Establishing synergy between small companies and banks

Pramukti Surjaudaja, Contributor, Jakarta

Small and Medium Enterprises (SMEs) are very important for any country, but they are particularly important for developing countries because they make a great contribution to a country's economic development by creating employment opportunities, playing an intermediary role and supporting major industries and companies. They also provide flexibility and room for innovation in a country's economic system.

Although Indonesia was hit by an economic crisis in 1997, SMEs proved to be resilient. Most of them survived the crisis and kept growing because they were not burdened with loans and were not involved in the speculative market of foreign exchange.

To date, banks in Indonesia do not have uniform definitions in relation to loan categories for SMEs. Some banks limit credits to Rp 50 million, which are called microloans. Some other banks provide loans ranging between Rp 100 and Rp 200 million and refer to them as consumer credits, while others categorize a loan of between Rp 100 million and Rp 5 billion as a retail credit. There are a couple of banks that provide loans of up to Rp 25 billion, terming them medium enterprise credits.

The country's central bank, Bank Indonesia, meanwhile, defines a loan of up to Rp 500 million as a Kredit Usaha Kecil (KUK), or loans for small enterprises. Hence, there is still no fixed definition for middle-scale credits. A loan given to a company with productive assets exceeding Rp 200 million and total sales of Rp 1 billion is not included in the above KUK.

Although SMEs are an important sector, in reality its players face various obstacles. Two of the country's economic analysts, Faisal Basri and Gatot Arya Putra, have said repeatedly that one of the country's economic problems lies in the numerous difficulties SMEs face in expanding. They often face difficulties in accessing loans from banks, technology, modern management and marketing, while government regulations often hinder their progress.

The banking sector is expected to assist the government in increasing the role of the country's SMEs. The government, through the Office of the State Minister for Cooperatives, Small and Medium Enterprises, has started to pay attention to this sector. However, in reality, only a small number of SMEs have been touched and the great potential of the SMEs has yet to be tapped, though the government realizes that the sector's contribution to the national economy is significant.

Revising existing regulations and issuing new ones, the government is striving to encourage the active participation of banks in taking care of SMEs, as well as helping them grow, as one of the country's acknowledged assets and strengths.

Bank NISP, which has focused its business on retail banking from the start, is one of the most active banks in Indonesia in assisting SMEs and providing them with loans. Bank NISP has been doing this for years as it is quite aware of the potential of such businesses and their suitability within the economic environment of Indonesia.

Although several banks have consistently assisted and provided guidance to their SME clients, a satisfactory result in the aggregate term is not yet visible. Prerequisites for credits, both in the case of large companies and SMEs, are basically similar. Admittedly, for SMEs, preliminary evaluation takes more time, as a more intensive verification, direct monitoring and cross-checking are required. The credit officer in charge also has to make more time available to form a closer relationship with the business owner and management of SMEs.

For the category of consumer credits, several banks, including Bank NISP, use a new credit scoring system to speed up the approval process while maintaining caution in channeling loans. Bank NISP links this credit scoring system with its credit risk rating and uses an international consultant to enhance it further.

Although collateral is one of the important considerations prior to approval, a bank should also take into account the eligibility and good intentions of the applicant. Most loans are unpaid because of incorrect assessment by the bank, or in some cases because the bank has not properly assessed the feasibility of the applicant's project or business.

During the country's economic crisis, Bank NISP continued to provide loans to SMEs that were ranked as having good intentions, and consistently gave them guidance. The bank realized that during this difficult situation it had to lend them a helping hand. Helping them has proved fruitful for the bank, as they turned into loyal clients and even recommended other SMEs to the bank.

The commitment of the country's banks to assisting SMEs has gained support in the area of providing loans from various international institutions, such as Exim Bank of Japan, the Netherlands Development Finance Company and USAID.

One example of cooperation with an international institution is the technical assistance provided by the Agricultural Cooperative Development International Volunteers in Overseas Cooperative Assistance (ACDI/VOCA), which is a nonprofit private organization with headquarters in Washington DC. One of ACDI/VOCA's activities is providing short-term loans to SMEs dealing in animal husbandry, especially poultry farming, in developing countries, including Indonesia. The funds are provided by the U.S. Department of Agriculture.

These foreign institutions and donors are aware of the potential of SMEs and are greatly concerned about their growth, so why shouldn't we also be aware and concerned? Haven't SME clients proved to be good and profitable customers if they are carefully maintained? Besides their resistance to economic crisis, most of them have good intentions and fulfill their obligations, which reduces credit risks.

A number of banks are becoming more aware of SMEs' potential, and consequently branch offices are being opened in locations close to their businesses. However, until now only a small number of the country's SMEs have enjoyed the services of banks.

A survey conducted in 2002 by the Asian Development Bank on the development of SMEs in Indonesia found that only 21 percent of the country's SMEs had received credits from banks, and 14 percent had applied but had not received loans. It also found about 33 percent needed credits but had not applied.

Although SMEs are a promising sector, banks are still advised to be cautious and selective in giving them loans. Using this "principle of caution", Bank NISP expects its total credits for 2003 to reach 80 percent of its total assets, as the bank's balance sheet on March 31, 2003, recorded a 72 percent loan to deposit ratio.

This serves as one example of how vital and potential SMEs are for the national economy. With a deep commitment on the part of the country's banks and a close cooperation between them and the SMEs, the wheels of the Indonesian economy are expected to move faster and more smoothly.

The writer is president director of PT Bank NISP Tbk.