Fri, 11 Jun 2004

Government prepares scheme to push bank loans for SMEs

Fitri Wulandari, The Jakarta Post, Jakarta

The government has prepared a scheme to channel excess liquidity in the banking sector to the business sector particularly the small and medium-sized enterprises (SMEs), a senior minister said.

Coordinating Minister of the Economy Dorodjatun Kuntjoro-Jakti said under the plan, state-owned enterprises (SOEs) would be asked to deposit a certain amount in banks as collateral to back up loans for the SMEs.

"Bank Indonesia has approved the scheme," he told reporters after a Cabinet meeting on the economy on Thursday.

Despite the current low domestic interest rate environment, banks have remained reluctant to channel their money to the business sector partly due to slow progress in corporate restructuring, which makes lending to companies risky. This has in turn has created excess liquidity.

Bank Indonesia has said that while bank lending prior to the late 1990s financial crisis reached about 75 percent of gross domestic product, the figure now is only around 25 percent of GDP.

The central bank has also said that one of the major reasons behind the current sharp drop in the value of the rupiah was the excess liquidity as part of the funds had been used to speculate against the rupiah. Bank Indonesia has raised the bank reserve requirement to absorb the excess liquidity.

The SME sector plays an important role in the local economy as it is a major job provider.

But Dorodjatun said that many SMEs were facing difficulties in obtaining bank loans for business expansion due partly to lack of collateral.

He pointed out as an example that when the government increased credit allocation for the SME sector to Rp 42 trillion in 2002, not all had been absorbed by the SMEs.

Dorodjatun did not give details about how much state enterprises will put in banks as collateral for loans to SMEs or when the scheme will take effect.

He said the scheme still needed tweaking before it could be realized.

Further, Dorodjatun said central bank moves to prevent banks from using excess funds to speculate against the local currency has started to show results.

A creation of a seven-day "intervention rate" which allows Bank Indonesia to borrow rupiah from banks at a 7 percent interest rate has absorbed just under Rp 20 trillion in excess liquidity.