TIL BDR GHALLEY | Thimphu
National Council members have called for easier access to finance for cottage and small industries (CSIs), proposing relaxed lending requirements and dedicated low-interest financing for small businesses as concerns grow over limited credit access and rising non-performing loans.
The proposal was raised in National Council eminent Member Phuntsho Rabten, who said access to affordable finance remained essential for the survival and expansion of small enterprises, but noted that existing lending frameworks had not delivered the intended impact.
He called for coordinated policy action involving the Ministry of Industry, Commerce and Employment, the Ministry of Finance and the Royal Monetary Authority, including incentives for financial institutions to ease collateral requirements and the creation of dedicated low-interest financing windows tailored to small businesses.
Phuntsho Rabten said Bhutan had already introduced a range of support mechanisms for small industries, including credit guarantee arrangements and dedicated financial institutions, but argued that implementation gaps and structural constraints continued to limit effectiveness on the ground.
He cited earlier initiatives such as the National Credit Guarantee Scheme and the establishment of specialised lending institutions aimed at supporting cottage and small industries, saying these measures were designed to address long-standing barriers in access to formal credit.
However, he said evidence and stakeholder feedback indicated that small businesses continued to face difficulties in securing loans under existing systems, while non-performing loans in the segment had also increased, raising concerns about sustainability and risk exposure within the financial system.
“Small business—finance is important,” he said, emphasizing that financial access remained central to the operation and expansion of small enterprises.
He added that while financial support mechanisms were necessary, weak policy design and inadequate implementation could result in repeated inefficiencies, including losses to the state without corresponding improvements in enterprise outcomes.
Cottage and small industries in Bhutan are widely regarded as a key driver of employment, particularly in rural areas, and a central component of government efforts to diversify the economy beyond hydropower and public sector activity.
In response to the concerns raised in National Council, the Ministry of Industry, Commerce and Employment said it had already developed a set of financing reforms under the Industrial Development Roadmap of Bhutan 2025, which aims to strengthen the country’s industrial base and support long-term economic diversification.
The ministry said the roadmap was aligned with Bhutan’s broader 21st Century Economic Roadmap and focused on building a more resilient, innovation-driven and inclusive economy, with particular emphasis on expanding private sector participation and reducing import dependence.
Itacknowledged that Bhutan’s financial system remains largely dependent on collateral-based lending, which limits access for small firms, start-ups and new industries that often lack physical assets to secure loans.
To address this constraint, the ministry said the roadmap proposes a shift toward more flexible financing models, including concessional lending arrangements and sector-specific credit allocation frameworks designed to channel a defined portion of bank lending toward priority industries, including cottage and small enterprises.
It said the proposed system would include lower interest rates for targeted sectors and, in some cases, lending arrangements that reduce or eliminate collateral requirements for eligible borrowers.
The ministry also proposed introducing alternative financing models beyond traditional bank loans, including venture capital and equity-based financing, aimed at supporting start-ups and innovation-led enterprises that are unable to meet standard lending criteria.
It added that such models would allow investors to share business risk and returns, thereby reducing pressure on entrepreneurs who lack fixed assets but have viable business ideas or scalable operations.
Another proposal under consideration includes performance-based lending, where credit decisions would be based more heavily on business viability, cash flow potential and creditworthiness rather than physical collateral.
According to the ministry, this approach is intended to better support early-stage enterprises whose value is often derived from intellectual property, market potential or projected earnings rather than tangible assets.
The roadmap also outlines asset-backed lending mechanisms, allowing businesses to secure financing using industrial equipment, machinery, inventories and factory assets as collateral, expanding the range of acceptable security beyond traditional land-based guarantees.
In addition, revenue-linked repayment models have been proposed, under which loan repayments would be tied to a percentage of business income rather than fixed instalments, providing greater flexibility for enterprises with seasonal or irregular cash flows.
The ministry further recommended strengthening credit guarantee schemes to reduce risk exposure for financial institutions, with partial government guarantees intended to encourage banks to expand lending to higher-risk but potentially productive sectors.
It also proposed blended financing approaches combining public funds and private capital, alongside soft loan facilities supported through industrial development funds, to improve affordability and access for small enterprises.
The Royal Monetary Authority said Bhutan has made sustained efforts over time to improve access to finance for cottage and small industries through a series of policy interventions and targeted credit programmes.
These include the Priority Sector Lending framework, the National Credit Guarantee Scheme, the National CSI Bank and Bhutan Development Bank Limited, all of which were established or adapted to improve credit flow to underserved segments of the economy.
The authority said these measures, in principle, align with international financial inclusion practices aimed at expanding access to credit for small enterprises and rural borrowers.
However, it noted that outcomes have been mixed, with continued evidence of elevated non-performing loans in lending portfolios targeting cottage and small industries.
The RMA attributed this to a combination of factors, including weak project viability, limited financial literacy among borrowers and insufficient post-lending monitoring and support mechanisms.
It said these challenges have contributed to continued risk aversion among financial institutions, which often revert to stricter collateral requirements despite policy guidance encouraging relaxed lending conditions.
The authority said this has reduced the effectiveness of credit expansion measures and limited the flow of financing to intended beneficiaries such as small entrepreneurs and rural businesses.
It also referred to the Economic Stimulus Programme, under which concessional loans were offered at interest rates as low as 4 percent, alongside regulatory relaxations including higher loan-to-value ratios 90 percent intended to ease borrowing constraints.
The programme also established dedicated implementation units within development banks to improve loan processing efficiency and expand outreach to underserved borrowers.
While the initiative provided short-term liquidity support, the RMA said challenges remained in targeting, repayment capacity and long-term sustainability of subsidised lending models.
It said many small businesses, particularly those led by youth, women and rural entrepreneurs, continue to face difficulties in accessing timely and adequate financing to convert business ideas into viable enterprises.
The authority said future policy interventions would need to move beyond interest rate reductions and collateral relaxation alone, and instead focus on strengthening credit appraisal systems, improving borrower preparedness and enhancing market linkages.
It also called for stronger financial literacy programmes and improved monitoring frameworks to ensure better loan performance and reduce systemic risk.
RMA responded that existing interventions need to be recalibrated to ensure financial inclusion efforts remain effective and sustainable. It said expanding concessional lending without addressing underlying structural risks could limit the long-term effectiveness of financing support for small enterprises.
The authority said the government remained committed to promoting cottage and small industries but emphasized the need to balance financial inclusion with credit discipline and financial sector stability.
