Can Indonesian Banks Meet The 20% SME Lending Requirement? A Closer Look at BI’s Rule On SME Loans
“Central Bank Day” or Bank Indonesia Day is held every July 5th. To mark that day, our post today will focus on an important regulation that was introduced by the central bank of Indonesia a few years back. Few countries have a central bank day and few have a regulation such as this one. But Indonesia is home to 57 million small and medium sized enterprises (SMEs) and this regulation was made in their favors.
Issued in early 2013, the 2012 Bank Indonesia (BI) rule and its 2015 revision stipulate that all Indonesian banks must channel at least 20% of their total loans to small and medium enterprises (SMEs) by 2018. This is a tough challenge for banks that have a limited branch network, and this is where PT Sampoerna Wirausaha (MEKAR) can help.
The regulation in itself, is an excellent ‘stick’ that will help underfinanced small businesses get the financing they so badly need. With the help of our lawyer at Mekar, a specialist in corporate and finance law, we are taking a closer look at this timely regulation that aims to foster the growth of Indonesian SMEs.
1. This regulation applies to all commercial banks
Indonesia has approximately 118 commercial banks, or what we call as Bank Umum; this includes sharia/Islamic banks and joint venture banks.
2. What does the regulation require?
The regulation instructs all commercial banks in Indonesia to channel a minimum of 20 percent of their total loans to SMEs. By BI’s definition, SMEs are businesses with no more than Rp 10 billion in net assets and no more than Rp 50 billion in annual sales.
For banks that used to rely heavily on corporate and consumer loans, setting aside 20 percent of their loan portfolio for the SME sector, by all means, is no easy task. BI understands this; it breaks the implementation of the regulation into several phases. Between 2013 and 2014, banks were allowed to lend to as many SMEs as they can. A threshold was only applied in 2015 onwards:
- For 2015: A minimum of 5% of total loans
- For 2016: A minimum of 10% of total loans
- For 2017: A minimum of 15% of total loans
- For 2018: A minimum of 20% of total loans
The target set by the central bank has proved to be particularly challenging for some banks. The Financial Services Authority (OJK) said in March 2017 that around one-fifth of commercial banks in Indonesia had fallen short of the 10% target. These banks are either a joint venture or foreign bank with local operations. Well, BI realizes it might be harder for these banks to meet the target, hence…
3. The regulation states that for foreign and joint venture banks, their export loans for non-oil and gas sectors can count towards their SME loans target
Many of these banks do not have as many branch offices as other commercial banks, making it harder for them to reach out to SMEs in small villages in the regions. They are also lacking in terms of SME network. But the banks are working to significantly increase their SME loan portfolio and BI is optimistic that all Indonesian banks will meet next year’s target of channeling 20% of their total loans to the SME sector.
4. There are two ways in which banks can provide loans to the SME sector
Banks can provide direct loans to SMEs. They can also choose to lend through indirect means, using schemes such as “executing” (where banks provide financing for third party financial institutions, which will then lend to SMEs); “channeling” (where banks appoint financial institutions as agents through which it will disburse the loans to SMEs) and/or through loan syndication. Mekar is active in the last two options.
5. BI says reports are important
All banks must submit a monthly report online of their realized SME loans to BI. At the end of every year, BI will verify if all the banks have met their target. If the central bank finds banks that fail their target…
6. A warning will be issued for non-compliance banks
BI will impose administrative sanctions to banks that do not meet their yearly target. The disciplinary actions can be in the form of a warning, a fine or recommending that further measures be taken by the OJK as the banking supervisory body. Some banks may see that they cannot climb to the next bank-tier or “buku” until the target is achieved. This means that the banks can only offer a limited set of services.
7. Luckily there is an easier way to meet the SME lending target
SME lending can be a profitable business but managing distribution and collections across this huge island nation is challenging. That is why the SME lending potential is largely untapped. Of the Rp 4,505 trillion lending last year, only about Rp 900 trillion went to SMEs, including the micro segment. Bank Rakyat Indonesia (BRI) was the largest lender to the sector. However, millions of SMEs still lack access to bank loans. There are many reasons for this. Many SMEs are located in areas where there are no bank offices, this makes it hard for banks to reach these small businesses and provide them with their services. Verification or underwriting and collections is costly without the right infrastructure.
Mekar, PT Sampoerna Wirausaha, offers a solution. Mekar is the only fintech company in Indonesia that syndicates and sells SME loans. Mekar’s peer-to-peer lending platform lets investors, both individuals and institutions, buy SME loans in bulk. Mekar has a supply of Rp 10 billion in guaranteed SME loans, with NPLs of less than 1%, ready for banks to add to their portfolio.
When a bank partners up with Mekar, Mekar can offer immediate access to SME loans via its web-platform https://mekar.id. This is a cost-effective and resource-efficient way that will allow banks to lend to a larger network of SMEs. Mekar does this by collaborating with big, experienced and reliable credit cooperatives. We can provide access to a loanbook of over Rp 500 billion with more than 600,000 productive borrowers.
Mekar offers you:
- Online access to thousands of SME loans, which can be bought in one payment transaction within 10 minutes;
- Returns of 8% to 15% p.a. after tax;
- Guarantee of your principal, provided by our lending partners. Our lending partners maintain CARs that are three times higher than than those of banks.
- Legal arrangement : We offer the required secure legal agreements, such as channeling agreement, corporate guarantee, subrogation agreement, for our bank partners;
- Verification and audit : Mekar selects the least risky SMEs (borrowers) for banks to lend to. We monitor and audit our lending partners regularly, doing random sampling of the borrowers as well.
- Compliance : We ensure that the business model will meet the regulatory requirements to help our bank partners achieve at least 20% SME loans.
- OJK supervision and a license for Mekar will be in place by October 2017.