18 Credit Insurance and Credit Guarantees as Instuments to. · KIK/KMKP Kredit Investasi Kecil/Kredit Modal Kerja Permanen (Small Investment Loan/Small Permanent Working Capital Loan),

ADB SME DEVELOPMENT TA

BACKGROUND REPORT

Published by: ADB Technical Assistance

SME Development State Ministry for Cooperatives & SME

Jalan H.R. Rasuna Said Kav.3 Jakarta 12940

Tel: ++62 21 520 15 40 Fax: ++62 21 527 94 82

e-mail: [email protected]

CREDIT INSURANCE AND CREDIT GUARANTEES AS INSTRUMENTS TO ENHANCE MARKET BASED

LENDING

WOLFRAM HIEMANN - TIKA NOORJAYA

DECEMBER 2001

ADB SME DEVELOPMENTTA

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I. TABLE OF CONTENTS

CREDIT INSURANCE AND CREDIT GUARANTEES AS INSTRUMENTS TO ENHANCE MARKET BASED LENDING.................................................................................... I

I. TABLE OF CONTENTS .......................................................................................... II

II. TABLE OF ABBREVIATIONS ...............................................................................IV

III. TABLE OF FIGURES .............................................................................................VI

IV. TABLE OF REFERENCES ...................................................................................VII

V. EXECUTIVE SUMMARY ......................................................................................VIII

VI. RINGKASAN EKSEKUTIF...................................................................................XIII

VII. GLOSSARY......................................................................................................... XIX

INTRODUCTION .................................................................................................................1

1 THE RATIONALE FOR CREDIT SUPPLEMENTATION ........................................2

1.1 Macro-economic reasons.........................................................................................2

1.2 Micro-economic reasons..........................................................................................3

1.3 The Indonesian rationale .........................................................................................4

1.4 Credit guarantee in view of critics ............................................................................4

1.5 Conclusion ...............................................................................................................5

2 THE INDONESIAN ENVIRONMENT.......................................................................7

2.1 Regulations ..............................................................................................................7

2.2 Credit insurance and guarantee companies in Indonesia........................................8 2.2.1 Perum SPU (Sarana Pengembangan Usaha, Public Enterprise) ............................8 2.2.2 PT Askrindo (Asuransi Kredit Indonesia, Ltd.) .........................................................9 2.2.3 PT ASEI (Asuransi Ekspor Indonesia, Ltd., Indonesia Export Credit Insurance).....9 2.2.4 PT PKPI (Penjaminan Kredit Pengusaha Indonesia, Ltd., Indonesia Credit

Guarantee Corporation ............................................................................................9 2.2.5 USAID LPG (Loan Portfolio Guarantee) ................................................................10


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2.3 Different approaches..............................................................................................10

2.4 Credit insurance and guarantees: Sector development in Indonesia ....................11

3 FINANCIAL ISSUES OF CIC/CGC .......................................................................13

3.1 Principles ...............................................................................................................13

3.2 Costs......................................................................................................................14

3.3 Premium charging policies of banks ......................................................................16

3.4 Costs as viewed by potential debtors ....................................................................16

4 BEST PRACTICES................................................................................................17

4.1 Summary of international experience ....................................................................17

4.2 Instruments for sharing and reducing risks and losses..........................................17

4.3 Practice of CIC/CGC in Indonesia .........................................................................21 4.3.1 Indonesia's credit insurance environment..............................................................21 4.3.2 Comparison with best practice...............................................................................22 4.3.3 Problematic competition among credit insurance companies................................23 4.3.4 Bank loan insurance and credit guarantee companies as profit earners ...............24 4.3.5 Imbalances in risk exposure ..................................................................................25

5 RECOMMENDATIONS .........................................................................................26

5.1 Consolidation of state-owned CGC and CIC enterprises.......................................26

5.2 Strengthening participation ....................................................................................28

5.3 Improving coordination with BI...............................................................................29

5.4 Review regulations.................................................................................................30

5.5 Government programs or schemes .......................................................................30

5.6 Regional CGC........................................................................................................31

5.7 Recommendations regarding private bank loan guarantee companies.................33

6 ANNEXES..............................................................................................................35


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II. TABLE OF ABBREVIATIONS

ADB Asian Development Bank

ASKRINDO, PT

Asuransi Kredit Indonesia, Perseroan Terbatas (Indonesia Credit Insurance, Limited Company)

ATMR Aktiva Tertimbang Menurut Risiko (Risk Weighted Assets)

BPR Bank Perkreditan Rakyat (Rural Bank, a secondary bank)

CAR Capital Adequacy Ratio

CI, CIC Credit insurance, credit insurance company

CG, CGC Credit guarantee, credit guarantee company

FA Financial Assistance

FAO Food and Agriculture Organization of the United Nations, Rome

KfW Kreditanstalt fur Wiederaufbau (Bank for Reconstruction, Frankfurt (Germany), a second-tier bank)

KIK/KMKP Kredit Investasi Kecil/Kredit Modal Kerja Permanen (Small Investment Loan/Small Permanent Working Capital Loan), an interest-subsidized loan scheme with compulsory credit insurance from 1974 until 1990

KLBI Kredit Likuiditas Bank Indonesia (Bank Indonesia Liquidity Credit)

KMK Kredit Modal Kerja (Working Capital Credit)

KPKM Kredit untuk Pengusaha Kecil dan Mikro (Credit for Small and Micro Entrepreneurs)

KUD Koperasi Unit Desa, (incorporated multipurpose village cooperative)

KUK Kredit Usaha Kecil (Small Enterprises Credit, including loans for low-cost housing and consumption purposes)

KUT Kredit Usaha Tani (Short-term seasonal credit to foodcrop agriculture)

LKM Lembaga Keuangan Mikro (Micro Finance Institution)

MoF Ministry of Finance

NPL Non-Performing Loans

Par. Paragraph

PNM Permodalan Nasional Madani, Perseroan Terbatas (non-bank financial institution for credit programs)

PHBK Proyek Pengembangan Hubungan Bank dengan Kelompok Swadaya Masyarakat (Project Linking Banks and Self-Help Groups)

PPAP Penyisihan Penghapusan Aktiva Produktif (Loan Loss Reserves)

RCGA Regianal Credit Guarantee Company

SME Small and Medium Enterprises (includes sometimes micro-entrepreneurs)

SPU Sarana Pengembangan Usaha (Enterprise Development Agency, (credit guarantee or insurance company)

SOE State Owned Enterprise


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SUP Surat Utang Pemerintah (Government Bonds)

TA Technical Assistance

UKM Usaha Kecil dan Menengah (Small and Medium Enterprises)

$ = USD = Rp 10,000 (fluctuation May - November 2001: 8,300 - 10,900)

Addresses of insurance companies see Annex 1.


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III. TABLE OF FIGURES

Figure 1. Alternative Government Support SME Finance Measures......................................... 3 Figure 2. Assets of credit insurance/guarantee companies, 2000 (figure for PKPI estimated).. 8 Figure 3. Products Offered by State-Owned CIC/CGC........................................................... 10 Figure 4. Erratic income and claims ....................................................................................... 14 Figure 5. Asuransi Ekspor Indonesia, figures from Annual Report 2000................................. 15 Figure 6. Cost advantage versus loan recovery ..................................................................... 20 Figure 7. Presence of CIC/CGC in Indonesia ......................................................................... 23 Figure 8. Portfolio imbalances, SPU 2001 (Amount of loans guaranteed) .............................. 25 Figure 9. Concept for an integrated national and regional CIC/CGC system.......................... 27 Figure 10. The intention to establish regional or provincial CGC: ............................................. 32 Figure 11. Calculation models for fixing loan interest rates ...................................................... 37


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IV. TABLE OF REFERENCES

Author Title

Asuransi Ekspor Indonesia (ASEI) Annual Report 2000, Jakarta APEC (Asia-Pacific Economic Cooperation), Working Group on Trade Promotion, Contributions and papers from:

The Seminar on Credit Guarantee Systems (Sept 17-19, 1996, Taipei)

- Jiang, Yun-Sen A prototype to Establish a Credit Guarantee System, Taipei

- Rufina, J.M. Credit Guarantee Risk Management, The GFSME Experience

- Zaafril Razief Amir Problems Encountered in the Implementation of a Credit Guarantee System and Resolution, The Indonesian Experience

Andi Ikhwan; Hiemann, Wolfram Pengalaman Internasional Penjaminan Kredit Kepada UKM, Background Report ADB TA SME Development, Jakarta 2001

Andi Ikhwan; Hiemann, Wolfram Strategies to Enhance Market-Based Lending to SME, Background Report, ADB TA SME Development, Jakarta, 2001

Eiko Wismulyadi (Bappenas); Bird, Guy D. (PT Hickling)

Small and Medium Enterprise Development, Jakarta, May 2001

Graham Bannock & Partners Ltd. Credit Guarantee Schemes for Small Business Lending, A Global Perspective, Volume I - Main Report, 1997, London

Gudger, Michael, Credit Guarantees, An assessment of the state of knowledge and new avenues of research, 1998, FAO, Rome

Perum Sarana Pengembangan Usaha (SPU)

Mitra Setia Menuju Sukses, 2000, Jakarta

Urata, Shujiro Policy Recommendation for SME Promotion in The Republic of Indonesia, July 26, 2000

ADB-TA Policy Paper Best Practices in Promoting Market Based Lending, ADB SME Development TA, Jakarta 2001


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V. EXECUTIVE SUMMARY

Result A strong credit insurance and credit guarantee company with assets close to Rp 2 trillion ($200 million) can be created with the consolidation of three state-owned credit insurance or guarantee enterprises, namely Askrindo, Sarana Pengembangan Usaha (SPU) and ASEI. This company can insure about 75,000 loans to SME with a combined ceiling of more than Rp 21 trillion (more than $2 billion).

At present, the effectiveness of credit insurance for increasing loans to SME is extremely limited:

− Bank Indonesia does not allow a lower risk weight and reduced loan loss provisions;

− The judicial or court system for the purpose of enforcing secured property rights is highly inefficient, in particular with regard to small loan amounts, expensive, time consuming and even unpredictable.

− Many banks doubt the usefulness of credit insurance. They lost confidence when the credit insurance companies experienced liquidity problems.

− A rating or scoring system is not available so that premiums cannot be adjusted to particular risks based on objectively verifiable indicators.

− The current financial market situation does not support credit insurance. Banks can choose clients with good credit records and sufficient bankable collateral.

However, times will change and one might wish to be prepared.

Background The insurance industry differentiates between

− credit guarantees offered by banks and private enterprises for trade credits that are based on commercial transactions between a producer of goods and services and its customer and

− bank loan guarantees or bank loan insurance offered mostly by state-owned or state-supported entities, credit guarantee or credit insurance companies (CIC/CGC), which are dealt with in this report.

For a number of macro- and microeconomic reasons many countries, industrialized and developing countries as well as countries in Eastern Europe, introduced bank credit insurance in particular for loans to SME. The main reason for these products is convincing banks to extend loans to prospective enterprises that just lack bankable collateral. The guarantee serves as a collateral substitute.

Credit insurance is a tool to improve macro-economic development and a means to direct and implement government policies towards predetermined targets. It is assumed that the costs of credit guarantees are balanced by off balance sheets benefits, e.g., higher employment, social stability and finally also increased future tax income. Compared to other instruments like directed loans or liquidity assistance for banks credit, insurance is an inexpensive tool to spur SME development.

