In recent years, the government ofBhutan has been placing increasing emphasis on cottage andsmall industry (CSI) development. It has been revising the2012 CSI policy to provide strong support for the growingsector. The envisioned reforms focus on six key areas todevelop entrepreneurship ecosystems: the policy andlegislative framework, the entrepreneurship culture andhuman capital, business development support andinfrastructure, access to finance and incentives, innovationand technology adoption, and access to markets. The CSIsector has several characteristics. First, the sectoraccounts for 90 percent of industry in Bhutan. Second, as of2018, there were more than 30,000 registered CSIs in thecountry, although only a third of these are consideredactive and operational. Third, according to the 2011 WorldBank Enterprise Survey, the average number of peopleemployed by CSIs in Bhutan was 1.9 per cottage enterpriseand 6.8 per small enterprise. Fourth, the CSI sector isdominated by men. Women are more active in service-orientedindustries, where they represent more than 41 percent offirm owners. Fifth, partly because of a lack of collateral,the CSI sector has not received strong skills and financialsupport, especially in agribusiness. Except for the BhutanDevelopment Bank Limited, the exposure of financialinstitutions in the agricultural sector in 2017 was below 1percent. As part of the reform process, there have beenmultiple CSI interventions by several agencies in keysectors. The policy implementation is still ongoing, butthere are several preliminary considerations. First, thefinancial viability of CSI banks (especially REDCL) must bemaintained, and the RMA should exercise strong oversight toensure that nonperforming loan ratios are adequatelymonitored at banks. Second, trends in priority sectorlending among CSIs will need to be monitored because theyare encouraging banks to shift away from traditional lendingnorms whereby collateral and loan guarantors areprerequisites. In this context, removing disincentives (e.g.financial infrastructure, reverse factoring platform) orproviding incentives (e.g. partial credit risk guarantees)rather than lending targets on financial intermediaries mayserve the CSI segment best. The analysis suggests that theimplementation of new priority sector lending policy for CSIbanking reflects a degree of shift in RGoB approach tofoster access to finance for CSI from one mainly focused onstrengthening market functions through supporting thedevelopment of the financial infrastructure or ecosystem andinstitutional capacity to one of a higher degree ofdirigiste intervention in the allocation process of loans bythe banking system.
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