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.