Lending to small businesses is rewarding
Wednesday, March 27, 2002
As large enterprises remain debilitated under mountains of bad debt, most banks, starved of loan assets, are zeroing in on lending to small-and-medium-scale enterprises (SMEs), which before the 1997 economic crisis were shunned by big banks as highly risky borrowers. But who are the SMEs really and how costly and risky is lending to these businesses?
Pramukti Surjaudaja, chief executive officer, M. Adrianto Setio, senior executive, and Andyani Pusparini, corporate communications head of Bank NISP -- the recipient of the 2001 Corporate Governance Award and a bank that has focused its lending on SMEs for more than 60 years -- shared their experiences in an interview with The Jakarta Post's senior editor Vincent Lingga.
Question: Why have SMEs suddenly become attractive to most banks, including the biggest banks?
Answer: The 1997 crisis proved how agile and flexible SMEs are. Most of them not only survived the crisis but also continued to thrive because they were not highly leveraged and not exposed to foreign exchange risks. While most big businesses are still struggling with huge bad debts, SMEs now form the majority of creditworthy borrowers.
But isn't lending to SMEs different from serving big borrowers? How can big banks realign their credit-assessment capability in such a short time?
Even though the fundamentals of credit assessment are generally the same for big businesses and SMEs, big banks that used to focus on big corporate loans sometimes need to develop expertise for the SME credit market. The assessment and management of SME borrowers is time-consuming; requiring field work, direct monitoring, indirect checks through trade or bank references. It is a lot of hard work, especially because most of the time you don't have audited financial reports to start with.
You have to nurture good rapport with the owners and management. Bank NISP has been strongly entrenched in the SME credit market and we don't feel threatened by the keener competition caused by the entry of big banks. In fact, many banks, which claim to have extended SME credits, only give consumer loans, not business loans for productive purposes.
Risk assessment, including credit evaluation, has been considered the main weakness of Indonesian banks. How does Bank NISP manage its risks?
Lending to SMEs requires much harder work, as many of them don't even have what we call modern bookkeeping, and the segregation of responsibilities between the management and owners is not clear. That is why "knowing your customer" becomes even more crucial here either through field visits and indirect checks of the characteristics of the borrowers.
For example, collateral is not the most important factor in our credit decisions. Bank NISP will not approve a loan application even though it is supported by collaterals worth ten times as much if we assess that the business proposition is not feasible. We find that loans often turn sour because of over-lending and the loan is not entirely used for the business it is allocated for.
Moreover, Bank NISP operates regional credit committees and a central credit committee with clear-cut scopes and segregation of authority and responsibility. Any loan must be approved by at least three of the seven members of each committee. Loans above Rp 5 billion must be approved by one of the commissioners.
The additional benefit of this structure is that Bank NISP branches can concentrate resources on servicing customers and marketing products.
But lending to SMEs seems to be greatly rewarding, as shown by NISP's financial report of 2001.
Bank NISP's pretax income posted a handsome rise of 32.44 percent to reach Rp 93.7 billion (US$9.37 million) last year. Lending increased 44 percent to Rp 4.4 trillion, third-party deposits rose 48 percent to Rp 5.9 trillion and total assets expanded 36 percent to Rp 7.1 trillion.
While many other banks recorded loan-to-deposit ratios of below 25 percent, Bank NISP posted 66.37 percent as of last December. In contrast to many other banks, whose earning assets consisted mostly of marketable securities, loans made up 68 percent of Bank NISP's earning assets.
There are now more than 414,700 bad SME debts worth Rp 40 trillion, which have mostly been taken over by the Indonesian Bank Restructuring Agency from closed or nationalized banks. Wasn't Bank NISP affected by the wave of bad debt?
Bank NISP was by no means spared of the problem. Its non-performing loans suddenly rose from an average 2 percent to 3 percent before the crisis to more than 28 percent in 1998. But we acted quickly to help restructure and refinance our SME clients. We even subsidized our credits when Bank Indonesia tightened its money policy in 1998 and 1999 and jacked up its benchmark interest rate to as high as 70 percent.
