New ruling for foreign banks

New ruling for foreign banks

JAKARTA (JP): Bank Indonesia, the central bank, has made it
compulsory for joint venture and foreign banks to lend to small
businesses.

Bank Indonesia's director for credit, Mukhlis Rasyid, said
yesterday joint ventures and foreign banks had to participate in
the development of small businesses by lending them money.

"This policy was taken in line with the provisions of the
World Trade Organization, which does not want discriminative
approaches to local and foreign banks," Mukhlis said.

Until now joint ventures and foreign banks have not had to
meet any minimum lending requirement to small businesses but had
to allocate 50 percent of their lending as export credit.

Now, they have to allocate at least 12.5 percent of this
calender year's increase in their outstanding rupiah and foreign
exchange credit to small businesses.

Next year, they will have to give at least 17.5 percent of
their total credit expansion to small businesses. The quota will
rise to 22.5 percent in 1999.

But foreign banks no longer have to give 50 percent of their
credit as export credit. Instead they have to lend 80 percent of
their offshore borrowings as export credit. The latter
requirement, which was also imposed on foreign borrowings by
domestic banks, was mandated in a new ruling issued late last
month.

Local commercial banks that have small business credit of 20
percent or more of their outstanding credit at the end of last
month have to disburse at least 25 percent of their credit
expansion this year, including those denominated in foreign
currencies, to small businesses.

Banks that have small business credits of less than 20 percent
of their outstanding credit as of the end of last month have to
extend at least 22.5 percent of their credit expansion to small
businesses.

The definition of small business credit has been broadened to
a maximum of Rp 350 million (US$144,628), up from Rp 250 million.

Mukhlis said the central bank would no longer apply commercial
banks' compliance with small business and export credit as a
yardstick to assess their soundness.

This means a bank's inability to meet lending ratios will not
affect its soundness.

Instead, the central bank would penalize banks that failed to
meet the mandatory lending ratio and reward banks that exceeded
the target, he said.

Banks' soundness would be judged mainly from their financial
condition, the quality of their management and prudence in
managing their funds, Mukhlis said.

Banks that can not meet the set lending ratio will have to pay
2 percent of the difference to Bank Indonesia.

The proceeds from these fines will be used to help banks that
exceed the mandatory lending ratio.

Banks which exceed the mandatory small-business lending ratio
up to 30 percent will get 0.5 percent of the excess.

Banks with small business lending ratio of between 30 percent
to 40 percent will get 1 percent. Banks with small business
lending ratio of over 40 percent will get 1.5 percent.

"If there is some left over, we will use it to help banks
which have difficulties meeting the mandatory small business
credit ratio," Mukhlis said.

Mukhlis said the central bank would no longer let banks which
failed to fulfill their small business lending ratio buy money
market certificates from other banks with a high lending ratio.

This arrangement injects funds from banks that had trouble
lending to small businesses to banks that did not have this
problem. The latter banks are supposed to extend the funds to
small business.

"We decided to stop these practices because they had been
misused by many banks without any real transfer of funds,"
Mukhlis said.

Small business credit from all commercial, development and
rural banks reached Rp 48.3 trillion last December, of which Rp
2.5 trillion was traded through money market securities. This was
23.5 percent of their outstanding credit.

Overall banking credit grew 23.5 percent last year, while
credit to small businesses grew 19.8 percent.

State banks extended 28.8 percent of their credit to small
businesses as of last September and private banks 18 percent.
(rid)