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.