Indonesian banks boosting small-business loans

JAKARTA/BANGKOK — Banks in Indonesia are boosting lending to operators of small and midsize companies, who have traditionally relied on family and friends for loans, as demand for credit grows.

Loans to such businesses in the Southeast Asian country increased to about 740 trillion rupiah ($55.8 billion), or roughly 20% of total bank lending, at the end of December. Bank Rakyat Indonesia, the nation’s second-largest by assets, and Bank Tabungan Pensiunan Nasional, partly owned by Japan’s Sumitomo Mitsui Banking, have worked out new mechanisms to provide funds for the growth of some 60 million smaller enterprises.

 A 24-year-old food stall operator in Central Java recently borrowed 17 million rupiah from BRI. Taking over the business of selling minced fish fries from his father, he decided to apply for a loan to open a store, as his monthly sales have increased 50% from three years ago.

“I want to hire lots of people and expand my business,” he said.

BRI, one of the most profitable banks in Asia, with a 30% return on equity, primarily engages in lending to small businesses. These borrowers accounted for 70% of its outstanding balance of loans, totaling 558 trillion rupiah, at the end of December.

While small-scale loans are considered risky and costly, BRI has held the balance of nonperforming loans to about 2% of total outstanding lending. The bank has established operational networks close to its customers; in addition to ordinary branches, it has more than 10,000 makeshift outlets across Indonesia, including many opened in marketplaces. Also, in 2014, BRI introduced a program allowing account holders to act as agents for people in their neighborhood for procedures such as filing for loans. It plans to have 75,000 agents this year and to quadruple the number of small loans, each capped at 25 million rupiah, compared to the previous year.

Being close to its customers and understanding them puts BRI in a strong position, said Mohammad Irfan, the bank’s director in charge of small-scale financing, which involves lending of operating funds ranging from several million rupiah to 100 million rupiah. The company uses credit information from its branches and agents to find potential clients and propose loans to promising businesses.

Bank Mandiri, Indonesia’s biggest in terms of assets, plans to accept applications for credit through post offices, while Bank Danamon is developing unsecured loans jointly with International Finance Corp., a member of the World Bank group.

Bank lending has yet to penetrate into much of Indonesian society, as the custom of borrowing from family and friends is still widely practiced. The amount lent to small businesses was equivalent to only 9% of the nation’s gross domestic product in 2013, the lowest ratio among major countries in Southeast Asia.

To stimulate demand and increase lending, BTPN began an education program for borrowers. The one-year program offers lessons by experts, based on a curriculum developed jointly by the bank and Bogor Agricultural University. Some 10,000 borrowers finished the course and received diplomas in 2015, according to the lender.

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