'Collateral-free loans won't raise inflation'

JAKARTA (JP): Minister of Finance Mar'ie Muhammad assured skeptics yesterday that the planned collateral-free loans of up to Rp 50 million (US$22,000) for small-scale businesses would not raise inflation.

"The funds for the collateral-free loans will not be part of Bank Indonesia's subsidized loans and their interest rate will be the same as that on other commercial credits for small businesses," Mar'ie told reporters.

The government requires commercial banks to allocate at least 20 percent of their outstanding loans for small-scale businesses, which can raise up to Rp 250 million in credit.

"But the ceiling of the collateral-free loans is set at Rp 50 million," he said after installing first echelon officials at his ministry.

The minister inducted Mohammad Soleiman Abdullah as chief of the ministry's state financial accounting board to replace Muhammad Nirwan Nazaruddin and First Air Marshal Soetriadji as inspector general of the ministry to replace I.G.P. Surya.

Mar'ie said earlier this week that the government is formulating a regulation on the collateral-free loans for small businesses. The planned ruling is expected to be implemented by state banks before being imposed on private banks.

He said yesterday that the borrowers of the collateral-free loans can use their contracts for projects to be financed with the loans or their liabilities as guarantees for their repayments.

Quoting chapter eight of Law No. 7/1992 on Banking, Mar'ie said that the guarantee for banking loans can be material assets, projects or liabilities related to the loans.

He said state banks will start providing such collateral-free loans within the next two months.

However, Rijanto, an outspoken banking analyst, was quoted by Bisnis Indonesia yesterday as saying that banks might face difficulties in providing such loans if the central bank does not support them by providing subsidized credits.

Rijanto, who is also commissioner of a number of private banks, also said that creditors might abuse the loans by using them to buy houses or cars, instead of financing business projects.

Praise

Meanwhile, Rizal Ramli, director of the Econit Advisory Group, praised the government's move, saying that it would help small businesses overcome their problems providing collateral for loans.

"It is a very positive breakthrough," he told reporters yesterday.

He said the plan will require banks to carry out professional banking practices as they will have to rely on the soundness of a prospective creditor's credit history.

"In disbursing such loans, banks should shift their focus from assessing collaterals to evaluating credit histories and analyzing business prospects," he said.

Giving an example, Rizal said the state-owned Bank Rakyat Indonesia managed to prosper even though most of its customers were mostly small and medium-scale businesses in villages.

He pointed out that although the assets of the bank's village branches made up only 10 percent of its total assets, the contribution of the small businesses to its profits accounted for almost 30 percent.

"This shows that as long as the principles of good banking based on a sound credit history are applied, loans to small businesses are profitable and carry minimal risk," he said. (kod/pwn)