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Jakarta Post

Digital credibility touted as replacement for collateral in lending

Digital credibility touted as replacement for collateral in lending Bank Indonesia says it continues to encourage micro, small and medium enterprises to produce high quality products so they can complete in the global market. (JP/sau)
Norman Harsono
Jakarta   ●   Fri, January 25, 2019 2019-01-25 20:09 832 75e76da2d15e495661b6357e2e8b14b3 1 Business bank,loan,digital,collateral,SME,creative-economy,banking,Rudiantara Free


The banking industry needs to adopt digital technology and ease lending procedures to increase its credit reach to micro, small and medium enterprises (MSMEs), a creative agency official says.

Many small enterprises are in need of bank loans, but less than half of them fail to secure loans because of insufficient collateral.

“I think digital credibility can replace collateral,” Fadjar Hutomo, deputy head for credit access at the Creative Economy Agency (Bekraf), told dozens of entrepreneurs in Jakarta recently.

He used the term “digital credibility” in reference to an MSME's digital track record, such as its online transaction history, social media activity and active email account, while “collateral” referred to an MSME’s immovable assets such as land and buildings.

Fadjar, a former venture capitalist, was essentially suggesting that a track record – as an indicator of cash flow – could replace collateral as security on a loan for SMEs.

“During my 20 years of work experience, many MSMEs complained about poor credit access because they were considered unbankable as they didn't meet the collateral requirement for a loan,” he said.

His suggestion is in line with a 2017 International Finance Corporation (IFC) report, which found that 60 percent of local SMEs preferred banks for business loans, but 26 percent of them struggled to secure them 40 percent of the time because of insufficient collateral.

Furthermore, the report found that banks generally preferred asset-based lending instead of cash-flow lending, which would have been more supportive of digital track records.

Fadjar’s suggestion was in anticipation of a doubling in online MSMEs after Communications and Information Minister Rudiantara announced three months ago a commitment to encourage 8 million MSMEs to go online – defined as using e-commerce platforms instead of just Instagram and Facebook – by the end of this year.

The minister’s target, despite only comprising 13 percent of the country’s 60 million MSMEs, represents a doubling of last year’s 3.8 million online MSMEs.

Bekraf has attempted to improve SME credit access by teaching basic accounting through an online training course, which is little more than a series of 12 five-minute tutorial videos.

Separately, Bank Mandiri senior vice president Adinata Widia said banks were hesitant to switch over to digital footprints because of the lack of regulatory and technological infrastructure to verify debtor information.

“For example, data points are still difficult to validate in Indonesia,” he said.

Instead, Mandiri has played it safe by partnering three months ago with fintech lenders Amartha and Koinworks, which pre-scrutinize, respectively, MSMEs and online businesses applying for loans with the bank.

Nevertheless, Adinata noted that Mandiri was open to accepting digital track records if they could meet its risk requirement, which was slightly lower than the industry average as its capital adequacy ratio last stood at 21 percent compared to 22.5 percent.

In comparison to banks, fintech lenders already offer collateral-free loans to attract MSMEs, but many such lenders, unlike banks, do not own the funds and therefore would not bear the loss caused by nonperforming loans.

A case in point is Investree, one of the largest peer-to-peer (P2P) lending platforms in Indonesia, which explicitly states in its terms and conditions that it is not responsible for losses from failed investments but does provide its own credit-rating system – A1 to C3 – to help determine the risk and interest rate of each SME debtor.

Even Tokopedia, an e-marketplace firm, is working on a financing scheme for its sellers using readily available data points, such as their rate of successful transactions, sales frequency and customer rating to assess their creditworthiness.

“Seventy percent of our merchants are first-time entrepreneurs so they lack credit ratings and formal establishment to get funding from traditional financial institutions,” said Tokopedia founder William Tanuwijaya.

Financial Services Authority (OJK) adviser Widyo Gunadi said that even though banks were not legally required to secure collateral on loans, they were bound by the 1992 Banking Law to return all funds collected from depositors – unlike P2P lenders.

Therefore, the decision to switch from collateral to digital records rests with the banks and not the state.

“The change is possible, but banks have to be very sure about the digital records,” said Widyo.