Establishing synergy between SMEs and banks

Establishing synergy between SMEs 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.)