# <u><mark>East Asia and Pacific</mark></u><sup>17</sup>

# **Major Trends**

Median nominal lending rates and lending deposit spreads declined -- particularly during 2010-17 -- in virtually all countries and are below the global median. Large countries such as China, the Philippines, Thailand and Malaysia have single-digit average lending rates. The median nominal lending rate in the East Asia and Pacific (EAP) region was about 8.1 in 2017 after a decline of 2.2 percentage points within the past 15 years. Even though this median rate is below the global median of EMDEs, important disparities exist between Lower-Middle Income Countries (LMIC) and Upper-Middle Income Countries (UMIC). In comparison with the global median, most countries with high nominal lending rates are LMIC (excluding Vanuatu and the Philippines). For instance, the Lao People’s Democratic Republic (20%), Mongolia (20%), and Indonesia (11.1%) had the highest nominal lending rates in 2017. Similarly, the lending-deposit interest rate spread in EAP has been narrowing down over since 2000. Indeed, many countries had average spreads of 5% or less during the 2010-2017 period, including China, the Republic of Korea, Japan, Myanmar, Thailand and Vietnam. The median lending deposit spreads have been higher in LMIC (6.1%) than in UMIC (3%) in 2017.

# **Major Challenges**

High lending rates and spreads are not a major issue across EAP. Most of the countries with higher spreads are low income countries, many of which have poor financial sector data. Nominal lending rates remain very high in: (i) Laos PDR potentially due high external debt (113.2% of GDP in 2017); and (ii) Mongolia arguably because the country faces macroeconomic challenges including high dollarization and external public debt (71% of GDP in 2017). In addition to those macroeconomic factors, poor competition in the banking sector as well as weak credit infrastructure and institutional framework are contributing to high lending rates in some countries. In Indonesia, nominal lending rates have come down but remain high, with dispersion across credit markets (lowest for investment lending, higher for consumption, micro credit, and working capital). In general, foreign banks have lower spreads than state-owned banks.

# **Policy Overview**

Some countries have attempted to overcome those challenges by capping interest rates, but results were mixed. Indonesia introduced deposit rate caps in 2013 to overcome excessive competition in deposit markets due to aggregate liquidity shortages. Contributing factors of high lending rates in Indonesia include liquidity tightening, lack of economies of scale, high risk premiums, operational inefficiencies, high market power of large banks, and weaknesses in the institutional environment.

In addition to interest rate caps, some countries introduced portfolio targets to direct credit to micro, small, and medium enterprises (MSMEs) and launched guarantee and interest subsidy programs. To foster credit to MSMEs, the government extended its credit guarantee and interest subsidy programs to MSME and micro lending.

> 17 This regional section is based on substantive inputs provided by Ana Maria Aviles (FCI-EAP), and Richard Record (MTI-EAP).

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