RENUKA RAI | Thimphu
The government is set to engage with the Royal Monetary Authority (RMA) and financial institutions to review Bhutan’s lending rate framework amid growing concerns that high borrowing costs are constraining business growth, discouraging investment, and placing additional financial pressure on households.
The issue was brought to the forefront during the National Assembly’s Question Hour session on June 9, when Radhi-Sakteng MP Tashi Tenzin questioned whether the government had begun reviewing lending rates in collaboration with the RMA and financial institutions, as previously pledged to support private sector development.
His question comes at a time when Bhutan is increasingly looking to the private sector to drive economic growth, generate employment, and reduce reliance on the public sector. However, many businesses, particularly small and medium enterprises (SMEs), continue to cite the cost of borrowing as one of the biggest obstacles to expansion and investment.
Responding to the query, Finance Minister Lyonpo Lekey Dorji said the government has already directed the RMA, in consultation with financial institutions, to review key components of the country’s lending rate framework, including the Minimum Lending Rate (MLR) and expected credit loss requirements.
According to the minister, the review aims to determine whether borrowing costs can be reduced while preserving the stability and soundness of the financial sector.
“A thorough review of all elements of the MLR will be required,” Lyonpo Lekey Dorji told the House. “Affordable lending rates are essential to improve access to credit, encourage investment, and support business growth.”
The issue gained further momentum after Deputy Speaker Sangay Khandu directed that the Ministry of Finance, the Economic and Finance Committee of the National Assembly, and the RMA hold further discussions after the current parliamentary session to explore options for easing borrowing costs.
The discussions come despite the RMA’s decision in March this year to reduce the Minimum Lending Rate from 6.11 percent to 5.7 percent. While the reduction was expected to make borrowing more affordable, many businesses say they have yet to see a meaningful decline in lending rates.
According to figures shared during the parliamentary discussion, the average lending rate in Bhutan remains around 11 percent, while savings deposits earn an average return of only 4.55 percent. This leaves a spread of approximately 6.45 percentage points between what banks charge borrowers and what they pay depositors.
Commercial lending rates currently range between 8 and 14 percent across financial institutions.
For many business owners, particularly SMEs that depend heavily on bank financing, these rates remain prohibitively high. Entrepreneurs argue that expensive credit increases operating costs, reduces profitability, and limits their ability to invest in expansion projects.
MP Tashi Tenzin said that the government must take stronger action to address the issue if it wants the private sector to become a genuine engine of economic growth.
“Bhutan is also grappling with a significant level of non-performing loans, which amount to billions. More than 51 percent of these defaulted loan accounts are held by farmers. In addition, house owners are increasing rental prices, largely due to the high interest rates on housing loans,” he said.
The MP argued that lending rates have consequences beyond businesses alone. High borrowing costs for housing loans, he said, ultimately contribute to higher rents, increasing the financial burden on ordinary citizens.
“For instance, rent is very high, which is linked to higher housing loan lending rates. Many spend 35 to 45 percent of their monthly salary on house rent alone,” he said.
The concerns raised by lawmakers reflect a broader debate about whether Bhutan’s current lending framework adequately supports economic growth.
Finance Minister Lekey Dorji explained that lending rates are determined through a combination of regulatory requirements and commercial considerations. At the core of the system is the Minimum Lending Rate, which serves as the benchmark lending rate for financial institutions.
According to the minister, the MLR is calculated based on several factors, including the marginal cost of funds, the negative carry associated with maintaining the cash reserve ratio, and banks’ operating expenses.
Beyond the benchmark rate, financial institutions apply additional commercial spreads to account for credit risk, tenor risk, and business strategy considerations. These components together determine the final interest rate paid by borrowers.
The minister said the government and the RMA are now examining whether some of these factors can be rationalised.
“During the recent MLR review meeting with the RMA, we agreed to review and rationalise factors such as operating costs and credit risk premiums to explore the possibility of lowering lending rates,” Lyonpo Lekey Dorji said.
The review is expected to assess not only how lending rates are calculated but also whether existing requirements related to expected credit losses and risk management can be adjusted to make credit more affordable.
However, the finance minister cautioned against viewing lower interest rates as a simple solution to all financing challenges.
He pointed out that non-performing loans continue to be a major concern within Bhutan’s financial sector and that loan defaults can occur even when credit is offered at highly concessional rates.
According to data shared during the parliamentary discussion, around 2,528 of Bhutan’s 7,082 non-performing loan accounts belong to farmers, accounting for approximately 35 percent of all NPL accounts.
The minister also cited experiences under programmes such as the National Credit Guarantee Scheme and loans provided through the Cottage and Small Industry Bank, where significant levels of default were recorded despite lending rates being as low as two to four percent.
“Non-performing loans can still occur despite low concessionary lending rates,” Lyonpo Lekey Dorji said, suggesting that factors such as business viability, market conditions, and borrowers’ repayment capacity often play a greater role than interest rates alone.
He further noted that microfinance institutions maintain relatively low levels of non-performing loans despite charging significantly higher lending rates.
“Microfinance institutions maintain a low NPL rate of about 2 percent despite charging lending rates as high as 20 percent,” he said.
The remarks highlight the complexity of the issue facing policymakers. While businesses continue to demand lower borrowing costs, regulators must also ensure that financial institutions remain stable and capable of managing risks.
The RMA reviews the MLR every six months. Introduced in 2016, the MLR was designed to serve as a transparent benchmark that reflects the actual cost of funds while encouraging competition within the financial sector.
Over the years, the framework has played an important role in guiding lending decisions. However, the growing gap between lending and deposit rates has led to increasing scrutiny from businesses, lawmakers, and consumers.
The latest discussions suggest that policymakers are now willing to revisit key elements of the framework in search of a better balance between affordability and financial stability.
Economists generally agree that lower lending rates can stimulate economic activity by reducing borrowing costs for businesses and households. Cheaper credit can encourage firms to invest in new projects, expand operations, and hire more workers. It can also boost consumer spending on housing, education, and other major purchases.
At the same time, economists warn that reducing lending rates too aggressively can carry risks. Increased borrowing may contribute to inflation if demand rises faster than supply. Lower rates can also encourage excessive debt accumulation, reduce bank profitability, and increase imports, placing pressure on Bhutan’s foreign currency reserves.
For Bhutan, where private sector growth is increasingly viewed as essential for long-term economic resilience, finding the right balance will be critical.
As discussions continue between the Ministry of Finance, the National Assembly’s Economic and Finance Committee, the RMA, and financial institutions, businesses will be closely watching for signs of reform.
While no immediate changes have been announced, the government’s decision to undertake a comprehensive review of the lending rate framework signals recognition that access to affordable finance remains one of the most pressing challenges facing Bhutan’s private sector. The outcome of the review could shape not only the future cost of borrowing but also the pace of investment, entrepreneurship, and economic growth in the years ahead.