We showed them that Bank NISP is their friend and business partner in good times as well as bad times. As you know, Bank NISP has about 13,000 SME borrowers. Manufacturing took up 42.6 percent of its loans, the services sector 22.4 percent and trading sector 20 percent. Consumer financing accounted for only 6 percent.
Bank NISP's non-performing loans have decreased steadily to 6.11 percent in 2000 and 4.09 percent, as of last December.
How did Bank NISP's directors manage to deal with so many shareholders, including four foreign institutional shareholders with a combined stake of 42.46 percent?
First, as a publicly traded bank, which is 20.81 percent owned by the investing public, Bank NISP must meet the tough disclosure requirements imposed by the capital market. Good corporate governance is another top priority. Bank NISP, for example, is supervised by three independent commissioners. But Bank NISP is proud to have such highly reputable shareholders as the International Finance Corporation, a unit of the World Bank, Moore, Hurst and Stiles Investment Ltd.
But our hard work is worthwhile indeed. Singapore-based Asian Banker research institution last December voted Bank NISP the 2001 Best Retail Bank for Indonesia under its annual Asian Banker Excellence in Retail Financial Services Awards.
Earlier in November, Hong Kong-based Asian Business magazine listed Bank NISP the best among banks in Indonesia in its 'Asia's Most Admired Companies' poll.
Also late last year, Bank NISP received the Acceptable Corporate Governance award from the Jakarta Stock Exchange, based on assessments by the Asian Development Bank and the National Committee of Corporate Governance.
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Saga of the convicted central bank governor
Tuesday, March 19, 2002 Vincent Lingga, Senior Editor, The Jakarta Post, Jakarta
Bank Indonesia, which until early February still rejected Bank Bali claims as ineligible, suddenly reversed its policy. Erman Munzir, director of the banking development division at the central bank, at Pande's request, assigned a special team from the bank examination division to examine the claims, a process that took almost one month.
The team concluded that Bank Bali claims to Bank Tiara and Bank Dagang Nasional Indonesia were valid transactions in accordance with the March, 1998 joint decree of the minister of finance and Bank Indonesia on the requirements for claims to be eligible for payment under the government blanket guarantee.
Erman notified IBRA Chairman Glenn Yusuf of the conclusion in a letter that also mentioned the existence of the cessie agreement between Bank Bali and Era Giat Prima.
Pande then worked at full speed, processing the claims with a sense of great urgency. He sent a memo on April 14, 1999 to Glenn recommending immediate payment of the Bank Bali claims.
On May 18, 1999, the ruling (March 1998 decree) on the requirements for the eligibility of claims for payment was amended specifically to make the Bank Bali claims valid and eligible for payment.
Rudy, Djoko Tjandra and several other Golkar executives met with minister Bambang at his residence on the evening of May 25. Bambang himself admitted that this meeting was one of at least three he made with them in May.
Between May 24 and May 27, a series of meetings between IBRA and Bambang's officials took place at the finance ministry to discuss the Bank Bali claims, the amendment of the ruling and the issuance of government bonds.
Then on May 31, minister Bambang issued IBRA with a power of attorney to make the payment of Bank Bali claims. He then sent a memo to the central bank requesting that it open the relevant account for the payment.
IBRA deputy chairman Farid Harianto also sent a memo on June 1 to the central bank governor, requesting the payment as IBRA chairman Glenn was on vacation overseas.
According to Harianto, he made the memo to the central bank governor in response to Bambang's reminder that the Bank Bali claims be paid on that day (June 1, 1999).
The panel of judges who tried Sjahrir decided last Wednesday that Sjahrir had violated prudential banking rulings by approving the payment of the claims only on the basis of a request from the IBRA deputy chairman, stating that the letter of request should have been signed by IBRA Chairman Glenn Yusuf.
Later in the afternoon of June 1, 1999 Pande informed Munzir at Bank Indonesia that IBRA was going to ask for the payment of Bank Bali claims. Then, Pande and IBRA deputy chairman Farid Harianto went to the Bank Indonesia office at around 7 p.m. to oversee the payment process.
