T

he financial regulator has urged rural micro lenders (BPRs), which mostly run with small capital, to merge with each other as it seeks to strengthen their role as the source of capital for small and medium enterprises (SMEs) in rural areas.

With increasing competition in the banking sector, BPRs face numerous challenges, including limited capital and poor management, according to the Financial Services Authority (OJK).

'€œHalf of the existing BPRs have small capital,'€ said Achmad Fauzie, the OJK'€™s financial institutions supervision coordinator for the eastern part of the country.

Achmad did not specifically mention the amount of BPR capital that fell under the regulator'€™s recommendation to merge. However, he said some existing micro lenders needed to adjust with the regulation particularly on the minimum capital requirements.

'€œThere are many existing BPRs whose capital is below the requirement set in the new regulation,'€ he said, adding that the new regulation did not require existing BPRs to merge but mergers were being recommended to strengthen their position.

In 2014, the government issued a regulation that divided Indonesia into four different zones, where every zone has a minimum capital requirement for new BPRs to comply with before rolling out. The zones are divided according to their rate of competitiveness. Zone I requires minimum capital of Rp 14 billion (US$1 million), while it is Rp 8 billion for Zone II, Rp 6 billion for Zone III and Rp 4 billion for Zone IV.

According to the OJK, out of 1,643 existing BPRs, 749, or 45.6 percent, have assets below Rp 3 billion. That size of capital, according to the new regulation, is below the minimum requirement for the least competitive Zone IV.

The association of rural micro lenders (Perbarindo), however, has played down the recommendation, saying that it is just a suggestion and is not binding.

'€œIt'€™s just a recommendation, not a regulation that we need to follow,'€ the association'€™s chairman Djoko Suyanto told The Jakarta Post on Friday.

'€œMerging is easy to say but hard to implement. If one person has more than one BPR then it is easy to merge them. If not, then it'€™s hard because every owner will have different interests and ideas,'€ he explained.

Djoko said mergers were the last option to take. BPR owners will meanwhile seek to increase their companies'€™ assets through increasing their profits, capital injections from shareholders and partnerships with investors.

'€œI want to reemphasize that mergers are not required for the existing BPRs [which existed before the new regulation was issued],'€ he said.

Despite being easy sources of credit for people in rural areas for their simple procedures, BPRs have not shown good performances in the past.

According to the OJK, only 4.5 percent of the total 776,908 SMEs credits recorded until May this year were received from BPRs. The other 95.5 percent were still received from commercial banks. (saf)