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ank Indonesia’s (BI) new regulation obliging banks to channel at least 20 percent of their lending portfolios to small and medium enterprises (SMEs) may hurt foreign banks, most of which do not have a strong footing in such credit segments, analysts warn.

Fauzi Ichsan, an economist with the UK-based Standard Chartered, said that the policy would affect foreign banks operating in the country as many of them currently disbursed less than 10 percent of their loan values to SMEs.

“This [the minimum requirement of SME lending] may be referred to as a populist policy, implemented by BI under pressure from the House of Representatives,” he told The Jakarta Post in a recent interview.

According to him, forcing banks with weak micro loans to up their SME lending portfolios would subsequently push up their non-
performing loan (NPL) ratios, as they were not used to doing business in such credit segments.

“There is a law that requires 20 percent of the state budget be earmarked for education. But, is the Education and Culture Ministry ready? The same analogy can be used for these banks,” explained Fauzi.

BI unveiled a package of regulations on Nov. 23, including a rule that obliges banks to channel at least 20 percent of their credit portfolios to the SME sector. The central bank is due to issue the official regulation in January next year, although it will give a certain time frame for the banks to adjust their business strategies in accordance to the rule, before having to comply with it.

The regulation was expected to trigger more competition in SME lending, which was currently controlled by a few lenders with wide reach, local bankers have said. Most of them, however, agreed that the regulation should be welcomed, especially as it was in line with the government’s goal to expand banking outreach in a country where only around 50 percent of householders have access to credit.

“The spirit [of the regulation] is good for both the economy and the industry,” OCBC-NISP’s president director, Parwati Surjaudaja, said on Thursday.

Foreign bankers, however, fear that the regulation will create an uneven playing field between foreign and local banks. Some of the foreign banks operating in Indonesia, notably Citibank,
HSBC and Standard Chartered, have a specific business segment of disbursing consumer-related loans, channeling only a small amount to SMEs.

“Our exposure to the SME credit segment is not that big because our core business focuses more on wholesale banking,” Ali Setiawan, the head of global markets at an Indonesian branch of the UK-based HSBC, told the Post on Thursday.

“Besides, our network coverage is different to local banks, which have extensive outreach to [rural] areas,” he added.

BI was aware of the concerns felt among foreign banks over the issue, BI spokesman Difi Johansyah said.

Difi explained that the new regulation would include a clause stipulating that, for certain foreign banks, the 20 percent credit threshold could be met by not only channeling credit to SMEs but also by channeling credit to export-related industries.

The rationale behind the issuance of the regulation was that the central bank wanted foreign banks operating here to contribute more to Indonesia’s economy by channeling credit to productive sectors, noted Difi.

“We do not want our foreign banks to channel credit into consumption and retail businesses only,” he said on Thursday. “If they are not yet prepared, then they had better get ready. These foreign banks are making money here, so they must think about our national interests as well.” (sat)