A number of micro-economic reasons favor the existence of credit insurance. However, private insurance companies normally do not engage in this risky, erratic business with


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loss-making prospects. Critics challenge the usefulness of any bank loan insurance or guarantee and consider it a waste of funds.

In 1970, credit guarantee for bank loans was introduced through LJKK, an institution covering loans for cooperatives. One year later the government founded Askrindo as a company insuring bank loans, also an instrument to implement government policies. They had to cover government supported credit schemes at regulated premiums and amassed huge losses, which were finally taken over by the government budget. LJKK was absorbed by PKK, a company with the same mission. In 1990, the government stopped several credit schemes and Askrindo experienced shortly afterwards another financial crisis. Indonesia’s MoF introduced Government Decision 486 on credit guarantee companies in 1996. Only one company, PKPI, applied for a license. The company is active but does not play an important role in the market. ASEI, founded in 1985, is another government company engaged in credit insurance and guarantees in particular in connection with financing imports and exports.

Already since 1999 and even more since 2000, after reforming Perum PKK to become Perum SPU, the government companies left their established market segments and encroached each others field of competence. Their main task has become to generate profits for the government coffers. They lost development orientation as indicated by the fact that they did not develop particular insurance schemes.

If banks pay constantly more premiums to CGC than they receive from claims they will reduce their demand for insurance and take over the risk themselves. Demand for coverage would also shrink if premiums would be raised. Operational costs based on a decreasing number of loans could easily exceed 5% p.a. of the amount guaranteed as experienced in a number of countries. No CIC/CGC is charging such a high rate. Few debtors would accept such a burden.

The premiums CIC/CGC normally charge are much too low and do not cover all expenditures for claims and operational costs. Internationally, there are few CGC or CIC that do not depend on continuous direct or indirect financial support from governments.

Insurance companies need reserves. These funds originate from equity and reserves as well as low interest deposits. They are invested in time deposits and earn market interest. Interest income often exceeds income from premiums. Therefore, insurance companies can pay more claims than they receive as premiums. However, the investor in a CIC/CGC would maximize its profits, if the company would not be active at all and only administer the deposits! The difference to the actual, lower profits is a loss for the government, an indirect, disguised subsidy.

When comparing best international practices for CI/CG with the Indonesian environment it becomes apparent that not all of the suggestions can be implemented under present conditions. Major obstacles are the weak legal system, unclear or missing government regulations, a still depressed economic environment with banks selecting their debtors very carefully, lack of a credit bureau intelligence, lack of a rating system for grouping risks, and BI not accepting CI/CG as a tool to reduce credit risk or as loan collateral. In addition, banks still remember mixed experience with claims when Askrindo went through a severe liquidity crisis. It seems that confidence has not yet been fully restored.

When comparing the list of risk sharing and risk reducing measures and other benchmarks with practice in Indonesia, one finds that CI/CG are not specific development policy instruments, for which one might justify subsidies. They do not follow best risk sharing and risk reducing measures. It is very surprising that Askrindo as a CIC has more points of sale than the more borrower-oriented CGC SPU.

The major question raised concerns the advantages and problems of having at least three government owned bank loan insurance companies competing each other. In future, the


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number of CGC might rise with provincial governments intending to engage in this line of business as in support for their local economy. In particular the profit-oriented approach is questioned in an industry where development orientation normally results in losses. The level of risk-taking is not regulated and one may hopefully not see in future particular sectors, in which an over average exposure is evident, in particular oil palm plantation, affecting the performance of all CIC/CGC.

Recommendations

1. Consolidation of state-owned CGC and CIC enterprises

It is proposed that a pre-feasibility study should constitute the benefits and hidden problems of consolidating the credit guarantee and insurance activities of all state-owned companies, in particular Askrindo, SPU and ASEI, in one powerful and resourceful company with assets close to Rp 2 trillion ($200 million). It is proposed that the government implements the recommendations forwarded in this study.

The proposal is based on strong indications that the benefits of a consolidated company would by far outweigh shortcomings as there are: reduced risks, savings and synergies, extended services and outreach, and a higher level of expertise and managerial capacity for the benefit of SME looking for financial support. The set-up of this organization should also allow the integration of activities of not yet existing regional CGC without resulting in harmful competition.

It was not possible to reveal whether additional income from loan-recovery will balance additional costs of personnel-intensive CIC/CGC. Some proponents of credit insurance prefer a slim organization. However, being directly involved in the recovery of bad debt adds to field experience and staff capacity, which is required for issuing guarantees. These aspects need to be further investigated in order to define the scope of tasks of a new CIC/CGC system.

2. Strengthening participation

Some of the drawbacks of one large company without competition are addressed in the proposal that banks using the services of the CIC/CGC should participate in its equity. This would not only be a sign of commitment. It is expected that the private co-owners of the consolidated CIC/CGC will supervise the administration of the company and continuously press for better services and higher efficiency.

It is proposed that regional or provincial governments should participate in the equity of the consolidated company. CI/CG are a political tool for SME development and they are more effective with the backing of local authorities.

For the same reasons, namely to support SME development, the government should invite foreign donors to participate with either equity or sub-ordinate loans, and with international expertise. It is assumed that one attractive company draws more donor interest than three small companies with weak development orientation. A multinational guarantee company model may serve as one approach with a potential to reach SME, in particular if, in view of the Basel II Accord, this is a way to obtain a high rating for the company. Loans guaranteed by such a company commands a lower risk weighting.

A reorganization of equity allocation also allows finding a solution for Bank Indonesia’s 55% equity participation in Askrindo, an investment that is considered less appropriate for a monetary authority. It is proposed that this share is taken over by commercial banks.


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Proposals for financing this transfer and other incentives, e.g., access to liquidity should attract the banks’ cooperation.

3. Improving coordination with BI

One of the strongest arguments for banks to apply for credit guarantees is a lower risk rating and application of lower loan loss reserve rates for the part of the loan that is covered by the insurance. Other countries, e.g., India and Malaysia, introduced such facilities for SME loans. The new set-up of CIC/CGC should come in a way that BI is in a position to accord lower rates, at least for small loans.

Another proposal relates to that CIC/CGC should be given access to the credit information system that, at present, is still operated by Bank Indonesia and exclusively furnishing information to commercial banks.

4. Review of CIC/CGC regulations

Regional governments plan to apply for a CGC license. MoF regulation No. 486/1996 on CGC needs review. It does not prevent management by unqualified persons and risk taking beyond common sense. It is recommended that rules, mechanisms, and supervision capacity should be put in place before the government allows the establishment of new CGC.1 Professional standards on maximum guarantee, management capacity, re-insurance requirements and reporting need to be established. The government may endow one company with special features as a commitment to keep it in the market. Careful attention should be given that cross-subsidies are not used to compete with enterprises that do not enjoy special facilities.

5. Government programs or schemes

The following actions are proposed in connection with CI/CG because they have the potential to contribute to more SME lending:

- Re-orientation from profit to development objectives;

- Definition of fields, targets and instruments for intervention, e.g.,

- Intervention that does not disturb market forces but compensates weaknesses for which the government is responsible, for instance, subsidizing costs of court procedures in connection with recovery of bad debt;

- Subsidizing costs and expenses in connection with the appraisal of the first loan guarantee request, e.g., fixed upfront fees that are normally not redeemable in case no credit guarantee will be granted;

- Promoting the advantages of credit insurance and guarantee to BDS providers, potential borrowers, and experienced front desk credit officers (not only their superiors)

6. Decentralization and regional CGC

It has been proposed to keep credit insurance centralized and to decentralize credit guarantee.2 CGC would work on a regional or provincial level whereas CIC would act as a 1 At present, the regulation is not applicable for Askrindo as credit insurance company and it explicitly excludes Perum PKK

from provisions of this regulation (Par. 15). 2 See: Urata, S., Policy Recommendations, p.40 ff.


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re-insurance company of the CGC thus almost copying the Japanese credit supplementation model. The problem has to be resolved how to integrate provincial CGC in places where CIC/CGC are already present and in places where they are not yet. As a matter of principle one has to aim at cooperation and not competition. There are good reasons that local governments should back their policy with credit guarantees as one tool. But in few provinces they will be viable. At least one should provide for that professional experienced managers are employed after and passing a fit and proper test. It is proposed that for regional CGC re-insurance should be compulsory and that they and their clients work together with business development service providers (BDS) to reduce risks. A preferred alternative would be if the provincial government would make available a trust fund and related rules to the branch of the national CIC/CGC in order to assure professional management.

7. Recommendations regarding private bank loan guarantee companies

It is recommended that the government should not in any way support a private competitor in bank credit supplementation with special facilities like soft loans3. A clever management might find ways to explore profitable market niches. Provincial governments should only cooperate, if a cooperation with the existing state-owned companies is out of question. One might, however, carefully investigate whether offering re-insurance is opportune.

If regional governments cooperate with a private credit guarantee company instead with a central state-owned company then it is acceptable, if the state-owned companies do not provide the service.

According to reports there are regulations requiring credit insurance for oil palm plantations during construction period. Interest during construction are part of the scheme’s investment costs. Therefore, during the grace period a claim is impossible and a credit insurance non-sense. It is recommended that the rule should be reviewed and that in particular private companies should not earn profits without taking any risk.

3 Mr. Krisnaraga, President Director of PKPI, proposed sale of shares to provincial governments, business associations, and

“soft loan” facilities. See: Bisnis Indonesia, 11 December 2001:”PKPI gandeng daerah untuk perkuat modal.”


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VI. RINGKASAN EKSEKUTIF

Hasil Dengan konsolidasi tiga perusahaan milik pemerintah, yaitu Askrindo, Sarana Perkembangan Usaha (SPU) dan Asuransi Ekspor Indonesia (ASEI) dapat diciptakan suatu perushaan asuransi kredit yang kuat dari berbagai segi, antara lain modal (asetnya mendekati Rp 2 trilyun), penyebaran, dan SDM. Perusahaan ini dapat menjaminkan kredit kepada 75,000 UKM dan koperasi yang plafonnya s/d diatas Rp 20 trilyun.

Pada saat ini efektivitas asuransi kredit dalam meningkatkan kredit kepada UKM sangat terbatas sekali:

− Bank Indonesia tidak mengizinkan memakai persentase ATMR di bawah 100% untuk kredit yang diasuransikan dan bank tidak diperkenangkan untuk mengurangi PPAP.

− Sistem iuridis dan pengadilan dalam hal menegakan hak atas barang yang menjadi agunan kredit dapat dinyatakan sangat tidak efisien dengan prosedur yang memakan waktu dan biaya yang tidak seimbang dengan nilai tunggakan kredit SME. Sistem tsb. melindungi debitur dari pada melindungi kepercayaan bank kepada debiturnya yang sudah sebelumnya dibuktikan dengan mencairkan kredit.

− Banyak bank mempertanyakan manfaat asuransi kredit. Mereka kehilangan kepercayaan masa yang lalu sewaktu perusahaan asuransi kredit mengalami kekurangan likuiditas.

− Suatu system untuk memberikan peringkat dan penilaian risiko kredit tidak ada sehingga premi asuransi tidak dapat disesuaikan berdasarkan pada risiko dan fakta obyektif dan terbukti.

− Pada saat ini beberapa bank tidak dapat menyediakan likuiditas untuk kredit kepada pengusaha UKM karena modal bank terlalu kecil. Bank yang likuiditasnya baik dapat menyeleksi nasabah yang memiliki agunan lebih dari cukup.

