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