The Bhutanese Leading the way.
As youths graduate from colleges or finish their high schools, the first thought is usually to get into a salaried job, preferably a government one.
The Royal Monetary Authority (RMA) working with the government and National Land Commission (NLC) wants to instead encourage entrepreneurship and boost Bhutan’s economy and exports by strengthening the Cottage and Small Industries (CSI), which also includes the agricultural sector.
They want to do this by not only offering collateral free loans through Financial Institutions up to Nu 10 mn but also institutional support, land and timely clearances, right down to the Dzongkhag level.
The Prime Minister Lyonchhen Tshering Tobgay said, “This is borne out of His Majesty’s vision to allow for greater access to finance for rural Bhutan. This will lead to an economic revolution in rural Bhutan.”
The PM said that there would be support for the agriculture, cottage and micro industries and industries and ventures of all sizes.
“It will contribute to rural prosperity and as well as prosperity for the overall economy,” said the PM.
The RMA has said the support will be for rural as well as urban entrepreneurs.
RMA, Govt & NLC come together
The RMA on 31st October presented to the cabinet its Priority Sector Lending (PSL) policy that encourages and incentivizes Financial Institutions to give up to Nu 10 mn of collateral free loan for Cottage and Small Industries.
The incentive is tax breaks for loans to the Cottage and Small Industries as per the fiscal incentives of the government. The RMA on its part can give higher ‘management score’ to the banks fulfilling its targets which would enable banks to give bonuses to its employees and also better dividends to its shareholders. The target is tentatively set at Nu 1.5 bn a year of lending to the CSI sector. Currently the RMA imposes limitation on dividends that can be given to shareholders.
The cabinet whose support to RMA is also crucial for the administrative back up gave its full support to the PSL policy.
The government support becomes important, as the government through its agencies like the Department of Cottage and Small Industries, Ministry of Agriculture and Forests, National Environment Commission etc will coordinate with the RMA to provide technical and institutional support for CSI projects along with timely clearances and less red tape.
Another key autonomous government agency here is the National Land Commission which has come up with the User Rights Certificate (URC) whereby government land can be given for use to youth, farmers and interest people, This is done through a certificate for that particular land use like commercial agriculture, food processing etc. The URC, however, is not a thram and will be valid as long as the land is used for that purpose. The important aspect of URC is that it opens up a land bank for interested entrepreneurs and at the same time is flexible.
A key aspect of the whole program where the government agencies come in is decentralization and empowering of local governments and sector officials at the Dzongkhag level. So under the PSL the Dzongdas will have a committee to receive and scan CSI proposals for lending, and if found to be valid and feasible, then it will be approved after which the person can approach any of the banks for financing. The Dzongkhag which will also have various line officials will facilitate faster and timely clearances like forest, environment etc as per the laws.
Financial and Technical windows
The PSL policy in that sense will have a ‘financial window’ where Financial Institutions will take care of financing to meet the RMA’s loan targets and products for the banks.
Working in tandem to this is the ‘Technical window’, which will be supported by the government, which has to do with institutional support, technical support and clearances. Even regulatory agencies like BAFRA will be encouraged to take on a facilitator’s role of not only regulating but also supporting the proposed business to come up. For example, the NEC while doing its job will be encouraged to facilitate timely clearances.
A senior RMA official said that these Financial and Technical windows are very important because the two main obstacles to business are getting the finance and then ensuring a supportive environment.
He said that when a youth goes to approach a bank for a loan the first obstacle is that the youth has no collateral, which the financial window now takes care of. He said the second obstacle is that the banks are reluctant to invest in a business where they feel it may not be viable due to factors like regulatory environment, lack of support, lack of technical input etc. This is where the Technical window comes in to facilitate the business.
The Prime Minister here said, “We will ensure that all relevant agencies work together and that decision making is not delayed. We have to ensure technical backstopping and for rural enterprises, line agencies can help be it agriculture, cottage industries, tourism, handicrafts etc.”
Not agriculture driven only
The RMA official said a misperception about the PSL, especially among the youth, is that it is agriculture focused and driven.
He, however, clarified that the PSL initiative would target the CSI sector of which agriculture is only a part. The official said that the CSI sector would have manufacturing, marketing, services, apps, transport etc and many other business ideas that the youth can take part in. He said that PSL should not be misunderstood by the youth to be an initiative to send youth back to the villages.