Namun demikian, situasi seperti ini dapat berubah dengan tiba-tiba. Lebih baik jika semua pihak sudah siap sebelumnya!

Latar Belakang Produk dari jasa asuransi kredit dapat dibedakan sbb.:

- garansi kredit yang ditawarkan oleh bank-bank dan perusahaan swasta untuk kredit perdagangan yang didasarkan pada transaksi komersial antara produsen barang dan jasa dengan pembelinya dan

- penjaminan kredit bank atau asuransi kredit bank yang hampir semuanya ditawarkan oleh perusahaan penjaminan kredit dan perusahaan asuransi kredit (CIC/CGC: credit guarantee company/credit insurance company) milik pemerintah atau perusahaan penyertaan pemerintah, yang dibahas dalam laporan ini.

Sejumlah ahli ekonomi makro dan mikro mengemukakan bahwa alasan banyak negara, negara maju dan negara sedang berkembang demikian juga negara-negara Eropa Timur, untuk memperkenalkan asuransi kredit bank, terutama adalah untuk menjamin risiko kredit yang diberikan kepada Usaha Kecil Menengah (UKM). Alasan utama terhadap produk ini adalah meyakinkan pihak bank dalam pemberian kredit kepada perusahaan yang memiliki prospek baik, tetapi tidak memiliki jaminan yang bankable. Jaminan dari perusahaan jaminan kredit merupakan pengganti jaminan fisik (collateral substitute).


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Asuransi kredit merupakan sebuah alat untuk meningkatkan pembangunan ekonomi makro dan merupakan alat untuk mengarahkan dan mengimplementasikan berbagai kebijaksanaan pemerintah dalam mencapai sasaran-sasaran yang telah ditentukan. Asuransi kredit seringkali mengalami defisit yang disebabkan biaya penjaminan kredit tidak ditutup oleh penerimaan premi dan penagihan kredit macet. Defisit ini dapat diimbangi dengan manfaat yang tak tercantum dalam neraca perusahaan (off balance sheet incomes), seperti meningkatnya kesempatan kerja, membaiknya stabilitas sosial, yang pada gilirannya akan meningkatkan pendapatan pajak di masa datang. Dibanding piranti lain, seperti kredit langsung atau bantuan likuiditas untuk kredit bank, asuransi kredit adalah sebuah alat yang tidak mahal dalam rangka memacu pengembangan UKM.

Sejumlah ahli ekonomi mikro mengemukakan sejumlah alasan manfaat keberadaan asuransi kredit. Walaupun demikian, perusahaan asuransi swasta umumnya tidak mau terlibat dalam bisnis berisiko yang tak menentu, dengan prospek merugi ini. Para pengritik menyanggah kegunaan asuransi kredit atau penjaminan bank, dan menilainya hanya membuang-buang dana saja.

Tahun 1970, penjaminan kredit terhadap kredit perbankan telah diperkenalkan melalui LJKK (Lembaga Jaminan Kredit Koperasi), sebuah lembaga penjaminan kredit koperasi. Setahun kemudian, pemerintah membentuk Askrindo (Asuransi Kredit Indonesia) sebagai perusahaan asuransi kredit bank, juga sebagai piranti dalam pelaksanaan berbagai kebijaksanaan pemerintah. Mereka diharuskan menutup berbagai skim kredit yang didukung pemerintah dengan tingkat premi yang ditetapkan pemerintah dan menyebabkan kerugian besar secara massal, yang akhirnya ditanggung oleh APBN. LJKK kemudian menjadi Perum PKK (Perusahaan Umum Pengembangan Keuangan Koperasi), sebuah perusahaan dengan misi yang sama. Tahun 1990, pemerintah menghentikan beberapa skim kredit, dan Askrindo dalam waktu sangat singkat mengalami krisis keuangan yang lain. Pada 1996, Menteri Keuangan Indonesia menerbitkan Surat Keputusan No. 486, tentang perusahaan penjaminan kredit. Hanya satu perusahaan yaitu PKPI (Penjamin Kredit Pengusaha Indonesia) yang mengajukan permohonan izin. Perusahaan ini aktif, tetapi tidak memainkan peranan penting di pasar. ASEI (Asuransi Ekspor Indonesia), yang didirikan tahun 1985, adalah perusahaan pemerintah lainnya yang bergerak dalam asuransi kredit dan penjaminan terakhir ini tidak lagi khusus yang berkaitan dengan pembiayaan ekspor dan impor.

Sejak 1999, dan apalagi sejak tahun 2000, setelah perubahan bentuk Perum PKK menjadi Perum SPU (Perusahaan Umum Sarana Pengembangan Usaha), perusahaan-perusahaan pemerintah tersebut meninggalkan segmen pasar saat pendiriannya, dan saling melanggar batas bidang kompetensinya. Tugas utama mereka menjadi penghasil laba untuk mengisi kas pemerintah. Mereka kehilangan orientasi pembangunan yang ditandai dengan fakta bahwa mereka tidak membuat skim asuransi khusus.

Jika perbankan secara terus-menerus membayar premi asuransi yang lebih besar kepada CGC dibanding klaim yang mereka terima, maka permintaan mereka terhadap asuransi akan berkurang, dan mengambil-alih risiko tersebut menjadi risiko sendiri. Kalau premi dinaikkan, permintaan atas penutupan asuransi akan menyusut. Biaya operasional dalam keadaan penurunan jumlah kredit, dapat dengan mudah melewati 5% per tahun dari jumlah yang dijamin sebagaimana pengalaman beberapa negara. Tidak ada CIC/CGC yang mengenakan biaya setinggi itu meskipun masih ada barangkali beberapa debitur yang mau menerimannya asal dapat akses ke kredit.

Premi CIC/CGC biasanya dipungut jauh lebih rendah dan tidak dapat menutup semua pengeluaran untuk klaim dan biaya operasional. Secara internasional, hanya sedikit CGC atau CIC yang tidak tergantung kesinambungannya terhadap bantuan keuangan pemerintah, baik langsung maupun tidak langsung.

Perusahaan asuransi membutuhkan cadangan. Dana ini berasal dari penyertaan modal, cadangan-cadangan, serta penerimaan dana dengan bunga yang di bawah bunga pasar.


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Mereka menginvestasikan dana ini dalam deposito berjangka dan menerima sukubunga pasar. Pendapatan bunga seringkali melampaui pendapatan yang berasal dari premi. Dengan demikian, perusahaan asuransi dapat membayar klaim lebih besar dari premi yang mereka terima. Tetapi, pihak investor dalam sebuah CIC/CGC akan memaksimalkan labanya, kalaupun perusahaan tidak aktif sama sekali, dan hanya mengadministrasikan dananya! Sebaliknya, laba yang kecil sebetulnya menunjukkan kerugian bagi pemerintah (karena laba tidak maksimal), dan secara tidak langsung merupakan subsidi terselubung.

Apabila praktik terbaik asuransi kredit/penjaminan kredit secara internasional dibandingkan dengan lingkungan di Indonesia, tampak jelas bahwa pada saat ini tidak semua saran dapat diimplementasikan. Hambatan utama adalah lemahnya sistem hukum, tidak jelas atau tidak adanya peraturan pemerintah, kondisi ekonomi yang masih depresi di mana perbankan menyeleksi debitur mereka dengan sangat hati-hati, tidak adanya biro penyelidik kredit, tidak adanya sistem peringkat untuk pengelompokan risiko, dan Bank Indonesia tidak menerima asuransi kredit/penjaminan kredit sebagai alat untuk mengurangi risiko kredit atau sebagai agunan kredit. Selain itu, perbankan masih teringat pengalaman pahit dengan klaim Askrindo, saat Askrindo mengalami krisis likuiditas. Hal ini memperlihatkan bahwa kepercayaan belum lagi pulih sepenuhnya.

Apabila daftar pembagian dan pengurangan risiko (list of risk sharing and risk reducing) dan acuan standar lainnya dibandingkan dengan praktik di Indonesia, ditemui bahwa asuransi kredit/penjaminan kredit tidaklah merupakan piranti kebijaksanaan pemerintah yang khusus, yang mana orang barangkali lebih mempertimbangkannya sebagai subsidi. Asuransi dan penjaminan kredit di Indonesia tidak mengikuti cara-cara terbaik dari pembagian risiko dan pengurangan risiko. Suatu hal yang sangat mengherankan bahwa Askrindo sebagai sebuah perusahaan Asuransi Kredit memiliki lebih banyak pos-pos penjualan (19) daripada perusahaan Penjaminan Kredit SPU (6) yang lebih berorientasi kepada peminjam.

Pertanyaan utama muncul berkaitan dengan manfaat dan masalah yang dimiliki setidak-tidaknya oleh tiga perusahaan asuransi kredit milik pemerintah yang bersaing satu sama lain. Di masa datang, jumlah CGC mungkin meningkat dengan adanya keinginan pihak pemerintah daerah provinsi untuk bergerak di bisnis ini dalam rangka mendukung perekonomian daerah. Terutama sekali pendekatan orientasi laba dipertanyakan dalam sebuah industri di mana orientasi pembangunan pada umumnya hasilnya merugi. Tingkat risiko yang dapat diambil tidak diatur, dan kita mungkin sangat berharap agar di masa datang tidak melihat sektor-sektor tertentu yang memperoleh penjaminan di atas rata-rata, khususnya kelapa sawit, yang berpotensi akan mempengaruhi kinerja semua CIC/CGC.

Rekomendasi 1. Konsolidasi Perusahaan-perusahan Asuransi dan Penjaminan Kredit milik

Pemerintah.

Diusulkan agar ada sebuah studi kelayakan awal yang mengungkapkan manfaat dan masalah-masalah yang tersembunyi dari konsolidasi kegiatan penjaminan kredit dan asuransi kredit terhadap semua perusahaan milik pemerintah, khususnya Askrindo, SPU dan ASEI, menjadi sebuah perusahaan yang penuh tenaga dan penuh sumberdaya dengan kekayaan mendekati Rp 2 triliun atau US$ 200 juta. Disarankan, pemerintah mengimplementasikan saran-saran yang tertuang dalam studi ini.

Usulan ini didasarkan atas berbagai indikasi kuat bahwa manfaat dari konsolidasi perusahaan akan jauh lebih banyak daripada kekurangannya, seperti: pengurangan risiko, penghematan dan sinergi, pengembangan layanan dan jangkauan, serta adanya tenaga ahli kaliber tinggi dan memiliki managerial tinggi yang bermanfaat bagi UKM dalam mencari dukungan keuangan. Penyusunan organisasinya harus memadukan


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kegiatan, tidak lagi mengadakan CGC regional, dan tanpa persaingan yang membahayakan.

Tidak mungkin untuk mengungkapkan apakah pendapatan tambahan dari pengembalian pinjaman macet akan mengimbangi biaya tambahan personil CIC/CGC untuk melakukan penagihan secara intensif. Para penganjur asuransi kredit lebih cenderung dengan pembentukan sebuah organisasi yang ramping. Bagaimanapun, dengan terlibat langsung dalam kegiatan pengembalian kredit macet akan menambah pengalaman lapangan dan kemampuan staf, yang dibutuhkan dalam penerbitan penjaminan. Aspek-aspek ini membutuhkan investigasi lebih jauh dalam menentukan ruang lingkup tugas dari sistem CIC/CGC yang baru.

