eral rigidi­ties in the coun­try.

The Gover­nor said that even the Re­serve Bank of In­dia (RBI) will be im­ple- ment­ing the same sys­tem star­ing Au­gust this year.

He said that with the im­ple­men­ta­tion of new sys­tem would en­sure best re­turns for de­pos­i­tors and best costs for lenders.

How­ever, the im­pact of the new pol­icy is ex­pected to bring about grad­ual changes from the fol­low­ing month, “The ef­fect of the change in the in­ter­est rate pol­icy will not be im­me­di­ate but it is ex­pected to be grad­ual, over the pe­riod of a year,” added the gover­nor.

The new sys­tem is ex­pected to gen­er­ate more com­pe­ti­tion among fi­nan­cial in­sti­tu­tions to of­fer in­ter­est rates in pro­duc­tive ar­eas.

The pol­icy has been im­ple­mented through ex­ten­sive con­sul­ta­tions with the fi­nan­cial in­sti­tu­tions, govern­ment and the Re­serve Bank of In­dia (RBI).

The new pol­icy will be im­ple­mented with ef­fect from 1st Au­gust this year and will be re­viewed ev­ery six months, based on the end of June and De­cem­ber month’s bal­ance sheets.

The im­pact is ex­pected to be grad­ual, over the pe­riod of a year, as fi­nan­cial in­sti­tu­tions in­crease their ex­per­tise and in­sti­tu­tional ma­tu­rity in com­pet­i­tively de­ter­min­ing the in­ter­est rate struc­tures. How­ever, the plat­form has been set for proac­tive com­pe­ti­tion and pro­fes­sion­al­ism with ex­pected pos­i­tive changes.

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