Under Agriculture, the focus is on commercial farming for export where large tracts of land are taken through the NLC and then banks finance the capital of a machine driven and less labor-intensive farm system. An example is a green house pilot project in Wengkhar where youth can use mobile apps to drip irrigate their crops instead of manually irrigating them.
The RMA official said that food production is just one component of agriculture but there are other things like transportation, processing and marketing where youth can get involved. He said that the agricultural sector under the PSL scheme has to show it is a viable and doable one and only once that is demonstrated then youth would move into this field.
The finances
On the financial part apart from the 1.5 bn estimated annual investment in the PSL for CSI the loans for the agricultural sector will be capped at 8 percent while for the non-agricultural sector it will be at 8.5 percent. Loans up to Nu 500,000 will not require any collateral and will get 100 percent financing but it requires the person to have a life insurance so that incase the loan cannot be paid the loan is at least insured.
From Nu 500,000 onwards to Nu 10 mn there is still no collateral required but the main capital investment must be insured like a truck, machinery etc and financing will only 70 percent which means the person seeking the loan has to come up with the remaining 30 percent.
In both cases, the loan has to be paid back and while the insurance will provide protection in case of accidents, death etc it will not mean that loans will be waived off for failed ventures.
The RMA official said that every aspiring businessperson has to take a certain element of risk.
The PSL scheme also does not want to give any impression of loan waivers given that five commercial banks are involved. The RMA official said that Bhutan does not have a precedent of loan waivers and it would not start now. He explained that in certain other countries political loan waivers was actually bad for farmers, as the banks would then refuse to give future loans.
Of the Nu 1.5 bn around Nu 1 bn will be for the non-agricultural sector while around Nu 500 mn will be for the agricultural and livestock sector.
The RMA is already training bank officials to deal with the PSL policy.
Coordination is the name of the game
However, more than the money the most important factor in PSL is the coordination across a variety of sectors from banks, regulatory agencies, government departments, NLC and local government.
The combination of the above will provide ideas, training, capital, land, removal of red tape, technical support, timely clearances and a supportive over all environment.
The RMA has also asked the Labour Ministry and DHI to come up with more entrepreneurship trainings.
According to RMA officials, there has been a huge and positive response from Dzongdas and local people in the Dzongkhags who are looking forward to the scheme.
There is appreciation in the Dzongkhags that the Dzongkhag administration is being empowered to receive and screen PSL proposals without people having to come to Thimphu.
With so many sectors involved in this massive and all encompassing enterprise, the RMA will be working closely with the government.
The RMA will soon be forming a PSL Committee in Thimphu that will have all the relevant sector representatives and it will meet ever three months to review and suggest improvements and changes to the PSL once it kicks off.
The RMA on 13th December will release its PSL policy which will list out specific priority areas for the banks along with other things.
The RMA is also coming up with a financial standard operating procedure and in cooperation with the government, it is coming up with a technical standard operating procedure that lays out the procedures and processes for PSL.
A change in the mindset
The PLS is not only a financial and administrative measure but also an attempt to change the mindset.
A RMA official said that even since His Majesty The King’s National Day address in Trongsa on 17th December 2016 the RMA and the banks and had been inspired to come up with the PSL.
His Majesty in the address had pointed out the need to make use of the limited arable land well for productive purposes and had also pointed out that that there would be countless benefits if financial institutions are able to extend unstinted support to young entrepreneurs and farmers.
The NLC Secretary Pema Chewang had earlier said, that the URC is the vision of His Majesty The King with the aim of using the limited arable state land in a sustainable way for economically productive activities in rural areas.
The mindset change in PSL is important as it also aims to make Bhutanese youth to not only think of salaried jobs but to become entrepreneurs using the natural advantages of Bhutan and in the process enrich themselves, help the nation’s economy and create jobs.
The other equally important mindset change is within the various government agencies that normally tend to work in silos or do not have much coordination with each other.
A RMA official said that the Dzongda is actually the CEO of the Dzongkhag but in reality, some of them act like ‘Governors,’ and are not seen as being accessible to the local people.
“The Dzongda under the PSL is the CEO and should go out and encourage people to come up with business ideas and also support them in the process,” said the official.
Ultimately, the role of the government is very critical given that RMA in cooperation with the five banks will muster up the finances.
The government will have to help ensure that the mindset changes among its various administrators and officials, that there is technical and regulatory support and that the entire environment is more conducive.
The PM said that all agencies have to be prepared to work together and be prepared for various activities.
The PSL policy will become effective from 1st January 2018, and the year will be seen as a rolling out year and things will get stricter and more formalized from 2019 onwards.