2. Memperkuat Partisipasi

Beberapa kekurangan dari sebuah perusahaan besar tanpa persaingan yang ditunjukan dalam proposal ini adalah bahwa bank-bank yang menggunakan jasa dari CIC/CGC harus melakukan penyertaan modal ke dalam CIC/CGC. Hal ini tidak hanya menandakan adanya komitmen. Diharapkan juga bahwa pemegang saham swasta akan mengawasi administrasi perusahaan dan secara terus menerus menuntut agar perusahaan memberikan jasa yang lebih baik dengan efisiensi yang tinggi.

Diusulkan, daerah atau pemerintah provinsi melakukan penyertaan modalnya ke dalam perusahaan yang dikonsolidasikan. Asuransi kredit/penjaminan kredit merupakan suatu perangkat politik bagi pembangunan UKM, dan akan lebih efektif dengan adanya dukungan penguasa setempat.

Dengan alasan yang sama, dalam rangka mendukung pengembangan UKM, pemerintah harus mengundang donor luar negeri untuk berpartisipasi dengan melakukan penyertaan modal atau memberikan pinjaman sub-ordinasi berikut dengan bantuan tenaga ahli internasional. Diasumsikan bahwa sebuah perusahaan yang atraktif biasanya menarik lebih banyak minat para donor daripada tiga perusahaan kecil dengan orientasi pengembangan yang lemah. Sebuah model perusahaan penjaminan internasional mungkin dapat dijadikan sebagai suatu pendekatan yang potensial memberikan jasanya kepada UKM, khususnya jika, dalam pandangan Basel II Accord, merupakan cara untuk mencapai perusahaan dengan peringkat tinggi. Penjaminan kredit yang dilaksanakan oleh perusahaan seperti ini mengandung risiko yang rendah.

Reorganisasi alokasi modal juga memungkinkan suatu jalan keluar bagi Bank Indonesia yang menyertakaan modalnya sebanyak 55% pada Askrindo, suatu investasi yang agaknya kurang tepat bagi sebuah otoritas moneter. Diusulkan, bagian saham ini diambil-alih oleh bank-bank umum. Proposal untuk transfer pembiayaan ini dan insentif lainnya seperti akses atas likuidtas, harus menarik kerjasama dari pihak perbankan.

3. Meningkatkan kordinasi dengan Bank Indonesia

Satu alasan yang sangat kuat bagi perbankan untuk mengajukan penjaminan kredit adalah mengurangi peringkat risiko dan menerapkan PPAP (Penyisihan Penghapusan Aktiva Produktif) yang lebih rendah untuk pinjaman yang ditutup dengan asuransi kredit. Negara lain seperti India dan Malaysia memberlakukan kemudahan seperti ini bagi pinjaman yang diberikan kepada UKM. Rancangan baru CIC/CGC harus membuka jalan bahwa Bank Indonesia memungkinkan untuk menyetujui pengurangan PPAP, setidak-tidaknya bagi kredit kecil.


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Usulan lain yang terkait ialah CIC/CGC diberikan akses ke sistem informasi kredit, yang saat ini masih dilaksanakan oleh Bank Indonesia dan semata-mata dimaksudkan untuk digunakan untuk melengkapi kebutuhan informasi bagi bank umum.

4. Peninjauan kembali peraturan tentang CIC/CGC

Pemerintah daerah berencana untuk memperoleh izin sebuah CGC. Peraturan Menteri Keuangan No. 486/1996 mengenai CGC perlu ditinjau kembali. Pertaturan ini tidak melindungi manajemen terhadap orang-orang yang tidak cakap dan mengambil risiko berdasarkan naluri. Direkomendasikan, agar terlebih dahulu dibuat aturan, mekanisme dan pengawasan, sebelum pemerintah mengizinkan pendirian CGC yang baru.4 Standar-standar profesional dalam penentuan batas maksimum penjaminan, kapasitas manajemen, kebutuhan akan re-asuransi dan pelaporan, perlu ditetapkan. Pemerintah mungkin dapat membantu dengan memberikan suatu perusahaan dengan fitur khusus sebagai komitmen untuk menjaga CGC baru di pasar. Perlu diperhatikan, bahwa subsidi silang tidak digunakan untuk bersaing dengan perusahaan-perusahaan yang tidak menikmati fasilitas khusus.

5. Program atau skim Pemerintah

Berikut disajikan berbagai usulan tindakan yang harus dilakukan oleh pemerintah berkaitan dengan asuransi kredit/penjaminan kredit, karena lembaga ini mempunyai potensi untuk memberikan kontribusi yang lebih besar dalam pemberian pinjaman untuk UKM:

- Re-orientasi dari tujuan-tujuan profit menjadi kepada tujuan-tujuan pembangunan;

- Mendefinisikan ruang lingkup usaha, target, dan instrumen untuk intervensi, seperti:

o Intervensi yang tidak mengganggu kekuatan pasar, tetapi menkonpensasi kelemahan yang merupakan tanggung jawab pemerintah, misalnya, subsidi biaya untuk prosedur pengadilan yang terkait dengan pengembalian kredit macet;

o Subsidi biaya dan ongkos yang terkait dengan pembuatan penilaian atas permintaan penjaminan kredit yang pertama, misalnya ditetapkan sejenis “biaya di muka” yang biasanya tidak dapat ditarik kembali dalam hal tidak ada penjaminan kredit yang diterbitkan.

o Mempromosikan keunggulan asuransi kredit dan penjaminan kredit kepada Penyedia Jasa Pengembangan Usaha (BDS), peminjam potensial, dan petugas kredit front desk (tidak hanya oleh atasan mereka).

6. Desentralisasi dan CGC Wilayah

Telah diusulkan untuk menjaga sentralisasi asuransi kredit dan desentralisasi penjaminan kredit.5 CGC akan bekerja dalam suatu wilayah atau tingkat provinsi di mana CIC akan bertindak sebagai perusahaan re-asuransi bagi CGC; dengan demikian hampir mereplikasi The Japanese Credit Supplementation model. Masalah yang harus diatasi adalah bagaimana mengintegrasikan CGC provinsi ke dalam CIC/CGC yang telah ada 4 Saat ini, peraturan tersebut tidak berlaku bagi Askrindo sebagai perusahaan asuransi kredit dan secara eksplisit

mengeluarkan Perum PKK dari ketentuan dalam peraturan ini (Pasal 15). 5 Lihat: Urata, Recommendation for SME Promotion, p. 40 ff.


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dan di tempat mana yang masih belum ada. Sebagai hal yang prinsip, CGC yang dibentuk oleh propinsi harus bekerjasama dengan CIC/CGC nasional, bukan bersaing. Ada sejumlah alasan yang baik, bahwa pemerintah daerah akan mendukung kebijaksanaannya dengan penjaminan kredit sebagai suatu cara. Untuk beberapa provinsi pembentukan CGC layak. Bagi propinsi yang ingin membentuk CGC setidak-tidaknya perlu menyediakan manajer yang profesional, berpengalaman, dan lulus uji kelayakan dan kepatutan (fit and proper test). Diusulkan, bagi CGC wilayah re-asuransi merupakan keharusan, dan mereka serta nasabahnya bekerjasama dengan JPU (jasa pengembangan usaha) guna mengurangi risiko. Alternatif yang lebih baik adalah jika pemerintah provinsi dapat menyediakan “trust fund” (dana abadi) agar dikelola secara profesional.

7. Rekomendasi mengenai Perusahaan Penjaminan Kredit Swasta

Diusulkan, pemerintah tidak perlu memberikan dukungan apa pun bagi pesaing swasta dalam supplementasi kredit perbankan dengan fasilitas tertentu, termasuk “kredit lunak”6. Manajemen yang pintar mungkin memperoleh jalan untuk menemukan cerukan pasar (“market niche”) yang menguntungkan. PKPI tidak memiliki re-insurance, suatu hal yang perlu dikaji dengan sangat berhati-hati dan cermat, apakah perusahaan pemerintah dapat menawarkannya ke swasta. Sama halnya jika swasta menawarkan kerjasama dengan daerah, hal tsb. dapat merugikan pemerintah. Dalam hal ini perlu juga ditinjau kembali jaminan kredit yang mengcover jangka waktu tenggang saja di mana IDC (interest during construction) merupakan salah satu factor biaya proyek, maka risiko kredit tidak akan dibayar tidak ada (alias 0) sedangkan premi dibayar. Jika hal ini disebabkan peraturan pemerintah maka tidak jelas kenapa peraturan tsb. masih ada dan kenapa asuransi tsb. tidak dibatasi untuk perusahaan pemerintah saja agar pada akhirnya semua mengambil manfaat dari pada beberapa investor secara pribadi saja.

6 Lihat Bisnis Indonesia, 11 Desember 2001, “PKPI gandung daerah untuk perkuat permodalan”; Krisnaraga, Direktur

Utama PKPI:”Dengan sedikit tambahan kredit lunak kami bisa memberikan penjaminan hingga 20 kali lipat dari modal.” Kredit lunak berarti sama dengan subsidi kepada perusahaan swasta yang modalnya Rp 10 milyar.


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VII. GLOSSARY

Moral hazard Moral hazard is the encouragement of risky behavior by investors, who see measures such as insurance or government subsidies as guarantees that they can reap the benefits of their risky investments while being protected against any losses.

Credit guarantee (penjaminan kredit) The guarantee assists the borrower. The credit guarantee company (CGC) acts as a guarantor for the loan of the bank's client. Three parties are involved: the CGC, the borrower and the bank as beneficiary. The guarantee can be regarded as a collateral substitute. The CGC assesses credit risks individually, like a bank, before issuing a guarantee. The risks are well defined.

Credit insurance (asuransi kredit) The credit insurance company (CIC) protects the bank. The CIC insures the risk that the debtor may not pay back his loan. The agreement involves only two parties, the bank and the insurance company. Credit insurance is a popular feature for schemes with automatic cover, i.e., no selection of risks takes place.

Private credit insurance companies use the term credit insurance to describe the hedging against the risk that a buyer of goods and services does not settle his trade accounts with the supplier or producer. In particular exporters are interested in this short-term trade credit insurance to protect the value of their accounts receivables (A/R). Banks extend loans with a credit insurance serving as a collateral substitute. This report does not deal with trade credit insurance.

Credit supplementation This term is used to cover credit guarantee and credit insurance.

Two-tier system In a two-tier system a credit insurance company acts as a re-insurance company for several credit guarantee companies. The credit guarantee companies insure their portfolio.

Additionality Additionality is created once a loan is granted which would have been turned down without credit insurance cover. This additionality is critical from development point of view when government involvement is demanded and the private sector does not offer credit insurance.


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Private credit insurance companies Private credit insurance companies (CIC) competing in the market do normally not cover bank loans. They insure shot-term trade credits and earn on fees. Trade credits emerge when a producer ships goods to a buyer for the time until the buyer settles the invoice. But Indonesia is different, because a private loan gurantee or insurance company exists.

For the purpose of this background paper it is not considered to be of an eminent importance to distinguish the legal and administrative differences between credit guarantees and credit insurance. Both instruments reduce in a similar way the bank's credit risk. They are, in the same way, able to enhance the willingness of banks to extend loans to SME. The main models of concluding contracts with banks are presented in Annex 2.


