Small businesses need banks help

Small businesses need banks help

The current issue of collateral-free loans to small businesses
was discussed in an economic and financial ministerial meeting on
Monday. The Jakarta Post talked to noted economist Laksamana
Sukardi to shed some light on the issue.

Question: What do you think of the government's plan on this
issue?

Answer: It's a little bit strange, I think, that people --
including the members of the House of Representatives -- are very
happy about it. Especially if we look at the case from the point
of view of prudent banking principles. A professional banker will
understand at once that collateral is not the main factor
considered by a bank in assessing a loan application. It's the
feasibility of the business that counts. Even if a businessman,
for example, has no collateral, as long as he runs a good
business the bank will give him a loan. It's very simple and
basic.

What worries me is that the banks here have not been applying
prudent banking principles; they only see collateral when they
evaluate loan proposals.

What I'm trying to say is, don't misunderstand the Minister of
Finance's statement. His statement does not mean that loans will
be given to business with no collateral without first evaluating
their future prospects.

Q: So we shouldn't ignore the feasibility of the business?

A: No you should not. A bank which only looks at the collateral
is a pawn shop. I am jittery about that. It's really dangerous if
banks are forced to extend a collateral-free loan of up to Rp 50
million without examining feasibility. Bank funds are mostly
owned by the people. Therefore, we have to differentiate between
professional, prudent banking and political rhetoric.
Everyone at banking schools knows that collateral is only a
second way out. The first way out is feasibility. If the business
is feasible, collateral is not necessary. Without a government
regulation, a professional banker has to know that rule.
So the most important thing here is how the government regulation
can make it easier for small businesses to succeed. A businessman
friend of mine has a good comment on this. He said that with this
regulation, it will be even more difficult for a small business
to get a bank loan. I think he is right.

Q: Why?

A: First of all, the bankers have to examine the business more
carefully. This means they have to conduct a survey or do
research on the business as well as a credit check. In fact,
small businesses that are stable usually don't need to get loans
because supplier credits are quite often more than enough. If a
bank loan is needed, it's usually not much. It will be very
dangerous if the program is overzealously implemented.

Q: How have bankers reacted?

A: I've found that it's already difficult for them to fulfill the
government's requirement that they allocate 20 percent of their
loans for small businesses. As a result their annual reports have
to look as if they have fulfilled the lending quota. It happens
with many banks here. While they report that their KUK (credit
for small business) targets are fulfilled, I don't think small
businesses actually feel it. So, the question is, do their
reports give exact data? I don't think so.

Even if the government were to ask them to extend 50 percent
of their credits to small businesses, I'm quite sure that they
would report fabricated figures of having accomplished that also.

Q: What is your suggestion?

A: You have to make a novel breakthrough by founding a new bank
which is specifically designed for small businesses and include
existing banks as shareholders. The bank should be run by
independent professionals who know about small businesses and are
experienced in managing loans for them. A hundred percent of the
bank's funds should be extended to small businesses.

Q: Do you think it's possible to establish such a bank here?

A: Of course. It's much easier to found such a bank than require
every bank to allocate 20 percent of their loans to small
businesses. Once set up, the private banks could then focus their
resources on medium and big businesses while small businesses
would be taken care of by these new banks. That way private banks
would no longer need to manipulate their annual reports just for
the sake of fulfilling the credit quota.(swa)

Laksamana Sukardi, former director of Lippobank, currently
serves as the CEO of the ReFORM Consulting Group and is the
Associate Director and Co-founder of the Econit Advisory Group.