The government has launched the priority sector lending (PSL) guidelines that aims to transform the Cottage and Small Industries (CSI) sector through better access to finance and increased opportunities for youth employment.
Loans up to Nu one million for cottage industry and upto Nu 10 million for small industry will be available at 8 percent interest for the agriculture CSI and 8.5 percent for non agriculture CSI.
The guidelines will be effective from January 2018.
The RMA says the support from the Government agencies and the financial institutions has been overwhelming and the result of the engagement of key partners has been a broad-based ownership of the project which is crucial to successfully implement the Guidelines.
In particular, the RMA held several meetings with the following agencies to better understand streamline and coordinate the various interventions, regulatory clearances and processes. The agencies are Ministry of Agriculture and Forests, Department of Cottage and Small Industry, Ministry of Economic Affairs, National Environment Commission, National Land Commission, Bhutan Agriculture and Food Regulatory Authority, Ministry of Finance and Ministry of Labour and Human Resources.
The RMA also met several times with the five commercial banks and the two insurance companies jointly as well as bilaterally to take into account their concerns and feedback. In consultation with the financial institutions, the RMA has prescribed the lending targets for 2018 and the ceiling preferential lending rates for the financial sector’s lending to the agricultural and non-agricultural CSIs. The financial institutions are free to compete within the prescribed preferential lending rates ceiling.
In addition, to address the issue of collateral-based lending to agriculture, the RMA requested the two insurance companies to design affordable insurance products keeping in mind broader national objectives.
The policy says that successive Governments have made huge investments in basic infrastructure such as road connectivity, water supply, electricity and telecommunications. Combined with improved access to finance, the PSL Guidelines is expected to complement the Government’s e orts for more inclusive growth and enable the beneficiaries to take advantage of existing infrastructure to boost their incomes and improve their livelihoods through engagement in the CSI sector.
In addition, the Government also provides numerous support schemes to the CSI sector through a dedicated Department of Cottage and Small Industry under the Ministry of Economic Affairs, as well as through youth-focused entrepreneurship development programs funded by the Ministry of Labour and Human Resources, while the Ministry of Agriculture and Forests provides several subsidies and support schemes to the agriculture sector.
Integrating such interventions from the Government with collective commitment from the financial sector for better financing is expected to catalyze the CSI sector into a growth driver that will contribute to achieving Bhutan’s overarching national goal of sustainable and inclusive socio-economic development.
While the main objective is to encourage commercially-oriented business in the CSI sector through the engagement of groups, cooperatives and incorporated companies, the guidelines also recognize the importance of individuals and has given due consideration to financing needs of the individuals.
The guidelines identify the CSI sector as a priority for targeted lending and increased coordination and efficiency in the delivery of government support schemes and incentives.
The CSI sector has immense relevance to the Bhutanese economy as the largest source of domestic production and employment, especially for the growing youth population, and in addressing challenges in the agricultural sector and rural-urban migration.
The sector is divided into agricultural and non-agricultural activities. Agricultural CSI includes primary production and value-added activities such as processing, packing, marketing and sales while non-agricultural CSI includes company’s production /manufacturing and services.
Projects with investment up to Nu 1 million is defined as ‘Cottage’ and those with investment size above Nu 1 million and up-to Nu 10 million is defined as ‘Small’ industry. Farmers and young entrepreneurs are the preferred clients for PSL lending and can avail loans as individuals, as groups/cooperatives or as a company incorporated in Bhutan. PSL financing will be available for both new CSI businesses startups as well as for CSI business expansion. Financial institutions must ensure that loans are provided for both categories.
Groups and cooperatives wishing to avail Agricultural CSI related financing must register with the agriculture ministry and fulfill the requirements stipulated in the “Rules on the Fiscal Incentives Act of Bhutan 2017” to be eligible for the incentives.
During the launch on December 13 in Thimphu the Prime Minister said that it is important for people in the country to work according to their capability and to work for the country’s economy.
He said that having a skill is not sufficient they must also have an investment to start any kind of business. “We have lots of youth graduating every year and at times we see imports of goods from outside and this indicates the opportunity in our country,” he added.
Until last year the government could not give a good investment opportunities to the people, he said, adding that, this is why they have come up with the PSL guideline where anyone – farmer, youth or businessmen – can avail the loan at lower interest rates.
Except for the Bhutan Development Bank Limited (BDBL), the exposure of financial institutions to the agriculture sector in 2017 was below 1%. With the PSL guidelines in place the 2018 target for lending to Agricultural CSI for all banks is to increase their exposure to 1% of their respective loans.
On non-agricultural CSIs there was a large variance in the current exposures of the financial institutions therefore an incremental target of increasing it by 1 percentage point over the exposure as of June 2017 has been set.
“PSL program is different from other programs as it involves all the financial institutions and government (associated agencies) will provide the support whenever needed,” Lyonchhen said.
The PSL guideline states that the Government has recognized CSI sector as one of the five economic jewels of Bhutan. Numerous support schemes and incentives are already in place to promote the RNR sector and the CSI sector, through MoFA, DCIS and MoEA. In addition, the Government’s Fiscal Incentives Act of Bhutan 2017 provides many fiscal incentives to the CSI sector.
All crops under Priority Sector Lending are covered for insurance. Existing crops and horticultural plants insurance scheme states that the amount premium is 2.9% on the sum insured (for every Nu 100,000 worth of crop the premium payable is will be Nu. 2900/- per annum).
Non-agricultural CSI can be insured under existing fire or industrial insurance and the premium will depend on the type of processing unit, the structure, the type of stocks and machines, the location, the risk assessment etc.
A Priority Sector Lending Council has been formed to monitor and evaluate the implementation of the PSL Guidelines and to provide recommendation to continuously improve the Guidelines. The Council will be chaired by the RMA and comprise of representatives from all government and nancial sector partners.
The Priority Sector Lending (PSL) Guidelines is the outcome of the vision of His Majesty the Druk Gyalpo as articulated during His Majesty’s National Day Address in Trongsa in December 2016, wherein, the opportunities that the nancial sector can create for our youths and farmers in entrepreneurship and commercial farming were articulated. Since then, the Royal Monetary Authority of Bhutan has been working closely with several government ministries and agencies and the nancial sector to translate and implement His Majesty’s aspiration.