1

INTRODUCTION

This report is the result of a request to investigate whether any measures regarding credit insurance (CI) and credit guarantees (CG) could contribute to more loans for SME. The Financial Services Working Group of ADB TA SME studied documents and literature, interviewed directors of the leading companies in the field of credit insurance and guarantee and held discussions with banks on their experience with credit supplementation.

Supported by their government many countries in developed and developing countries established credit insurance or credit guarantee companies (CIC/CGC). The main objective of these institutions is to assist entrepreneurs, in particular SME, without sufficient bankable collateral to obtain a bank loan.

Private enterprises and banks guarantee or insure the payment of short-term trade transactions, i.e. trade credits between two enterprises based on sale and purchase of goods and services. They consider it too risky to insure or guarantee the payment of common bank loans. CI and CG are, with few untypical exceptions, a product of government-owned or government supported entities. This report informs in Chapter 1 about the macro-economic and micro-economic rationale for CI and CG. A number of critics question the effectiveness of CI and CG as a political instrument burdening the taxpayer either directly or indirectly. Their main arguments are presented.

In Indonesia, the MoF issued a Government Decision (SK) on credit guarantee companies (CGC) which rules only one private enterprise out of a total of four companies involved in CI and CG. A short description of these businesses and the market development during the past 30 years is presented in Chapter 2.

In order to better understand the government support mechanisms and the financial challenges of CIC and CGC, Chapter 3 introduces the reader to how these companies generate income and how they can pay a dividend although costs exceed income from insurance premiums.

Based on experience during the past decades in many countries, it was possible to develop what one may call best practices. Chapter 4 presents also the environment of Indonesian CIC/CGC that may render it difficult to always follow best practice. In this regard, instruments sharing and reducing risks play a major role and they are compared with present practice in Indonesia. Most of all, it has been found problematic to see government-owned companies competing each other in this market without a clear development mission but instead with the main objective to earn profits. This may have already resulted in dangerous imbalances insurance companies elsewhere would have liked to avoid.

This paper presents in Chapter 5 several recommendations to improve the efficiency and effectiveness of CI and CG in Indonesia. In fact, this report is not the first one to question the general institutional set-up. It is proposed to consolidate all CI and CG activities of the government in one powerful and resourceful entity and to call for broader, even international, equity participation. These changes should come alongside the necessity to integrate regional aspiration to establish local CGC and to finance SME through a second-tier bank taking over the functions formally held by BI.


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1 THE RATIONALE FOR CREDIT SUPPLEMENTATION

1.1 Macro-economic reasons

Credit insurance is regularly mentioned as a government support tool for SME. In contrast to direct loans and interest subsidized loans, credit insurance is widely regarded as a subsidy for SME loans without distorting the market.7 It eases access to loans at, or slightly above, market rates.

Credit insurance or credit guarantees shall enhance the willingness of banks to offer financial support to target groups, including SME. It is assumed that banks will disburse loans they otherwise would not have granted (additionality). Over time, banks either drop this market segment or, one of the hidden agendas; they develop institutional capacity in the supply of SME loans. In the latter case the bank does not feel anymore the necessity to insure new loans to SME. This has been identified as one reason why demand for cover decreases over time, a feature found with many insurance schemes.

Credit insurance is a tool to improve macro-economic development. It is not disputed that, in particular in developing countries, insuring or guaranteeing bank loans is not a profitable business. The regular absence of private insurer is one indicator. This is not regarded to be a market failure. Private companies could offer a cover, however, the costs would be too high and the conditions not very attractive. The position of governments is different. There are profound economic reasons to offer credit insurance, in particular to SME. The losses of (or subsidies for) credit insurance are balanced by macro-economic advantages. Enterprises obtain loans they otherwise would not have received. They employ more workers, the economy is structured more efficiently with small, medium and large enterprises, and a higher degree of social stability can be created through leveling income disparities. Higher tax income and savings (less subsidies in other sectors) are expected to exceed costs of supporting credit insurance.8 Private insurance companies cannot reflect macro-economic advantages in their profit/loss statements and balance sheets.

Credit insurance is a tool for implementing distinct government policies. It can direct and accelerate the flow of investments to particular targets. Credit insurance can be extended to

- specific sectors, developing countries prefer industries;

- specific regions, those that lag behind in development;

- specific target groups, like SME, business start-ups or others

- specific other targets, e.g., investment in environmental measures

In order to secure that the money flows the government supports its policy with making available liquidity, i.e., funds to be used for lending. However, this approach jeopardizes “cheap” assistance.

Producing additionality, new access to loans, even a moderate degree, should be a provision. It is not doubted that many loans were extended because they were backed up by credit insurance. However, few impact studies were undertaken.9 Experience abroad shows that creation of additionality depends on a well-designed program.

7 This is also a reason why credit insurance and subsidized interest rates should not go together. It is considered a moral

hazard. Indonesia made this experience with the KIK/KMKP scheme and lately with KUT. 8 The insurance companies have not much evidence for these impacts on hand as it is not part of the monitoring system. 9 A director of an Indonesian CIC/CGC remembered only one study which was undertaken some 20 years ago.


3

Figure 1. Alternative Government Support SME Finance Measures

Alternative financial

assistance

Initial cash requirement

Multiplier gearing ratio or impact

Additionality Others

Direct loan very high (100%)

1 very high (>80%) only selected SME can benefit; demand cannot be fulfilled

Bank liquidity, Re-discount facility

high (50-80%) 1.25 - 2 high (>50%) Depending on central bank monetary policy

Interest subsidy

- short/medium- term loans

- long-term loans

low (5%)

low (5%)

20

low (<30%)

very high (>80%)

distorting the market

Credit insurance inflow! (-3%) 10 - 50 high (>50%) Figures are indicative only

Another advantage of insurance as an instrument to support SME relates to cash flow considerations. Whether credit guarantees can initiate flow of funds in the desired direction the government does not need to intervene directly if funds are scarce. Thanks to the multiplier effect, a fund to cover losses up to Rp one billion may generate a loan flow of perhaps Rp twenty billion and a related higher impact. The other cash flow advantage is based on the fact that premium payments result in an immediate cash inflow whereas claims are settled in future. Governments do not spend money they even receive money.

1.2 Micro-economic reasons

Banks are interested in credit insurance or guarantee if these tools can increase their profit and/or reduce their risk. This condition exists if liquidity exceeds conventional credit demand. Sometimes, insurance cover will be sought even if the value of tangible collateral exceeds the loan amount. The insurance pays faster than it may take to liquidate collateral.

The question is, whether insurance companies could do things better than banks, i.e., in particular assessing risks. Credit insurance makes good sense when the insurer has assessment expertise and related experience in particular sectors, which the bank does not own. Normally, that is not the case but in particular fields with attractive growth rates, e.g., the market for electronic goods, this condition can be found. For example, Korea introduced the fast growing Korea Technology Credit Guarantee Fund in 1989. In particular small banks profit from this kind of support to keep abreast with the sector growth of their clientele.

Banks are well advised to look for credit insurance if their portfolio shows a high exposure to a particular sector in the economy. The insurance can prevent the bank's collapse, if "too many eggs are in one basket", if, just for example, more than 30% of the loan portfolio concerns shrimp farming alone.

Banks also try to buy cover against the risk that the legal system may not allow them to recover a loan within reasonable time. Therefore, it is sensible if banks look for credit insurance despite the loan being already fully securitized with tangible collateral.

As long as insurance cover allows banks to apply a lower loan (asset) risk rating for the calculation of CAR (capital adequacy ratio), banks have another good reason to insure


4

their loans. In some countries guaranteed loans will be accorded a 20% or at least 50% risk weightage instead of 100%. This enhances the banks' capacity to extend loans without increasing equity. Although RoA (return on assets) may decrease due to a lower margin, the shareholders can enjoy a higher RoE (return on equity) simultaneously with a lower risk.

1.3 The Indonesian rationale

The rationale for private CGC is embedded in the objective of Decree MoF 486/1996 on Credit Guarantee Companies, i.e., simply "improving access to funds".

In their brochures and publications, the state-owned companies as well, including ASEI, mention unanimously SME and cooperatives as their target group and their commitment to support and foster the prosperity of these enterprises.

In fact, they have another important mission, which is less represented in their official handouts, namely, like the other SOE, generating profits and paying dividends. This may be one reason why the government does not anymore interfere in the management of these companies and does not determine development targets or subsidized premiums.

1.4 Credit guarantee in view of critics

One of the ten commandments of the most famous and perhaps the oldest insurance company, Lloyds in London, goes: "Never insure a bank loan!"10

Guarantees and insurance cover against credit repayment losses find many critics. "Many scholars and professionals are opposed to guarantees. They have argued with equal force that credit guarantees in general and in particular for SME are a waste of precious development resources and a policy unlikely to produce the results held out by the proponents."11

The following are some of the reasons and considerations brought forward:

On behavior:

- The demand for loans is larger than the supply of loanable capital. Banks choose to finance low risk clients who do not need credit insurance.

- Credit insurance invites to neglect prudent banking and thorough loan appraisal.

- Banks will engage in opportunistic behavior selecting only high-risk loans to be insured.

- Imperfections in the legal system should be better addressed directly through improving legislation and court procedures rather than avoided through a guarantee scheme intervention.

10 As reported by Mr. Adrie Tassyam, Managing Director Askrindo 11 see Gudger, Credit Guarantees


5

On costs:

- If the price for credit insurance reflects the risk and costs, it is normally too high and not attractive for banks.12 If the price is attractive for banks then the credit insurance companies will lose capital.

- Administrative costs of credit insurance are very high.

- The bank could establish reserves, a kind of insurance fund, from charging higher interest rates for riskier loans.

On capacity:

- Bankers are better at evaluating risks than credit insurance companies.

- Normally, guarantors know less about borrowers than banks.

On additionality

- Additionality, impact etc. is difficult to measure, for example due to displacement effects from reduced activities of other firms.

- Guarantees do not really produce additionality. It is a political instrument to direct credit flows to politically important groups almost irrespective or their creditworthiness.

On target achievement

- CGC cannot direct the flow of funds to specific targets, for instance, when projects are less feasible, or if banks lack loanable funds (liquidity).

1.5 Conclusion

In his book on credit guarantees, Gudger comes to the broad conclusion that there are few instances in which a traditional loan guarantee service adds value in a sustainable way.13 This opinion is challenged. GB&P14 argue that there is still a role for the guarantor as a third-party risk sharer and facilitator:

- Lessons have been learned from failed schemes.

- Moral hazard is the result from poorly designed schemes.

- Long-term benefits, including those of financial deepening, can be considerable while costs can be controlled if schemes are well designed and implemented.

In fact, expenses and costs, including those of mismanagement, can relatively easy been summarized whereas the benefits of subsidizing loans with credit insurance or guarantee are difficult to prove. This is an unsatisfying situation.

Therefore, the decision to continue or discontinue state-owned credit insurance is a quite political one. However, before deciding to discontinue support to CIC/CGC, one should look for means to increase the efficiency of the system based on best practices.

