There has been a strong indication that Bank Indonesia’s lending rate has not correlated significantly with commercial lending rate.
During 2009, while BI’s rate has decreased by 2.75 percent to 6.5 percent, the bank lending rate has only decreased slightly by 0.76 percent to 13-14 percent.
The miniscule decrease in the bank lending rate means that the banking sector has failed to play its role as a financial intermediary.
It is not surprising, then, that in 2009 bank lending only grew by around 10 percent, lower than
the initial target, as stated in the Banking Business Plan, of 15.6 percent.
The failure of the banking sector to play its role as intermediary institution impacted negatively not only on the real sector, but also on the whole performance of the Indonesian economy.
Thus, this should spur BI to address the problem by launching creative and innovative policy to encourage the banking sector to improve its lending capability.
Banks might argue that their failure to expand lending is due to low demand from the real sector. This argument may be true if it is related to their traditional consumers — large enterprises (LEs).
The global financial crisis has forced LEs to reduce their production capacity.
Moreover, various problems in the forms of increasing risks, unsound policy, and poor infrastructure have discouraged LEs to expand their business.
However, if it is related to Small and Medium Enterprises (SMEs), the argument that a slide in demand is a major reason for the poor bank lending performance is questionable.
As in the Asian financial crisis of 1997/1998, SMEs weathered the current global financial crisis better than LEs.
This is because SMEs have not been as dependent on formal and export markets, as such they have been able to survive and adapt to the sudden shock more quickly and flexibly than LEs.
Hence, during the current global financial crisis, SMEs have played an important role as a buffer for the critical situation by creating employment and generating income for those belonging to the lower socio-economic class.
Unfortunately, despite playing a vital role in the Indonesian economy, SMEs also suffered from a number of problems.
One critical problem that SMEs face is their limited access to the banking sector as a source of capital. This limited access has adversely affected the ability of SMEs to grow and develop.
The lack of understanding among banks about the business characteristics of SMEs is a major reason why banks remain reluctant to lend to them.
Indeed, from a bank’s point of view, SMEs are frequently identified as parties that tend to borrow small amounts and have little borrowing experience.
Banks also consider SMEs as having insufficient credit requirements, such as collateral, audited book accounts, cash flow projections or business plans.
Accordingly, allocating credit to SMEs forces banks to incur an increased risk and higher transaction cost associated with evaluating or screening SMEs applying to borrow, disbursing payments, monitoring, and collecting payments.
Statistical data shows that the ability of BPRs (People’s Credit Banks) to expand their lending portfolios to SMEs increased over time. This is because BPRs have solid networks to reach SMEs in rural and relatively remote areas.
BPRs also have better understanding than general banks about structure, characteristics and economic feasibility of SMEs.
This means BPRs have a better capability to broker business deals with SMEs.
Unfortunately, the financial structure of BPRs is much weaker than that of general banks. This leads to BPRs having a limited liquidity to meet all loan applications from SMEs.
Thus, the rejection rate of BPRs to meet the increased SMEs’ loan applications is relatively high.
Banking linkage where general banks and BPRs work cooperatively to provide loans for SMEs can be an alternative to overcome this problem. Banking linkage provides benefits for all parties involved.
First, enabling BPRs to strengthen their financial structure to provide more loans to SMEs.
Second, helping general banks to deal with the problem of excess liquidity and expanding its lending capability.
Third, opening more access for SMEs to source of capital.
Despite offering various benefits, BI and the government should be selective to intervene and support the development of banking linkage.
Experience in the manufacturing sector indicated that strong and direct government intervention, such as ordering state owned enterprises and LEs to involve in the linkage through bapak-angkat (foster parent) programs, is largely unsuccessful and ineffective in promoting the linkage.
In the manufacturing sector, linkage is relatively successful when it is developed based on profit motivations and provides benefits for all parties involved.
A policy lesson that can be drawn from the development of bapak-angkat programs is that instead of intervening directly, BI and the government should design and introduce an appropriate legal framework that can help solve commercial disputes in the linkage.
This is because the current Indonesian legal framework is still complicated and ineffective in coping with contractual breach.
For example, when a firm involved in the linkage brings its commercial disputes with its partners to the court system, it is extremely costly because the firm has many expenses (i.e. time, money, and other resources) to attend long and slow court hearing processes.
In any case, the cost of attending such extended hearing process may be higher than the value of the transaction that the dispute is about. Thus, this discourages firms to take legal action when they have commercial disputes.
Banking linkage may involve more parties (BPRs, general banks, SMEs, and other BPR consumers) than those in manufacturing linkage.
Thus, the probability for commercial disputes to occur (such as when one party delays a payment or fails to honor an agreement) is higher in the banking linkage than in the manufacturing linkage.
This suggests that BI and the government should be well prepared in designing and introducing reliable and effective legal framework to anticipate the emergence of commercial disputes.
The writer is a researcher at the Economic Research Center (P2E)-LIPI, author of the book with the title The Economic Role of Inter-Firm Networks in the Development of SMEs.
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