Banks to allocate Rp 60.4t for MSME this year

The Jakarta Post, Jakarta

The high demand of loans from micro, small and medium enterprises (MSME) last year -- supported by sound credit performance -- has prompted the banking industry to increase its lending targets for the businesses by 60 percent this year.

Bank Indonesia Governor Burhanuddin Abdullah said local banks were planning to lend Rp 60.4 trillion (US$6.46 billion) to MSME this year, up from last year's target of Rp 38.5 trillion.

"The increase signals the revival of the small businesses. Banks are confident and optimistic over the huge lending potential, which can help the expansion of the banking sector as well," he said in a press statement distributed on Friday.

This year's lending allocation for small business accounts for some 60 percent of the total lending available from local banks, which is estimated to reach Rp 106 trillion. Some 40 percent of the total lending will be from state banks.

Burhanuddin was optimistic that the loan demand from the sector would exceed the banks' lending targets as it did last year. Despite the encouraging announcement, many small business owners still have limited access to information and capital.

Last year, the banks lent Rp 72 trillion to the MSME sector, up by 87 percent from the initial target of Rp 38.5 trillion. In 2003, banks disbursed just 63.8 percent of their Rp 42.3 trillion lending target for the sector.

"The MSME sector has limited access to capital markets and resources. To improve that, there should be a comprehensive regulation that can bring them closer to capital and to market demand," said Burhanuddin.

He also underscored the need for the small businesses to improve their management of their loans to avoid default and maintain the confidence of the banking sector.

One of the main reasons for banks wanting to increase their loan portfolios to the sector last year was due to the declining number of non-performing loans (NPL) in the sector in the recent years.

According to the central bank, last year's NPL figure among MSME stood at 3.44 percent, down 0.86 percent from the previous year of 4.3 percent. Both figures are lower than the banking industry's average NPL rate of 4.5 percent and 6.7 percent in 2004 and 2003, respectively.

Loans are considered non-performing if the interest payments on them are more than three months overdue, and the NPL is commonly used to gauge a bank's financial health. BI requires all banks to maintain a NPL figure of below 5 percent.