Sjahril remained at his office until the Rp 904.6 billion in Bank Bali claims was credited to the Bank Bali account at the central bank.
Of that amount, Rp 546 billion was immediately transferred by Bank Bali to Era Giat Prima's or Djoko Tjandra's clearing account. And starting on June 3, 1999, the Era Giat Prima account triggered a flurry of money transfers to numerous companies and officials, including Golkar leaders.
The payment to Era Giat Prima was discovered by Standard Chartered Bank during a due diligence investigation on about July 20, 1999, made in the light of its plan to acquire 20 percent of Bank Bali. Also, later in July, Rudy lost Bank Bali, as it was taken over by IBRA.
The payment, which was later called the Bank Bali scandal, began to explode in the mass media in late July 1999. Amid the public uproar, Era Giat Prima and other recipients of the fee transferred back the money to a Bank Bali escrow account in mid-August, 1999.
Sjahril thought that was it.
But then in early 2000, Sjahrir got into trouble with then president Abdurrahman Wahid, who wanted him to resign, a request he defiantly rejected. Sjahril was later declared a suspect in a corruption case within the Bank Bali scandal in June, 2000 and was immediately put by then attorney general Marzuki Darusman, a Golkar leader, into detention for six months.
However, Sjahrir, who remained the central bank governor even during his detention, was released in December 2000 but as a defendant. As if nothing happened, he returned to his job, but had to appear at the court once a week.
While Sjahrir's trial was under way, Abdurrahman himself was removed by the People's Consultative Assembly in July 2001 for his alleged involvement in a corruption case related to the misuse of Bulog funds, which also put Akbar under detention.
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Saga of the convicted central bank governor
Monday, March 18, 2002 Vincent Lingga, Senior Editor, The Jakarta Post, Jakarta
Bank Indonesia Governor Sjahril Sabirin is now a convict after he was found guilty of corruption by the Central Jakarta District Court on Wednesday for violating prudential banking rules in relation to what is popularly known as the Bank Bali scandal.
Chairman of the Golkar party and Speaker of the House of Representatives Akbar Tandjung, a suspect in the Bulog fund scandal, was earlier put into detention by the attorney general.
But both officials remain in office. Bizarre, isn't it?
Certainly not in Indonesia, which has been languishing in a multidimensional quandary since 1998 because of the complications of the economic crisis, the transition from three decades of authoritarian rule to democracy and from strong, centralized government to regional autonomy.
It is business as usual. Neither seems to have become demoralized, stubbornly clinging to their respective state posts. They are not legally required to temporarily relinquish their posts. Nor have they shown any moral courage to do so.
Like most other senior officials convicted of corruption or facing graft charges, both Sjahril and Akbar insist they are innocent, claiming they are simply the victims of political power games.
Are they?
This is an area within the authority of the court to decide.
However, insofar as Sjahril's case is concerned, there are a lot of questions looming over the manner in which the government has so far handled the Bank Bali scandal, which was partly responsible for killing then president B.J. Habibie's chance of reelection in October, 1999.
PricewaterhouseCoopers (PwC), which investigated the scam, concluded in its 135-page report, which was supplemented by more than 35 documents as supporting evidence, that there were numerous indications of noncompliance, irregularity, misappropriation, undue preferential treatment, concealment, bribery and corruption and fraud found in the processing and payment of Bank Bali interbank claims.
It recommended several senior officials and businessmen for further investigation but so far only four, including Sjahril, have been taken to court.
Strange, though, three earlier defendants, Rudy Ramli, Pande Lubis and Djoko Tjandra, were acquitted of all charges by courts in 2000.
PwC conducted a special investigation of the fund scam in September, 1999 at the request of the chairmen of the Indonesian Bank Restructuring Agency (IBRA) and the Supreme Audit Agency.
Here is a recap to refresh our memory of the Bank Bali scandal, which started to explode in the mass media in late July, 1999, and was later investigated by a special House committee.
