June 1, 2026
THIMPHU – Financial institutions in the country continue to be profitable, with rising deposits and a rebound in credit growth. Yet for many businesses, particularly small and medium enterprises (SME), one obstacle continues to stand in the way of expansion: the high cost of borrowing.
Despite the Royal Monetary Authority (RMA) reducing the Minimum Lending Rate (MLR) from 6.11 percent to 5.72 percent in 2025, commercial lending rates remain stubbornly high, ranging from about 7 percent to as much as 15 percent.
The challenge comes at a time when Bhutan is increasingly looking to the private sector as the primary engine of economic development. However, high lending rates and stringent collateral requirements continue to restrict access to finance, particularly for start-ups, small businesses, and rural enterprises.
Interest rates on bank loans range from 7.4 percent to 15 percent annually, depending on the type of loan and the level of risk involved. Priority and secured loans, including those for education, agriculture, and cooperative housing, typically attract rates of between 7.4 and 9 percent. Most commercial and SME loans fall within the 9 to 12.5 percent range, while unsecured personal loans, overdrafts, contractor financing, and some transport loans carry rates between 13 and 15 percent.
Economists warn that expensive credit is limiting investment, slowing business expansion, reducing employment opportunities, and hindering the private sector’s ability to drive economic growth.
Dr Sanjeev Mehta, a senior professor of economics at Royal Thimphu College, said Bhutan’s banking system remains heavily dependent on deposits as its primary source of funding, limiting the speed at which lending rates can fall. “When interest rates fall, depositors are less responsive due to limited alternatives, and clients are unlikely to shift savings across banks.”
Bhutanese banks maintain high lending rates while offering relatively low returns on deposits, with funding relying heavily on deposits rather than wholesale markets or capital access.
The credit-to-deposit ratio increased to 81.8 percent in 2025, indicating stronger lending but tighter liquidity buffers.
According to the RMA’s 2025 report, deposits accounted for 82 percent of total liabilities in the banking sector, amounting to Nu 260.95 billion, an increase of Nu 34.37 billion from the previous year. Fixed deposits alone contributed Nu 16.95 billion of that growth.
Paid-up capital accounted for 3.9 percent, while reserves and contingencies made up 8 percent of total liabilities.
Total deposits in financial institutions increased by 13.6 percent in the fiscal year (FY) 2024–25 to Nu 260.95 billion, driven mainly by term deposits, followed by savings and current deposits. Interest income increased by 9.8 percent to Nu 13.3 billion, outpacing a 4.8 percent increase in interest expenses, while profit after tax increased by 19.6 percent to Nu 3.6 billion.
The distribution of deposits across banks broadly mirrors credit patterns, with Bank of Bhutan (BoB) holding 45.2 percent or Nu 118.02 billion, followed by Bhutan National Bank (BNB) at 25.8 percent or Nu 67.28 billion, Druk PNB at 10.5 percent or Nu 27.38 billion, and T-Bank at 7 percent or Nu 18.16 billion.
Bhutan’s banks offer higher deposit rates for Bhutanese abroad than for residents to attract foreign currency, with savings rates of 5–6 percent compared to 4.5–5.5 percent and fixed deposits of 9–9.5 percent compared to 6.5–9.1 percent. Housing loan rates range from 8.28–9.75 percent for residents and about 8.5 percent for Bhutanese living abroad.
Switzerland offers the lowest commercial bank lending rates at about 2.86 percent, supported by a near-zero central bank policy rate. Similarly low rates are seen in Denmark, the euro area, China, and Japan, with Denmark and parts of the euro area at around 1.6–3.7 percent, China at 2.6–3 percent, and Japan maintaining very low rates due to weak inflation and long-term stagnation. Banks in the US, Japan, and Singapore do not pay interest on deposits.
