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)