Accounting for some 91% of employment, 57% of GDP and 20% of exports by value in 2012, according to Bank Indonesia (BI) statistics, micro, small and medium-sized enterprises (MSMEs) form the backbone of Indonesia’s economy. Yet the predominantly informal nature of such companies has constrained their access to funding and scope for growth. Although lending to the segment accounted for roughly 18.63% of all outstanding loans by October 2013, aggregate figures obscure significant divergences between banks.
Amidst a raft of new regulations announced in November 2012, the regulator unveiled ambitious new lending targets for banks, requiring them to devote some 20% of their balance sheet to MSME loans. While compliance is expected to be gradual in the five years to 2018, rebalancing lending down the corporate ladder will be challenging for joint venture and foreign banks in particular. Channelling such an increase in spending will require innovation in distribution strategies and further developments in the ecosystem for lending, including upgrading credit information systems.
Gradual Targets
Implementing regulations for the new lending targets were issued in January 2013 and set a gradual pace for their introduction. Lenders are expected to expand their MSME books according to their ability in the first two years, but must have 5% of all outstanding loans to the segment by 2015. The targets then increase by five percentage points a year, reaching the 20% target in 2018.
The aim is thus to redirect growth away from nonproductive credit – mainly consumer loans – towards productive lending. The central bank’s definition of MSMEs is more restrictive than that of many lenders: micro firms are those with less than Rp300m ($30,000) in annual sales, smaller firms are categorised as those with under Rp2.5bn ($250,000) and medium firms as those with under Rp50bn ($5m). This is compared to, for example, Standard Chartered’s classification of small businesses as those with under Rp100bn ($10m) in turnover and medium firms as those with under Rp375bn ($37.5m). While the targets may seem ambitious, they are in line with other Asian countries’ banking policies during crucial stages of development. South Korea, for instance, set minimum lending targets of 40% of the balance sheet during its developmental phase in the 1980s, according to Danareksa’s head of economic research, Purbaya Yudhi Sadewa.
Clarifying its approach somewhat, BI spokesman Difi Johansyah announced in January that lending to nonoil export-oriented industries would meet the MSME lending criteria, while lenders would also be allowed to channel their lending through the country’s 26 regional development banks.
Current Lending
Under BI’s stricter definition, joint venture and foreign banks, whose balance sheets have traditionally been skewed towards larger corporate lending and wholesale funding, devote a minimal 2.37% of their total lending to MSMEs as of July 2013. By contrast, state-owned banks devoted 26.7% of their total lending to the segment, followed by foreign-exchange commercial banks’ 19.7% and rural development banks’ 17.25% at the same point.
Total lending to MSMEs grew 13.86% y-o-y to Rp487.92bn ($48.79m) in August 2012, with a non-performing loan (NPL) ratio of 3.94%, according to BI data, higher than the aggregate banking sector average of near 2%. Growth accelerated to 18.73% y-o-y to Rp579.31bn ($57.93m) in August 2013, while the NPL ratio fell to 3.61%. The bulk of this growth was driven by state-owned banks and foreign-exchange commercial banks, which accounted for 49.49% and 41.45% of total outstanding MSME credit in July 2013. Lending was dominated by wholesale and retail trade, which accounted for 53.24% of all MSME lending, followed by processing (10%), agriculture (7.47%), construction (6.62%) and property (5.33%). Loans were mostly for working capital, which made up 73.46% of the total, with investment loans accounting for the balance.
The best-positioned lenders as of November 2012 included traditionally rural-focused institutions. These include state-owned microfinance bank Bank Rakyat Indonesia (BRI) and Bank Bukopin, which devoted 43.1% and 30.1% of their balance sheets, respectively, to MSME lending in November 2012, according to JP Morgan. Private commercial banks Panin Bank and Bank Danamon had also allocated 37.5% and 32.1%, respectively. The three other state-owned banks were relatively close: Bank BTPN’s MSME lending accounted for 19.7% of all loans, and both BNI and Mandiri stood at 15.9%. The five other top 10 banks will have to ramp up lending, with Bank BTN reaching 16.6%, Bank CIMB Niaga (14.3%), Bank Internasional Indonesia (12.8%), PermataBank (12%) and Bank Central Asia (10.3%).