Bhutan’s interest rate regime has evolved with market conditions, but many borrowers still rely on unregulated lenders offering cheaper credit without legal protection. Poor borrowers struggle with repayment, leading to forced asset sales and mortgage auctions, which deepen inequality as only wealthier buyers can afford to acquire real estate assets.
International studies on credit rationing and collateral-based lending show that stringent collateral requirements exclude low-income households from mortgage markets.
The Bozen Economics and Management Paper Series (BEMPS Working Paper) from the Free University of Bozen-Bolzano in Italy finds that such requirements act as structural barriers, limiting homeownership, slowing poverty reduction, and deepening wealth inequality.
According to the Economic and Finance Committee of the National Assembly, rural borrowers still face challenges in accessing loans despite reforms to standardise interest rates and land valuation practices, as differences in rates and valuations continue to restrict credit access.
For instance, in 2024, Bhutan Development Bank (BDBL) faced public criticism over its 15 percent annual interest rate for a Nu 1 billion collateral-free community development loan under its micro-lending programme aimed at enhancing rural prosperity through efficient financial services. The scheme received just over 30 inquiries and 12 applications.
The government has intervened through targeted policies, including interest subsidies and concessional financing under the Economic Stimulus Programme for agriculture, youth entrepreneurship, and tourism, to ensure affordable credit without undermining banking stability.
Uneven economic growth
High lending interest rates support banking stability and liquidity but come at a cost to economic growth. Economists call this “credit crunch” that limits access to finance for rural and agriculture-based SMEs, which account for over 95 percent of Bhutan’s industrial enterprises.
In developing economies, micro, small and medium enterprises account for about 90 percent of businesses and over half of global employment.
Dr Sanjeev Mehta said higher interest rates reduce private spending, shifting aggregate demand downward and slowing economic growth while increasing unemployment. “Higher interest rates will dampen short-term growth but strengthen long-term macroeconomic and financial stability.”
He explained that while large capital-intensive sectors can still expand, a “two-track economy” is emerging as small firms face greater vulnerability and survival risks.
“Larger businesses have greater capacity to manage this through multiple channels. However, small firms do not have the capacity to look for alternatives,” he added.
Bhutan’s economic growth is projected at 6.31 percent, driven mainly by hydropower and government infrastructure investment, without broad-based private sector development. This has not translated into sufficient well-paid jobs for young people, as the working-age population continues to seek employment overseas.
Credit to the private sector showed volatile, stop–start growth, falling from 19.8 percent in FY 2022–23 to 5.6 percent in FY 2023–24, before rebounding to 15.5 percent in FY 2024–25, according to the RMA.
Credit to housing declined by 1.8 percent in FY 2024–25 but remained the largest segment at 28.5 percent, while hotel and tourism accounted for 13.5 percent, up 0.5 percent.
The Private Sector Development Plan 2024–2028 states that Bhutan’s economy is constrained by restrictive regulations, limited access to finance, dominance of state-owned enterprises, and a hydropower-dependent structure, leading to higher business costs, weak private investment, and slow job creation.
The latest World Bank Development Update also points out that Bhutan’s private sector development is constrained by limited access to finance, especially due to non-performing loans, and underscores the importance of foreign direct investment for job creation.
Higher interest rates have stalled the real estate market and residential construction sector, the main driver of domestic employment. “The real estate market in Bhutan is suffering from excess capacity and risks a bubble, while higher interest rates may reduce investment flows and improve financial sector stability,” a senior economist said.
The effects extend to consumers as well. Landlords often pass higher lending rates onto tenants through higher rents, while businesses managing debt reduce wages or jobs, with lower-income workers affected first.
RMA officials said elevated interest rates drive rental inflation by raising borrowing and debt-servicing costs for property owners. “This economic squeeze is particularly acute within the working-class demographic, where incomes are primarily derived from monthly remuneration and a high share is spent on consumption.”
