Lending Minimum Rate

Context
Recently, the Central Bank of Bhutan (RMA) has announced tan increase in he raising of
minimum lending minimum rate by 6 percentage point starting beginning this from March
that is from Nu. 6.86% to 6.91%. The minimum lending rate wasis determined by the Royal
Monetary Authority (RMA) of Bhutan based onconsidering various factors such aswhich
included economic conditions, inflation rates, monetary policy objectives, and the overall
stability of the financial system. The RMA assesses considers various factors to set a rate
thatto fix the rate to encourages lending while also ensuringand to ensure financial stability of
an economy.

2. Factors influencing changes in Minimum Lending Rate (MLR)

by RMA starting March 2024 from Nu. 6.86% to Nu.fixed the rate to 6.91% includes
considering the following factors:-

Operating costs: Inflation trends in the economy have led to increased operational costs for
banks, such as rents, utilities, and salaries following the 6th pay revision in 2023.

Inflation: High inflation rates prompted the RMA to raise the minimum lending rate to curb
spending and alleviate inflationary pressures.

Cash Reserve Ratio (CRR): The decline in CRR also contributed to the increase in MLR.
CRR is a mandatory reserve for banks and financial institutions to maintain liquidity for
unforeseen emergencies, and its decline necessitated a higher MLR to ensure financial
stability.

i. i. Operating cost: Tthe recent inflation trends in the economy has have
resulted in rise in price of day to functionsoperational costs for of banks like
such as rents, banks utility services and increase in salaries of the banks
workers as perfollowing the 6th pay revision in 2023.

ii. ii. Inflation in the country: High inflation rates had prompted the RMA to
raise the minimum lending rate to curb spending and reduce inflationary
pressures.

iii. iii. Cash Reserve Ratio (CRR) : The decline in CRR is another factor that
pushed RMA to increase the LMR. CRR is the portion of cash deposits that is
mandatory for banks and any other financial institutions to maintain as
reserve for the unforeseen emergencies, and its decline necessitated a higher
MLR to ensure financial stability.

This ensures banks have sufficient cash to meet customer withdrawal and
other financial obligations. It also serve as a tool for monetary policy control
like on 17th February 2024 Ministry of Finance has issued a notification on
moratorium on import of vehicle to ensure minimum foreign currency
reserve that is adequate to meet the import of essentials for not less than one
year. The rise in MLR act as monetary policy to control the money flow to
foreign economy.
3. The lending minimum rate fixed by the RMA can impact the economy in
several ways such as:
1. High Cost of borrowing : A higher minimum lending rate increases the
cost of borrowing for businesses and consumers, which can dampen
investment and consumption spending. According to the Professor Sanjeev
Metha, higher interest rates mean high risks of lending capital. This means
non-performing loans are likely to rise in the future and banks want to
prevent banks from lending to riskier sectors to prevent the non performing
loans.

2. Economic growth in long term: Aaccording to Sherub Dorji, in BBS he said

that while higher lending rates may reduce borrowing and investment in the
short term, however, they can contribute to long-term economic stability and
sustainable growth by preventing asset bubbles and excessive risk-taking.