Sometime in October-November, 1998, Bank Bali president Rudy Ramli was approached by several politically well-connected businessmen, who offered assistance to recover Bank Bali's interbank claims for a fee.
At that time, Rudy was on the verge of desperation, having spent almost one year getting the claims settled, but both IBRA and the central bank, in charge of verifying the claims, rejected them as ineligible for payment under the government blanket guarantee for bank deposits and claims.
The guarantee scheme is managed by IBRA, an agency under the Ministry of Finance.
Since Rudy already considered the claims a total loss, he did not see any harm in accepting the offer. He and another Bank Bali director, Rusli Suryadi, signed on Jan.11, 1999 a "cessie agreement" with PT Era Giat Prima, an unknown company managed and owned by Djoko Tjandra, a politically well-connected property developer, and Setya Novanto, a deputy treasurer at the Golkar party.
Also around October-November, 1998, then finance minister Bambang Subianto, who supervised IBRA, offered one of his long-time friends, Pande Lubis, formerly an executive of a state bank, a senior position at IBRA. Pande later accepted the offer and joined IBRA in December, 1998 as a deputy chairman (one of four).
Then on Feb. 11, 1999, Rudy was invited to a special meeting at Hotel Mulia that was also attended by A.A. Baramuli, a Golkar leader and Chairman of the Supreme Advisory Council, Novanto from Era Giat Prima, Bank Indonesia Governor Sjahril Sabirin, Minister of State Enterprises Tanri Abeng, Pande Lubis from IBRA and several other senior officials.
During the meeting Baramuli allegedly asked Sjahril to give special attention to speeding up the processing and payment of Bank Bali's interbank claims to Bank Dagang Nasional, Bank Umum Nasional and Bank Tiara, which had been closed and put under IBRA.
Also around February, Baramuli asked minister Bambang to replace IBRA chairman Glenn Yusuf with Pande but to no avail. Then, in March, Baramuli went over Bambang's head and suggested directly to then president B.J. Habibie that Pande be named IBRA chief. But Habibie was convinced by Bambang that Pande was not qualified to lead IBRA.
Then things suddenly moved, starting in mid-February. Pande took over all files of Bank Bali claims and arranged a series of meetings with Bank Indonesia officials and Bank Bali executives starting in mid-February to reexamine and process the Bank Bali claims.
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Beware of Mitsui Leasing and ACA
Monday, March 18, 2002 By Vincent Lingga
The recent floods jolted me into a painful awareness that PT Mitsui Leasing Capital Indonesia, through which I bought a Toyota Corolla sedan in 2000, failed to inform me adequately about the insurance cover for the car the company had purchased with PT Asuransi Central Asia (ACA).
Upon digging into the bundle of documents on the credit and car purchase agreements to look for the insurance policy and contract, I found only a one-page document bearing the ACA letterhead containing a very brief summary about the insurance policy.
The document only explains that Mitsui has covered the car with a three-year insurance contract of a compound method (gabungan), with three additional clauses, Nos. 32, 33 and 37. In another document containing the breakdown of the consumer loan, Mitsui mentions only that the type of the car insurance is all-risk.
But it does not cite the amount of the premium for the three-year coverage, nor does it inform me of my rights under the insurance coverage, or what the term "all risks" means.
Upon inquiring at Mitsui, one of my office staff members was told that the original insurance policy and contract were kept by Mitsui. A copy of what Mitsui claimed to be the insurance contract was later faxed to my office. But what I got was only a copy of what is called the Indonesian Standard Automobile Policy, not the specific contract with ACA.
The copy of the contract does not explain the difference between what is defined as a standard insurance policy and the insurance contract of a compound method with additional clauses Nos. 32, 33 and 37 Mitsui had signed for my car.
Is this the way Mitsui and ACA treat their customers?.
After all, the cost of the insurance was additional to the loan that had to be repaid. A company professing good corporate governance should have informed me of all my rights even without my having to make a specific request. Hence, beware of dealing with Mitsui Leasing and ACA, they might exploit your ignorance.
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