BI Announces Measures to Relax Banks’ Lending Rules

JAKARTA-
Indonesia’s central bank on Friday announced a set of measures to help banks keep the country’s economy growing in the difficult financial climate, including plans to boost their ability to lend to the nation’s small businesses.

Bank Indonesia also warned that 15 banks had about $4 billion of exposure to risky speculative investments, which it said were damaging the economy.

Muliaman D. Hadad, a BI deputy governor, speaking after a bankers’ meeting on Friday evening, said that it was important to maintain banks’ financing capacity, especially to small and medium enterprises, or SMEs, that he said would become the backbone of the economy in the crisis.

“We don’t want the banks’ ability to lend to decrease or this will become a barrier to the [government’s] target of 4 to 5 percent economic growth for this year,” Muliaman said.

The central bank has already lowered the standards for banks to measure the risk on loans, or the risk-weighted ratio, for SMEs to enable lenders to provide more loans to businesses with the same amount of capital.

Muliaman said BI was now giving banks more latitude to gauge the credit-worthiness of small businesses. Under the new policy, the risk calculation for SME loans of Rp 1 billion ($88,000) to Rp 20 billion would be based on a general assessment of a debtor’s cash flow to determine whether it had the ability to repay the loan.

“Before this, the risk calculation also included the debtor’s business prospects and financial performance,” Muliaman said “Banks must have a strong risk control system and a good capital adequacy ratio to use these new incentives.”

To prevent losses from speculation in derivatives and other exotic offshore investment products sold by domestic banks, BI will require lenders to report these instruments before bringing them to market.

“They should also explain their target market. We demand that only sophisticated customers be offered such products,” said Budi Mulia, another BI deputy governor.
Budi said that 15 banks currently had about $4 billion of exposure in speculative products. These investments were encouraging people to buy US dollars and were putting the rupiah — and the economy — under pressure, he said.

BI also eased requirements for bank mergers. Banks are required only to announce an acquisition and merger once and undergo a single fit-and-proper test, not two as before.

Agus Martowardojo, president director of state-owned PT Bank Mandiri Tbk, welcomed the new measures as “responding to bankers’ needs.”But he also said that more regulations could be relaxed, citing a regulation that barred cross-ownership of banks and another limiting the kinds of businesses banks could invest in.
By relaxing the rules, “bankers can move more confidently,” he said.