12 However, it might still be attractive for those clients who would prefer an "expensive" loan rather than no loan! 13 Gudger, M., Credit guarantees – An assessment…, Preface by John H. Monyo, Director FAO 14 GB&P, Volume I, p. 65


6

Based on a survey conducted by ACNielsen for ADB Technical Assistance to SME covering 482 SME in Medan and Semarang, only about 20% of the respondents received a bank loan. Reasons for problems obtaining the first bank loan are:

- No credit record available, the enterprise is new or did not yet require a loan;

- Not sufficient collateral, entrepreneurs invest in their business and not in land;

- Many banks are not experienced with loans to SME;

These are exactly reasons for credit insurance. It is assumed that at least 64,000 (10% of 640,000) small enterprises and 10,500 (15% of 70,000) medium enterprises could obtain a bank loan with insurance or guarantee if they and the banks would be beter informed and insurance or guarantee coverage would be more readily available. (For more details see Annex 6).

The loan guarantee is not only a substitute for traditional collateral. Even if debtors can provide sufficient tangible collateral, the bank may have a good reason to ask for a credit guarantee in order to balance other deficiencies.

Banks should check loan proposals according to their feasibility or loan repayment capacity they generate (viability) and according to 5C out of which collateral is only one. A credit guarantee might be helpful if one or maybe even two of the 5C are supposed to be weak.

5C and reasons for credit guarantee

Condition The applicant is engaged in a sector being considered less prospective or too competitive in general, or the bank is less experienced financing the specific field in which the client wants to invest. Liquidation of collateral may take much time.

Character The client is new and the client's credit history is not available (start-up, no track record yet).

Capacity The bank has some concerns regarding the debtor's experience (< 2 years) and his management capacity (e.g., poor book-keeping); credit guarantees are used for loans to new businesses.

Capital Including the new loan applied for, the debtor's ratio of equity compared to total assets may be considered to be too low.

Collateral The value of collateral offered is insufficient, e.g. lower than loan amount plus one year interest.

The market potential of credit guarantees and 5C15 as its reasons

15 Commercial banks check credit applications based on five criteria, internationally called “5C”: condition, character, capacity, capital, collateral. Other systems, e.g., 7C, are less popular.


7

2 THE INDONESIAN ENVIRONMENT

2.1 Regulations

In 1996, MoF issued Government Decision No. 486/KMK.017/1996 regulating credit guarantee companies (CGC) whose task it shall be to support enterprises in obtaining funds from a wider variety of sources.

The following is an abstract of the regulation [and some comments]:

- CGC shall only provide guarantee for credits extended by banks, leasing or factoring companies, consumer finance enterprises, and venture capital providers as well as companies offering other kinds of installment purchases (Par.2). [CGC guarantee credits of financial institutions but not trade credit.]

- Guarantee certificates will be issued (Par.3). [It is not said who will issue these certificates, to whom the certificates will be given and who is entitled to ask for the certificates. This allows banks to ask for loan guarantees without the knowledge of the borrower.]

- CGC can choose to be incorporated as a PT (limited liability or shareholder company) or as a cooperative (Par.4).

- The minimum statutory equity is Rp 10 billion [$1 million now but more than $4 million at date of announcement], Rp 3 billion are required to start the business (Par.5 and 7).

- CGC are licensed in two steps: first a provisional license, then an operating license; MoF regulates and supervises CGC (Par.6).

- A CGC can also be established jointly by private investors and state-owned enterprises (Par.7). [As the contrary is not explicitly mentioned one can assume that any investor, individuals or companies, can enter the arena. The decree does not limit foreign participation].

- The company can be established in all parts of the country. Opening branches requires the permit of Director General for Financial Institutions, MoF (Par.10). [Related rules are not explained in the decree.]

- The company has to report quarterly to MoF (Par.11).

- Financial figures have to be published in a newspaper within three months after closing books (Par.11).

The decree does not contain rules on prudential management, e.g., maximum individual risk, total gearing ratio, etc. After five years, only one company was established under this decree, namely PKPI (Penjaminan Kredit Pengusaha Indonesia), for which this decree was actually issued.

The other companies involved in guaranteeing or insuring bank loans are established under special government decrees. A special law on credit guarantee or insurance does not exist. Reportedly, a draft law on this issue exists but it is not followed-up.


8

"The objective of MoF Decree 486/1996 is to extend credit guarantees for the liabilities of promising businesses which lack tangible collateral in order to facilitate their financing and to stimulate sound credit transactions through the efficient management and utilization of credit information and therefore to lead a balanced development of the national economy.

The importand massages of the decree are:

- Support to SME through credit guarantee (CGC) companies must not solely be provided by government;

- CGC are requested to be the active company in the sense that they should make a total credit analysis and evaluation regarding the potentiality and credibility of the clients.

- Therefore, a conclusion, CGC supporting SME must be physically sited near to the client company.

- The client's scale of business is not limited.” From: Problems Encountered…, contribution to Seminar on Credit Guarantee Systems, Taipei, 1996

The Comment on the Decree 486/1996 by the Director General of Financial Institutions, MoF, Zaafril Raziel Amir

2.2 Credit insurance and guarantee companies in Indonesia

Access to the market for bank credit guarantee or insurance is not restricted. In Indonesia, three state-owned companies engage in insuring bank loans or issuing loan guarantees competing each other. Surprisingly, one private enterprise dared to enter this specific line of business.

Figure 2. Assets of credit insurance/guarantee companies, 2000 (figure for PKPI estimated)

2.2.1 Perum SPU (Sarana Pengembangan Usaha, Public Enterprise) Has the longest history dating back to 1970 when the government founded its predecessor LJKK (Lembaga Jaminan Kredit Koperasi, Cooperative Credit Guarantee Institution). Cooperatives lack bankable collateral and could obtain loans backed by a guarantee. In 1981, after experiencing losses, LJKK was integrated into the new Perum PKK (Perusahaan Umum Pengembangan Keuangan Koperasi, Public Enterprise for Development of Cooperative Finance). In 1998 based on a government regulation on KUT (Kredit Usaha Tani, Farmer Business Loan, a seasonal credit to food crops), PKK insured

878

527

287

100

100200300400500600700800900

Rp billion

Askrindo ASEI SPU PKPI


9

the repayment of this $ 1 billion scheme. About 75% of the amount is considered macet ("loss"). Based on a November 2000 government regulation (PP No. 95), SPU was established to continue and even broaden the scope of activities of its predecessor. At present, about 110 staff work at headquarters and about 100 in five branches.

2.2.2 PT Askrindo (Asuransi Kredit Indonesia, Ltd.) was set up in 1971. It is owned by BI (55%) and the Indonesian Government (45%). The company grew with the introduction of the KIK/KMKP16 loan scheme for which insurance was compulsory. When this interest-subsidized scheme was discontinued in 1990, the company had to actively look for a market for its products and convince banks of the advantage to cover the risk of loans. Askrindo had to be re-capitalized twice in the past years. Its image with banks was severely hurt. During the financial crisis in 1998 the government asked Askrindo to cover import L/C, related working capital loans and issue surety bonds, new products.

2.2.3 PT ASEI (Asuransi Ekspor Indonesia, Ltd., Indonesia Export Credit Insurance)

was established in 1985 to assist Indonesian entrepreneurs, including SME, to penetrate foreign markets in a move to diversify from oil/gas exports. The company provides, among others, working capital insurance. It states that "there is usually only one, state-owned provider of such insurance in a given country, operating with the full support of the government. Because of the extended risks like country risk, exchange rate risk and payment risk, services such as those provided by ASEI are not attractive for private sector involvement."17

2.2.4 PT PKPI (Penjaminan Kredit Pengusaha Indonesia, Ltd., Indonesia Credit Guarantee Corporation18

is one of the very few private companies guaranteeing SME bank credit. Incorporated in 1996 and operational since 1997, PKPI was backed by KADIN (Chamber of Trade and Industry), several politicians and with encouragement of BI allowing the company to start its business under the Decision MoF No. 486 from the same year. The proponents aimed at raising a guarantee fund of $120 million to be contributed by private persons, participating banks and large companies, equivalent to Rp 282 billion19 against a minimum equity of Rp 10 billion required by law. The supporters lowered the target to become Rp 20 billion but, finally, could only mobilize Rp 10 billion. The economic crisis that started shortly afterwards prevented this company from playing a role in the market. Experienced people know about the efforts to set up PKPI but consider this company having never done any business. In fact, PNM20 cooperates with this company, e.g., to cover risks for loans to BPR (rural bank). Other clients include Bank Muamalat (sharia bank) and two large SOE, Bank Negara Indonesia and Bank Mandiri. Individual loans up to Rp 500 million are guaranteed up to 75%. Total exposure is about Rp 100 billion without the risks being re-insured. PKPI does not get government support. The company is covering loans

16 Kredit Investasi Kecil (Small Investment Credit) and Kredit Modal Kerja Permanen (Permanent Working Capital Credit)

were loans for SME exceeding the equivalent of $10,000. 17 ASEI Company Business Profile in www.asei.co.id/pioneer.htm, October 24, 2001 18 see GB & P, p. 76ff. 19 exchange rate 1996: about Rp 2,350/$ 20 PT Permodalan Nasional Madani, a government-founded financial institution to continue credit programs formerly

administered by BI, and set up to give financial support to SME.


10

during the grace period, a guarantee without risk21, and does not fulfill its obligation to publish its financial figures.22

2.2.5 USAID LPG (Loan Portfolio Guarantee) a remote-controlled Washington based loan guarantee scheme cooperated with banks in many countries, including six Indonesian institutions back in 1996. One small private national bank with SME focus continues to use this particular cover on a modest level. By mid 2001, less than 40 loans were backed up by this guarantee. The claim rate is zero. The public relations value of the scheme (cooperation with USA) and the offer of technical assistance are main reasons for engaging in this venture. Banks have also two reasons for not using this facility. It is considered more costly and under present circumstances banks do not want to engage in loans that need to be guaranteed in the first place.

2.3 Different approaches

Askrindo insures packaged risks rather than individual loans. Loans in packages have different quality. The insurance company covers 50% of the productive assets as based on BI formulae. This is less than 50% of the outstanding amount because it includes already discounts for loans with inferior quality.

SPU, ASEI, and PKPI provide loan guarantees, which typically cover higher (up to 75%) percentages of the loan. Potential borrowers will have to permit that not only the bank but also the credit guarantee company will have a closer, on-the-spot look at the enterprise and its books. PKPI will do some desk research and appraisal, but in principle, the company allows banks to conclude guarantee contracts. USAID LPG and PKPI just trust banks to decide on whether criteria are fulfilled to buy the guarantee and on the instance of claims without reviewing internal bank procedures.

However, the companies agree that their product range overlaps and that they compete in the same market. Today, their major distinction is only their different history.

Figure 3. Products Offered by State-Owned CIC/CGC

Product \ Institution Askrindo ASEI SPU BEI

Insurance v v v

Loan (v) v (re-/co-financing)

Trade loans v v

Penjaminan (Guarantee)

Surety Bond v v v

Customs Bond v v

Working Capital and Import L/C v v v

Penjaminan L/C Impor (USD) v

21 Apparently, the company makes use of a loophole in regulations governing long-term program loans. During the

construction phase of plantations interest have to be paid. However, interest during construction are part of the total investment costs.

22 The ADB TA SME Team could not obtain figures from PKPI itself nor from MoF as supervisor, indicating that there was never a follow of the development of this company.


11

2.4 Credit insurance and guarantees: Sector development in Indonesia

Credit insurance and credit guarantee started with different markets for two companies founded by the Indonesian government in 1970 and 1971.

During the past 30 years, three different periods can be identified.

