With a prayer ceremony, Prime Minister Tshering Tobgay launched the Priority Sector Lending (PSL) Guidelines 2017 at the Kuenrey of Simtokha Dzong yesterday in Thimphu.
An outcome of the vision of His Majesty The King, the PSL guidelines provides loan schemes for the cottage and small industries (CSI) sector, which is divided into agricultural and non-agricultural activities.
Agricultural activities include primary production and value-added activities such as processing, packaging, marketing and sales. Non-agricultural CSI comprises manufacturing and services.
It is estimated that PSL will inject a total of Nu 1.5B capital in the CSI sector (Nu 530M for primary agriculture and livestock production and Nu 950M for non-agriculture CSI). This will be achieved if every bank increases their lending in the agriculture and CSI by one percent.
A client can borrow upto Nu 10 million depending on the types of investments. (see box for details)
The interest rate for lending funds for agricultural activities is 8 percent, while it is 8.5 percent for non-agricultural activities. The PSL guidelines will come into effect from January 1, 2018.
The launch comes a year after His Majesty The King reminded the financial sector during the National Day address in Trongsa last year, of the opportunities the sector could create for youth and farmers in entrepreneurship and commercial farming.
According to a press release from the Royal Monetary Authority (RMA), projects under the agricultural CSI sector must be insured so that insurance would substitute as collateral. Loans for non-agricultural activities will be based on cash flow or project financing along with fire and theft insurance.
Farmers and young entrepreneurs are the preferred clients for PSL. PSL clients can avail loans as individuals, groups or as a company incorporated in Bhutan. PSL financing will available for both new startups as well as CSI business expansion.
According to the PSL Guidelines, financial institutions should ensure that loans to priority sector activities are serviced through Special Credit Channels that provide PSL clients requisite information and support as well as coordination with the government’s special technical window.
The financial institutions will be responsible for organising the set-up and operations of their respective special credit channels.
All priority sector projects should be routed through the Special Technical Window Services (TWS) of the government. TWS will also be responsible for providing technical clearances to potential clients by coordinating with other agencies like local governments, the National Land Commission and the National Environment Commission.
TWS would be responsible for reviewing and assessing project proposals and assist, advise and guide clients in developing a commercially feasible project proposal.
A detailed Standard Operating Procedure will be developed to outline the terms of reference for the operation of the TWS and coordination with the financial institutions.
Lyonchhen Tshering Tobgay said the CSI sector was one of the jewels of the economy with enormous potential. “We are happy to launch this initiative with prayers at the Simtokha Dzong,” he said.
He said His Majesty The King had commanded that youth and people in the agriculture sector needed financial assistance and that accordingly, the PSL Guidelines was launched.
Lyonchhen said PSL was required to supplement the loans provided by financial institutions like BDBL and REDCL. “The PSL initiative would be a revolutionising factor in the economy,” he said. “People needed capital to do business and this PSL initiative would provide just that.”
On how the government and the financial sector would deal with possible cases of non-performing loans, Lyonchhen said that the issue would not arise as long as the borrowers are willing to work hard and sincerely. “Moreover, the interest is also low,” he said.
A PSL Council will be established to periodically review and coordinate the interventions and the role of the financial sector to ensure the success and relevance of the policy objectives.
Except for Bhutan Development Bank Limited (BDBL), the exposure of financial institutions to agriculture in 2017 was below one percent. Lending to agricultural CSI for all banks for 2018 should increase to one percent of their loans.
RICBL and BIL are also exempted from this agricultural CSI lending target since they have developed affordable insurance products, according to RMA.
The PSL Guidelines is an integrated platform that coordinates interventions of several government agencies to stimulate the CSI sector as an important driver of Bhutan’s economic transformation through improved access to finance.
A special government window in the form of Dzongkhag PSL Committee chaired by the dzongdag will coordinate the interventions of all relevant government agencies to provide seamless delivery through a single window that constitutes representatives from all dzongkhags.
Similarly, access to loans from financial institutions will be coordinated through special credit channels in each of the financial institution.
A PSL Council will monitor and evaluate the implementation of the PSL Guidelines. The Council will be chaired by the governor and would comprise representatives from all government and financial sector partners.
Representatives from government agencies and financial institutions are being trained to implement the PSL.