Building owners say lower housing loan interest rates would ease rent pressure by reducing repayment costs and helping stabilise rents, especially in Thimphu. They point out that high borrowing costs on loans of Nu 24–30 million make it difficult to reduce rents despite steady rental demand.
Dr Sanjeev Mehta said interest rates determine the cost of borrowing and affect investment decisions and profitability. “An investment is profitable only if its rate of return exceeds the interest rate. When interest rates rise, investment falls, and the risk of loan defaults increases,” he said.
The data show the banking sector is under strain, with the non-performing loan ratio peaking at 22 percent or Nu 33 billion in July 2020 before improving to 3.09 percent in December 2025. Housing, trade, and commerce remain the largest credit segments.
The Parliament is deliberating on the Insolvency and Rehabilitation Bill of Bhutan 2026 to strengthen the framework for resolving bad loans.
Banks remain profitable
Bhutan has five commercial banks – BoB, BNB, BDBL, Druk PNB, and T-Bank – and three non-bank financial institutions – Royal Insurance Corporation of Bhutan (RICB), Bhutan Insurance Limited (BIL), and the National Pension and Provident Fund (NPPF).
There are also five licensed microfinance institutions – RENEW Microfinance, Microfinance Bhutan, Bhutan Care Credit, Tarayana Micro-Finance, and Bhutan Association of Women Entrepreneurs Microfinance (BAOWE Pelzhing) – which expand access to domestic credit and support private investment.
The banking sector remains profitable, with consistent dividend payouts and strong growth in loans and deposits, despite fluctuations in net profit and tax obligations, mainly due to higher impairment costs and taxes.
In FY 2024–25, financial institutions recorded strong profitability supported by 17 percent credit growth, according to the 2025 RMA report.
Lending was mainly driven by production and manufacturing at Nu 8.26 billion, housing at Nu 6.77 billion, and tourism at Nu 6.21 billion.
Domestic credit increased to Nu 257.9 billion from Nu 220.5 billion, with commercial banks accounting for 82.7 percent of total loans and non-bank institutions 17.3 percent. BoB accounted for the largest share of loans at 35.8 percent, followed by BNB at 22.7 percent.
RMA officials said banks outperform non-banks mainly due to stronger lending operations, adding that “most profits come from interest income on loans, while fees, foreign exchange, dividends, and investments add smaller contributions,” which also shows MLR as a key driver of margins and profitability.
In 2024, BoB earned Nu 1.54 billion in profit, BNB Nu 528.31 million, BDBL Nu 152.72 million, Druk PNB Nu 281.71 million, and T Bank Nu 145.67 million, which collectively contributed Nu 1.22 billion in corporate income tax. In the non-banking sector, RICBL recorded Nu 871.31 million, BIL Nu 207.88 million, and NPPF Nu 3.16 billion.
Among 25 companies under Druk Holding and Investments, financial services comprising BoB, BNB, and RICB in 2024 contributed about 26 percent of group revenue, amounting to Nu 122.94 million.
The banking sector employs around 3,100 employees.
Bank officials say lending rates cannot be reduced arbitrarily as they depend on the cost of funds, regulatory requirements, risk, and market conditions, and that profitability ensures financial stability, protects depositors, and supports continued lending.
“While banks remain profitable, this ensures stability, protects depositors, and enables continued lending to the economy. Moreover, the bank also pays high interest rates to depositors,” said a bank official. “We recognise concerns around affordability and will continue working to balance sustainability with broader social and economic needs.”
Banks, under Corporate Social Responsibility (CSR), support education, health, environment, youth development, and vulnerable groups, including donations for events and ceremonies, which still fall short of the legal requirement to contribute at least 1 percent of net profit. With combined profits of Nu 6.9 billion in 2024, CSR obligations amount to about Nu 68.9 million.
Globally, CSR is shifting from voluntary goodwill to structured compliance frameworks, which is seen in countries such as India and Mauritius, where companies are required to spend 2 percent of profits on social and environmental initiatives.