It is going to get more expensive to borrow money from banks. The Royal Monetary Authority issued a news release last week announcing that it is increasing the Minimum Lending Rate, MLR, by six percentage points. The MLR is the lowest interest rate a bank can charge its customers for loans.
The Minimum Lending Rate for the next six months, starting March will be 6.91 per cent. Banks use the MLR as a base rate to determine the interest rates for various loans they offer borrowers.
Following the revision, each bank now has to adjust its lending rates for the next six months based on this new MLR.
The MLR is determined using three parameters, which are common across all financial institutions. They are operating costs, marginal cost of funds, and cash reserve requirement or CRR.
Operating costs represent the expenses necessary for the day-to-day functioning of banks like rent, utilities, salaries, and supplies.
The marginal cost of funds is the expenses incurred by financial institutions to raise additional funds through deposits or loans.
And, CRR is the portion of cash deposits that is mandatory for financial institutions to maintain as reserves. This requirement ensures banks have sufficient cash to meet customer withdrawals and other financial obligations. It also serves as a tool for monetary policy control.
According to the RMA, the current MLR was increased owing to banks in the country seeing an increasing number of time deposits and higher costs incurred to pay interest on those deposits.
According to central bank figures, time deposits increased from a little over Nu 106bn in June last year to almost Nu 115bn in December.
On the other hand, economists say an increase in the MLR suggests that financial institutions are facing higher costs or risks associated with lending money.
“It cannot be anti-inflationary because inflation rates are also not very high. It means restrictive quantitative policy. Quantitative restrictions. So, this could reduce borrowings. Higher interest rates mean high risks of lending capital. This means non-performing loans are likely to rise in the future and they want to prevent banks from lending to riskier sectors,” said Sanjeev Mehta, Economics Professor at Royal Thimphu College.
He added that the inefficiency of bank operations is now being passed on to the investors, which is not good.
“Raising interest rate has an impact on the economy. First thing, it will affect investments. Because it will raise the cost of borrowing. At a time when Bhutan’s economy is looking for higher growth targets to achieve a 12,000 US dollar per capita economy by 2034, this may adversely affect investment. From that perspective, it is not a good reaction.”
An increase or decrease in MLR influences the overall cost of borrowing in the economy and affects consumer spending and investment decisions.
Sherub Dorji
