Quotas worry foreign banks

JAKARTA (JP): Foreign banks have said they will find it hard to comply with the ruling on small-business credit quotas because they have trouble assessing small companies.

Paul Beiboer, head of the corporate division at PT Rabobank Duta Indonesia, said most foreign banks, including Rabobank, would find it difficult to assess the viability of lending to small business.

"I think for all foreign-owned banks it will be a big problem to comply with the regulation," Beiboer told journalists Tuesday.

Early this month Bank Indonesia, the central bank, made it compulsory for joint venture and foreign banks to lend to small business.

For this calender year, they are required lend at least 12.5 percent of their credit growth to small business. This quota will rise to 17.5 percent next year and to 22.5 percent in 1999.

Banks which fail to meet these quotas will be fined 2 percent of their credit shortfall. These fines also apply to domestic banks. The proceeds from fines will be used to reward banks which can exceed the quotas.

Beiboer said most foreign banks were not ready to loan to small business because the regulation came without warning.

News about the small-business credit quotas was first circulated several weeks ago.

"Of course to see now the black and white in writing that the regulation has been issued is somewhat of a surprise, particularly because the foreign-owned banks are not equipped with these small loans," Beiboer said.

He complained that small businesses, as defined by the new ruling, were too small to finance.

"We're talking about loans of less than US$150,000. That means loans to really small-sized companies... If the size were, for example, a million dollars it would be easier to comply," he said.

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

Bank Indonesia's director of credit, Mukhlis Rasyid, said the increase did not represent a real increase because it only reflected an adjustment to the value of the rupiah.

Mukhlis said small-business credit should only be for small businesses, with total assets up to Rp 200 million (excluding land and buildings) and total business turnover up to Rp 1 billion.

"With this policy, we only want to target the majority of small businesses, not even the upper level of small companies or medium ones," Mukhlis said.

The new ruling aims to increase the portion of banking credit to small business, which accounted for 23.5 percent of local commercial banks' outstanding credit last year.

The ruling requires domestic commercial banks, with small- business credits making up 20 percent or more of their outstanding credit last month, to extend at least 22.5 percent of their credit growth this year to small business.

Domestic banks, with small-business credit making up less than 20 percent of their outstanding credit, will have to extend at least 25 percent of their credit growth this year to small businesses.

Beiboer said that banks with few staff and small back-offices would find it hard to assess small businesses.

"You can imagine that banks that have branches on almost every corner of the street are much better equipped to analyze and monitor small-sized companies than the large banks that have perhaps only 50 or 100 people in the country," he said.

Banking analyst I Nyoman Moena said that meeting small- business credit quotas had more to do with commitment than the number of branches that banks had.

He said the new ruling on small-business credit, which covered foreign banks, was a fair ruling. Foreign banks were previously exempt from regulations on small-business credit.

"Banks should realize that extending small-business credit is one effort toward reaching equal wealth distribution. That is something that is required by banks operating here," Moena told The Jakarta Post.

If banks were reluctant to extend credit to small business, it meant they were contributing to widening economic disparity which endangered the country's stability, he said.

"Banks should not think of growth only. They should also think of wealth distribution through credit to small businesses if they do not want to be a source of destabilization," he said.

Moena, also head of the Local Private Banks Association's supervisory agency, said that bankers should have high integrity, which included the pursuit of equality.

Therefore, incentives and disincentives introduced in the new ruling should be temporary measures to increase banks' compliance with small-business credit regulations, Moena said. (pwn/rid)