Lending to small businesses is rewarding

Lending to small businesses is rewarding

As large enterprises remain debilitated under mountains of
bad debt, most banks, starved of loan assets, are zeroing in on
lending to small-and-medium-scale enterprises (SMEs), which
before the 1997 economic crisis were shunned by big banks as
highly risky borrowers. But who are the SMEs really and how
costly and risky is lending to these businesses? Pramukti
Surjaudaja, chief executive officer, M. Adrianto Setio, senior
executive, and Andyani Pusparini, corporate communications head
of Bank NISP -- the recipient of the 2001 Corporate Governance
Award and a bank that has focused its lending on SMEs for more
than 60 years -- shared their experiences in an interview with
The Jakarta Post's senior editor Vincent Lingga.

Question: Why have SMEs suddenly become attractive to most
banks, including the biggest banks?

Answer: The 1997 crisis proved how agile and flexible SMEs
are. Most of them not only survived the crisis but also continued
to thrive because they were not highly leveraged and not exposed
to foreign exchange risks. While most big businesses are still
struggling with huge bad debts, SMEs now form the majority of
creditworthy borrowers.

Q: But isn't lending to SMEs different from serving big
borrowers? How can big banks realign their credit-assessment
capability in such a short time?

A: Even though the fundamentals of credit assessment are
generally the same for big businesses and SMEs, big banks that
used to focus on big corporate loans sometimes need to develop
expertise for the SME credit market. The assessment and
management of SME borrowers is time-consuming; requiring field
work, direct monitoring, indirect checks through trade or bank
references. It is a lot of hard work, especially because most of
the time you don't have audited financial reports to start with.

You have to nurture good rapport with the owners and
management. Bank NISP has been strongly entrenched in the SME
credit market and we don't feel threatened by the keener
competition caused by the entry of big banks. In fact, many
banks, which claim to have extended SME credits, only give
consumer loans, not business loans for productive purposes.

Q: Risk assessment, including credit evaluation, has been
considered the main weakness of Indonesian banks. How does Bank
NISP manage its risks?

A: Lending to SMEs requires much harder work, as many of them
don't even have what we call modern bookkeeping, and the
segregation of responsibilities between the management and owners
is not clear. That is why "knowing your customer" becomes even
more crucial here either through field visits and indirect checks
of the characteristics of the borrowers.

For example, collateral is not the most important factor in
our credit decisions. Bank NISP will not approve a loan
application even though it is supported by collaterals worth ten
times as much if we assess that the business proposition is not
feasible. We find that loans often turn sour because of over-
lending and the loan is not entirely used for the business it is
allocated for.

Moreover, Bank NISP operates regional credit committees and a
central credit committee with clear-cut scopes and segregation of
authority and responsibility. Any loan must be approved by at
least three of the seven members of each committee. Loans above
Rp 5 billion must be approved by one of the commissioners. The
additional benefit of this structure is that Bank NISP branches
can concentrate resources on servicing customers and marketing
products.

Q: But lending to SMEs seems to be greatly rewarding, as shown by
NISP's financial report of 2001...

A: Bank NISP's pretax income posted a handsome rise of 32.44
percent to reach Rp 93.7 billion (US$9.37 million) last year.
Lending increased 44 percent to Rp 4.4 trillion, third-party
deposits rose 48 percent to Rp 5.9 trillion and total assets
expanded 36 percent to Rp 7.1 trillion. While many other banks
recorded loan-to-deposit ratios of below 25 percent, Bank NISP
posted 66.37 percent as of last December. In contrast to many
other banks, whose earning assets consisted mostly of marketable
securities, loans made up 68 percent of Bank NISP's earning
assets.

Q: There are now more than 414,700 bad SME debts worth Rp 40
trillion, which have mostly been taken over by the Indonesian
Bank Restructuring Agency from closed or nationalized banks.
Wasn't Bank NISP affected by the wave of bad debt?

A: Bank NISP was by no means spared of the problem. Its non-
performing loans suddenly rose from an average 2 percent to 3
percent before the crisis to more than 28 percent in 1998. But we
acted quickly to help restructure and refinance our SME clients.
We even subsidized our credits when Bank Indonesia tightened its
money policy in 1998 and 1999 and jacked up its benchmark
interest rate to as high as 70 percent.

We showed them that Bank NISP is their friend and business
partner in good times as well as bad times. As you know, Bank
NISP has about 13,000 SME borrowers. Manufacturing took up 42.6
percent of its loans, the services sector 22.4 percent and
trading sector 20 percent. Consumer financing accounted for only
6 percent. Bank NISP's non-performing loans have decreased
steadily to 6.11 percent in 2000 and 4.09 percent, as of last
December.

Q: How did Bank NISP's directors manage to deal with so many
shareholders, including four foreign institutional shareholders
with a combined stake of 42.46 percent?

A: First, as a publicly traded bank, which is 20.81 percent owned
by the investing public, Bank NISP must meet the tough disclosure
requirements imposed by the capital market. Good corporate
governance is another top priority. Bank NISP, for example, is
supervised by three independent commissioners. But Bank NISP is
proud to have such highly reputable shareholders as the
International Finance Corporation, a unit of the World Bank,
Moore, Hurst and Stiles Investment Ltd.

But our hard work is worthwhile indeed. Singapore-based Asian
Banker research institution last December voted Bank NISP the
2001 Best Retail Bank for Indonesia under its annual Asian Banker
Excellence in Retail Financial Services Awards. Earlier in
November, Hong Kong-based Asian Business magazine listed Bank
NISP the best among banks in Indonesia in its 'Asia's Most
Admired Companies' poll. Also late last year, Bank NISP received
the Acceptable Corporate Governance award from the Jakarta Stock
Exchange, based on assessments by the Asian Development Bank and
the National Committee of Corporate Governance.