Phase 1:

Credit Program Insurance. From 1974 onwards until 1990, Askrindo covered all loans financed with liquidity from Bank Indonesia (KLBI), for example the KIK/KMKP scheme. The insurance for a number of credit schemes was compulsory. Askrindo acted as an implementer of government programs. In order to cover ever-rising costs of defaults, the banks had to pay 1.5% annually to which BI added 4.5%. The insurance covered loans to five million SME amounting to Rp 14.5 trillion. The amount was channeled through about 1,500 bank branches. Askrindo had to pay for claims about Rp 650 billion. Perum PKK paid every year claims exceeding premium income, peaking 1985 (more than 11 times premium income).

Phase 2:

Deregulation: Since 1990 (Pakjan) a new approach stopped KLBI-loans like KIK/KMKP. Banks are now free to opt for cover. Insurance of old KIK/KMKP loans ( maturity of five to ten years) still added to income but new business went flat. Since 1991 until 2001 Askrindo paid claims amounting to Rp 1,200 billion to about 500 bank branches for 870,000 clients whose cover amounted to Rp 22.9 trillion. In 1992/93 Askrindo experienced severe financial problems. Until 1994, the business volume decreased 90%. Accumulated losses amounted to Rp 291 billion in 1995. The government had to re-capitalize Askrindo and the company looked for a new orientation. In 2000, ten years after withdrawal of the KIK/KMKP facility, Askrindo had still to pay Rp 10.6 billion for related claims. For Perum PKK/SPU the change came 1992 with the first year premium income exceeding claim payments. Since 1994 the company booked always more premium than claim payments (based on internal figures, published figures differ). SPU loses its customer base, the cooperatives.

Figure 4. SPU Development of (a) No. of clients and (b) loan amounts covered

01000200030004000500060007000

1995 1996 1997 1998 1999 2000

Rp

billi

on

No of clientsRp billion


12

Phase 3:

Competition. The insurance companies are expanding their product range and networks. Since end of 2000, Perum SPU is competing with PT Askrindo. The company is not anymore restricted to covering loans to cooperatives and members of cooperatives. Reportedly, the government, based on consultation with the IMF (or even based on IMF suggestions), opened the market for SPU. Askrindo earns more income from new products (customs and surety bonds) than from traditional bank loan insurance. Demand for commercial loans is depressed due to high interest rates and vague economic development. Supply of credit is limited as the banking industry has not yet recovered from the crisis. Banks can afford selecting clients and choose those whose loans do not need insurance. SPU concludes less than 300 contracts, now only a small minority still based on credit programs.


13

3 FINANCIAL ISSUES OF CIC/CGC

3.1 Principles

A bank representative was disappointed. "We paid more premium for credit insurance than we received from claims." Would it have been better if more loans had become delinquent?

In fact, credit insurance or guarantee companies can allow settling claims exceeding income from premiums. At the same time they can present growing assets and still pay a dividend. They do not earn money with premiums. They earn money with returns from investments, interest earned on time deposits and ventures. Bank credit guarantee and insurance companies receive funds without costs (equity investment, retained profits and other reserves) and loans at – sometimes far - below market interest rates.

The procedure is simple, for example (the mechanism is based on reality, however figures are indicative only):

- The investor, normally the government, provides the equity of Rp 300 billion;

- The money is put on a time deposit account and earns 16% p.a. or Rp 48 billion;

- The CGC receives Rp 10 billion income from underwriting;

- The CGC receives Rp 3 billion from recovered claims; standard is 20%-30%;

- The CGC pays Rp 15 billion for claims, this is more than premium income;

- The operational costs amount to Rp 20 billion, even higher than claims;

- This leaves the company with a surplus of Rp 26 billion (48+10+3-15-20);

- Rp 8 billion are transferred to the reserves account; total assets increase;

- Rp 18 billion or 6% dividend goes to the government;

Few people detect that the government lost (or subsidized loans indirectly with) Rp 22 million, namely the difference between on the one hand, underwriting income (premium) and recovery and, on the other hand, claims plus costs (10+3-15-20).

The government could even earn a higher dividend without straining the budget. In Malaysia, the Central Bank has been advised to make available to the CGC a loan at 1% interest p.a. thus allowing still an income for the central bank. The CGC earns about 4%. The 3% difference is part of CGC's total income. These are ways how governments can manipulate, in particular if the central bank is not independent. Private investors do not receive the same treatment. They can hardly compete.

In reality, if there would not be a hidden subsidy, premiums must be much higher. Following above example, the insurance premium should have been 220% higher (3.2-fold) or, for example, 3.2% instead of only 1.0%.23 "Too expensive" is the general comment. In fact, there are few schemes worldwide that could operate with much less than 4% to 5% premium if one would consider all costs. Even in USA, for attracting (!) investors communes sell credit guarantees for fully collateralized loans that cost 3% p.a.24

23 Net cost/income = (15+20-3)/10 = 32/10 = 3,2 24 New Hampshire Business Finance Authority offers credit guarantees at 1% closing fee plus 2% annually fee for a working

capital loan. The Authority guaranteed 8 loans amounting to $ 5.8 million. Five debtors reported that they created 68 new jobs. For more details see: www.state.nh.us/bfa/wag.htm


14

The income earning funds of insurance companies are needed. Firstly, the funds substitute a source to increase reserves. Secondly, they are required as a buffer because incomes and claims vary erratically from year to year and from product to product. The larger an insurance company becomes, the more efficient can it balance inequalities internally. Thirdly, the fund helps negotiating with banks. Credit guarantee or insurance are sold together with liquidity for loans.

Figure 5. Erratic income and claims

-40

-30

-20

-10

0

10

20

30

40

Export Credit1999

Export Credit2000

Work. Capital1999

Work. Capital2000

Rp

billio

n

Premium Claim Balance

Source: ASEI, Annual Report 2000

For example, export credit insurance decreased from 1999 to 2000 but claims increased dramatically.

Compared to other countries, Indonesia's insurance companies are in a favorable position because their earnings on investments are much higher due to high interest rates.

3.2 Costs

Issuing guarantees is costly, administrative overheads are high. In many instances, these costs exceed those paid for claims or they are higher than premium income.

Two fundamentally different approaches can be found:

- Keeping cost of running the guarantee system to a minimum by having only one office is one way.

- Offering services in the vicinity of clients means establishing a number of branch offices, a requirement in particular for credit guarantee companies. Costs are higher but claims are probably lower.25 Therefore it is understandable that administrative costs can well be higher than claim payments.

25 No figures were found to support this assumption.


15

The Japanese supplementation system employs about 6,000 in 52 offices; the Korean has over 2,000 on the payroll and the Indonesian SPU just about 200 in 6 offices.

Figure 6. Asuransi Ekspor Indonesia, figures from Annual Report 2000

Although a number of CGC and CIC enjoy a series of profitable years, they normally experience a disastrous year once in a while. Gudger concludes: To date no SME …guarantee company has consistently priced its guarantees at levels that permit it to maintain its capital, let alone increase its capital through retained profits. Losses are offset by donor funds or continuing subsidies. This is not only the experience from developing countries. The Japanese Government itself is constantly subsidizing its famous credit insurance and guarantee system.26

Jasmec sets the premium rate at a low level in order to reduce the burden of the guarantee fee on SME. Consequently, this is neither a market price nor a cost price. It is a political price. It is a way of channeling subsidies to a target group. Unfortunately, only those enterprises benefit that have access to bank loans and make use of this facility. Other entrepreneurs who finance their enterprise with assistance from family members or those without access to or requirement for bank loans are not eligible for this subsidy.

Mr. Rufina, Managing Director GFSME (Philippines) comments that in the longer term it is more sensible not to subsidize, but rather to encourage markets to accurately price the costs of providing credits to SME.27

A CGC has the choice:

-

- With low fees they earn income from underwriting. But their profits will be lower.

- With higher fees they cannot fulfill their task because their product is out of demand.

There are two techniques that can disguise the actual amount an insurance cover costs and renders analysis difficult:

- upfront or commitment fees followed by a small annual charge;

- advance payment for medium and long-term loans with a discount;

A CGC may provide profits but may also provoke the question whether their activity is really required. Normally, managements do not abolish them. Therefore, by arguing to assist disadvantaged SME, they justify low fees and demand for an increasing fund to generate interest income large enough to cover operational losses. This is a vicious circle.

The demand of guarantee fees being

- high enough to cover expenses and claims on one hand and

- low enough not to put off borrowers on the other hand

can hardly be implemented. The first demand is seldom met.

26 Jasmec in its internet self-presentation: " The two-tier structure based on the system's decentralized operation with strong

financial support from the national government enables the extensive use of credit guarantees in Japan." 27 Contribution to APEC

a) Income from investment > income from premium + recoveryb) Payment of claims > premium incomec) Operational costs > premium income

128

27

18

27

33

85

0

20

40

60

80

100

120

Penerimaan Pengeluaran

Rp

mili

ar

Laba - Profit

Tambah cadangan - Add toreservesBiaya Opersional -Operational costPembayaran Claim - ClaimsettlementRecovery - subrogation

Penerimaan Premi -Premium IncomeHasil Investasi/Penempatan -Income from investments

Income Cost and Profit


16

3.3 Premium charging policies of banks

A risky loan commands a higher interest rate. A loan guarantee decreases the risk. Some banks just apply their base lending rate and charge the cost of insurance to the client. Others consider it a moral hazard and would not tell the client that a part of the loan is insured. The premium itself might be shared by different partners. For example, banks paid 1.5% and BI 4.5% to insure KIK/KMKP loans with Askrindo. Further details and explanations can be found in Annex 3.

3.4 Costs as viewed by potential debtors

SME "feel" or "consider" costs to be too high. Their decision to take up a loan or not is not based on a meticulous calculation. For example, they consider a 22% loan being too expensive when leading banks offer loans at 19%. However, this is the published rate for preferred clients and SME would hardly get it unless they provide cash collateral or favors. At the same time they would accept a leasing loan at 23% or a bank loan at 20% plus 1% for credit insurance plus 1% for life insurance. They might also not invest, if the credit insurance costs 2%, only because they regard it as a too heavy burden. Banks may choose to either accept a "no, thank you" or, if they really want to sell the loan, to sit together with the client and prepare a cash flow projection. At present, the situation does not demand from the bank's staff to engage in this sort of marketing effort.


17

4 BEST PRACTICES

4.1 Summary of international experience

Provided the government regards it opportune to assist SME with their financial problems through strengthening credit insurance and credit guarantee institutions it is recommended that one should first study models that have been proven to be successful and best practice elsewhere. These best practices reduce moral hazard and keep costs within acceptable limits.

Based on an evaluation of credit guarantee companies (CGC) worldwide the authors28 conclude that best design principles relate to the following:

a) Governance and ownership should reflect interests (risk sharing) of three agents: banks, SME, government (CGC);

b) CGC should be constituted as a local, independent legal corporation;

c) As many lenders as possible should participate;

d) Interest spreads should not be constrained;

e) The CGC should be adequately resourced with funds and qualified staff to achieve economies of scale (conflict potential with b!);

f) The CGC should seek risk minimization and enhancing trust of the clientele through re-insurance;

g) Processing time for reviews and claim processing should not exceed three weeks;

h) The CGC management has to demonstrate strong marketing and communications functions;

i) Mutually beneficial relations between CGC and banks based on a clear and comprehensive contract with incentives for banks, e.g. refund to banks if performance is far over average;

j) Banks should regard CGC as part of their commercial strategy;

k) CGC plan should be made in a way that impact is possible but they should not be over-ambitious;

4.2 Instruments for sharing and reducing risks and losses

Insurance deals with risk or loss sharing and risk reduction or prevention. The following is a presentation of how the most prominent features surrounding credit insurance or guarantees can be solved. More details on risk management are compiled in Annex 4.

a. Ownership

The risk of delinquency should be shared between borrower, bank, and guarantor through CGC co-ownership. Therefore it is recommended that participating banks become co-owner of the CGC. Bank representatives in the CGC's supervisory board will pay attention that the management does not engage in too risky operations and that claims and operational costs are kept within reasonable limits. For example, maximum individual 28 GB&P, London


18

cover should not exceed 5% of the guarantee fund. The CGC can offer opening deposit accounts with the participating banks so that they are attracted to join.