While some foreign lenders such as Commonwealth Bank are already compliant with the near-term target, others like ANZ remain far off the mark. Given the parallel requirement for top-tier banks to expand branch networks in more remote areas, the regulator expects leading lenders to expand their reach both geographically and by intensifying their lending. Indeed, the five provinces with the highest lending to the segment – four of which are in Java – accounted for 57.84% of all MSME loans in October 2013, while the top 10 accounted for 78.07%, according to BI.
Channels
With downward pressure on net interest margins for corporate loans and slowing growth in consumer lending in 2013, banks are eager to diversify towards riskier, high-yielding assets such as MSMEs. A 2013 banking survey from PwC found that 44% of banker respondents named SME lending as the key driver of growth, up from 31% the year before. The best-positioned lenders in the micro segment include BRI with 7128 micro-lending branches in 2012, Mandiri with 2212, Danamon Bank with 1562, Bank BTPN with 582 and Bank BJB with 437, according to CLSA.
With a still high average cost-to-income ratio of 74.1% in 2012, according to PwC, expanding branches and personnel to channel these extra funds will pose challenges to corporate-focused banks clustered in major urban centres. However, one potential avenue for growth is illustrated by Mandiri’s rapid expansion in its micro-lending ledger, which grew at a compound annual rate of 47% from 2009 to 2012, bolstered by the bank’s cooperative subsidiary, Mitra Usaha, which expanded its micro-outlets from 610 to 2212 in the four years to 2012. In early 2013 Mandiri also partnered with postal service provider Pos Indonesia and state-owned pension fund Taspen to expand its reach further.
A second avenue will be for banks to collaborate with affiliated multi-finance companies (MFCs) to expand their leasing activities for SMEs, even though MFCs’ leasing revenues have declined from 17% of bank income in 1998 to 11% in 2011, according to OECD data. While such moves have been limited in 2013, competition between banks to tap such distribution channels will increase in 2014 as the first deadline approaches.
Quality
While most agree on the principle of channelling more funding to the more productive segments of the corporate market, the challenges of preserving loan-approval discipline and containing potential NPLs are clear. “Corporates are very strong now and the NPL ratio in this segment is very low, while micro-loans are repaid on a daily basis, so we can see any issue and identify as it develops,” Destry Damayanti, Bank Mandiri’s chief economist, told OBG. “The fragile segment is SMEs with turnover of Rp500m-2bn ($50,000-200,000), as they are very vulnerable to rising interest rates.” Indeed, the NPL ratio amongst MSMEs has historically been roughly twice that of total loans.
While BI requires all SMEs with a turnover of over Rp25bn ($2.5m) to conduct independent auditing of their accounts, smaller firms remain opaque. The central bank’s credit information bureau, established in 2006, provides some information, although this is skewed toward consumer rather than commercial lending, according to the OECD. The bureau only collates information from banks and credit card firms, but not the wider range of financial institutions. Enactment of new regulations in February 2013 by BI, with support from the International Financial Corporation, allows for the establishment of private credit bureaux, the first of which is expected in 2014, which should help to provide more complete information. Meanwhile, although two SME credit guarantee and insurance schemes have been in operation for cooperatives’ lending since 1971, the impact has remained limited.
The regulatory-driven expansion in banks’ risk assets in coming years coincides with market pressure to scale down the corporate market towards MSMEs. Yet with significant differences in capabilities between stateowned and certain local commercial banks on the one hand, and foreign-linked banks and wholesale lenders on the other, the industry faced significant uncertainty in late 2013 over how the rules would be enforced.
Balancing the priority of expanding financial access to less formal and smaller companies, while also ensuring banking sector stability will be key for the regulator, particularly in a period of tightening liquidity for smaller banks. Channelling such lending will require innovation in distribution channels and products, in addition to continued discipline in credit approval.
Read More from OBG