Some systems are based on cooperative principles.29 The entrepreneurs who need a credit guarantee have to purchase a share of the CGC and keep it at least until they do not need the guarantee anymore. This makes the guarantee more expensive but at least the nominal insurance rate can be kept low and attractive.

b. Partial cover

The risk of the individual loan should be shared. Equal sharing (50%/50%) has been found a less favorable proposition since the lead is not always clear. Uncertainties prevail over division of responsibilities. CGC should cover between 60% and 80% of the bank's loss and in no instance more than 85%30. No loan should be extended without at least 15% to 20% of the amount made available as collateral (self-financing, e.g., down payments). Most of the debtors will acquire tangible assets with the proceeds from the loan. These will also serve as collateral. Normally, its collateral value would at least cover another 30% of the loan.

c. Handling of interest

Insurance schemes are less attractive if they rule out the payment of unpaid interest. It has been found acceptable to cover accrued but not yet paid interest until the date of default. Insurance companies will press for early default conditions. This forces banks to react immediately and strict in case of repayment delays. Recovery rates are higher.

d. Pricing

No best practices are known for pricing credit guarantees for loans to SME. There are indications that borrowers prefer an upfront charge plus low annual fees rather than higher annual fees. The opening, commitment, or handling fee charged at loan disbursement may amount to 1% to 2% (might be subject to a minimum and maximum amount) plus an annual fee between 0.5% (social orientation for small loans) to 2% on the outstanding loan amount, in extreme cases even up to 4%. Several CGC offer a discount if the fee is paid in advance for several years.

As a theoretic rule, charges should be high enough to prevent unnecessary use and low enough not to put off borrowers; fees and long-term investment income should be high enough to cover expenses and defaults.

As a practical rule, the nominal annual guarantee premium should be about 20-30% of the real interest rate. For example: loan interest rate 19% - inflation 11% = 8% real interest rate x (20% to 30%) = 1,6% - 2,4% p.a. This is much higher than charges by Indonesian CIC/CGC.

29 The Belgium Societes de Caution Mutuel (founded in 1848): The capital of the guarantee fund comes from the borrowing

SME (25%), SME organisations (25%) and one state-owned commercial bank (50%) 30 Some US mortgage insurance companies cover even more than 100% because the respective loan is already

overcollateralized, i.e., the value of the collateral is higher than the mortgage.


19

e. Target groups

Target groups are differentiated as follows:

- Priority group;

It has been found that formal SME with fixed assets in the range of $10,000 - $200,000 (Rp 100 million to Rp 2 billion) are the ideal target group for CGC. The portfolio should include only a small portion of firms with less than 2 years market experience. Individual micro enterprises should not be a target group. They may look for cover through participation in joint liability groups.

- Priority sector;

Most often governments aim at enterprises in industry and manufacturing (sector with highest growth rates) and avoid covering agriculture.31

- Priority region;

Governments tend to direct investments to regions with problematic infrastructure and low growth rates.

f. Eligibility criteria

Loans should be for fixed assets and working capital in the range of $10,000 - $250,000, the maximum for working capital should not exceed $50,000.

g. Claims handling

First of all, the instance of delinquency, and finally claim, could be reduced through training measures, prudent lending, continuous monitoring, and strict collection procedures. The following rules should get attention:

- The instance of a claim is an opportunity for the CGC to demonstrate the company's credibility with quick payouts in well-defined circumstances.

- Provided claims for up to 6 months of interest are part of the contract the claims should be processed latest 12 months after arrears were recorded. In Indonesia, the process should be faster because due to high interest rates, banks loose money with every day delay.32

- The CGC should reject claims if conditions are not met. The parties should be alerted if these instances exceed 5% of the claims.

- As a benchmark, about 25% of loan loss should be recoverable.

- The option of rescheduling or other similar measures should be reserved for the party bearing the costs of debt recovery.

h. Post-claim loss recovery responsibility

Schemes differ in the point whether claims should be recovered by banks or by CGC. There are few, but important, advantages if the bank is responsible for continuous collection of defaulted loans:

31 In several countries separate mechanisms exist on how to resolve the problem of overdue loans to agriculture. Simple seasonal crop insurance has worlwide not shown lasting successes. Recently, Indonesia's credit insurance companies engaged in oil palm plantation financing based on smallholder-processor business schemes. 32 Delinquency of a Rp 400 million loan "costs" about Rp 6 million per month (at 18% p.a.) or Rp 200,000 per day for interest not received.


20

- Personnel is available and personnel costs are part of the bank's cost;

- The bank staff knows the client well, but this may also be a disadvantage, a moral hazard;

- The bank branches are located close to the client;

- Insurance companies can keep operational costs quite low and pretend to be efficient.

The number of reasons why CGC should collect overdue loans is higher:

- No image damage for the bank if CGC collects;

- Direct confrontation of client (debtor) and bank (creditor) is avoided;

- Advice on bank-internal credit assessment, credit monitoring and recovery procedures will improve the bank's capacity;

- Fewer instances of gross neglect on part of bank staff;

- Fraudulent cooperation of bank staff and client becomes more difficult;

- Bank failed to recover or restructure the loan;

- CGC has expertise in collecting doubtful or delinquent loans, especially if the CGC collaborates with many banks in one region;

- Close cooperation with courts (taking over cases from many banks);

- Income from bad loan recovery (subrogation) is much more important for CGC than for banks (higher loss sharing percentage of CGC, higher percentage in company income; banks may not be interested to follow up loan recovery33);

Based on experience, recovery rates tend to be higher if CGC collect overdue amounts. However, no strong evidence has been found whether higher recovery rates set off the additional operational costs.

Figure 7. Cost advantage versus loan recovery

Bank collects CGC collects

Operational cost CGC low high

Loan recovery low high

i. Leverage

For state-owned CGC the main objective should be an increased volume of guarantees enabling more borrowers to be insured and not maximizing investment income in attempt to show profit. Promotion is one way to increase the business volume and achieve great numbers required for risk dispersal.34

33 It may be too costly for the bank if, for example, 80% of proceeds go to the CGC. Says a bank representative:”We only

collect for the credit insurance.” 34 CGCMB (Malaysia) organised road shows, seminars, workshops for both potential borrowers and financial institutions.

SMBCGF (Small and Medium Business Credit Guarantee Fund, Taipei) holds annually approximately 40 workshops for 2,600 bank staff (junior and senior groups).


21

j. Monitoring of additionality

At least once in two years, sample checks should provide information on the additionality of loans guaranteed. At least 60% of the loans should be additional.

k. Other success factors

Several other factors for successful application of credit insurance or guarantee were identified:

- Banks desire to work with the target group but lack experience and information;

- Banks regard credit guarantee as a tangible security assuring them of the effectiveness;

- The CIC management originates from professionals and should not be a place for former bureaucrats;

- The premiums are negotionable and not stipulated by the government;

4.3 Practice of CIC/CGC in Indonesia

4.3.1 Indonesia's credit insurance environment

One should always have in mind that conditions in Indonesia almost certainly differ from the environments in which successful schemes were implemented. Best practices elsewhere should be examined on their acceptance and adaptability to Indonesian conditions some of which are:

- Indonesians are not yet insurance-minded and reluctant to buy cover, maybe also because of disappointing insurance claim experiences.

- The nature of the people prefers looking for peaceful agreements rather than battling for judicial decisions.

- Handling of law is time consuming and costly, the outcome is unpredictable and controversial.

- Government regulations are often renewed and sometimes not clear or contain loopholes. Proper monitoring and follow-up is missing.

- The economic environment is still weak, nominal interest rates are high, real interest rates on deposits are positive >3%, exchange rate fluctuation is volatile

- Banks do not have support from a credit bureau.

- A rating or scoring system, which would allow realistic pricing of CG, is lacking.

- Portfolio management has been neither developed in banks nor in insurance companies.

- Institutions to educate and train staff for credit insurance companies are locally not available.

- Loans covered with insurance do not accord a lower risk weighting for the calculation of CAR.


22

4.3.2 Comparison with best practice

Indonesia differs in several points from what has been found common or best practice elsewhere. Credit insurance or credit guarantees are

- not a specific development policy instrument;

- not targeted at specific sectors, regions or target groups;

- not managed according to risk management principles (high single commodity risk exposure);

- not managed according to portfolio principles (no deep segmentation of clientele);

- not priced to cover cost but to stay in business;

- not always based on a clear contract thus allowing room for disputes;

Insurance companies

- do not regularly check bank-internal procedures and documentation, some almost blindly trust banks;

- do not quickly settle claims;

- do not include deferred interest in their cover;

- do, for the majority, not collect delinquent loans;

Other points differing with best practice are:

- The objective of Indonesian CIC/CGC is not an increased volume with a high rate of additionality;

- Not all managers have a professional background, some have long bureaucratic experience;

- The CIC Askrindo has more points of sale/service (18 offices) than the CGC SPU (5 offices);

- The CGC and CIC face an uphill task of restoring the banks' faith in the insurance themes. The institutions have to counter the recurrence of any negative perceptions associated with the earlier schemes through presentation of actual facts and proper explanations and rationale.


23

Figure 8. Presence of CIC/CGC in Indonesia

City Askrindo SPU ASEI BEI

Jakarta HQ HQ HQ HQ

Surabaya Branch Branch Branch Branch

Medan Branch Branch Branch

Bandung Branch Branch Office

Semarang Branch Branch Office

Makassar Branch Branch

Padang Marketing Office Branch

Denpasar Branch Office

Palangkaraya Marketing Office

Batam Marketing Office

Manado Marketing Office

Pekanbaru Marketing Office

Purwokerto Marketing Office

Samarinda Marketing Office

Jakarta Selatan Marketing Office

Palembang Marketing Office

Lampung Marketing Office

Pontianak Marketing Office

Banjarmasin Marketing Office Askrindo is in all locations present where others have a branch or office!

4.3.3 Problematic competition among credit insurance companies State-owned enterprises have two tasks, namely to assist the government in the implementation of policies through programs and to add income to, among others35, the state coffers. The latter task, paying dividend, gained importance in recent years. Although the CI/CG-companies have their particular fields of competence the managements look for possibilities to expand and to enter into business fields already occupied by one of the other enterprises. For example, ASEI extends credit guarantees to banks that increasingly do not differ any more between working capital loans for export finance or for general working capital, and Askrindo issues increasingly surety bonds.

Banks requiring credit insurance or guarantee can ask SPU and Askrindo for quotations. If, for example, SPU offers a 1% premium and Askrindo asks a 1.2% premium, banks will most likely end up paying 1%. In the absence of competition banks would have accepted 1.2%. The 0.2% difference is a lost income opportunity for the government.

Another point of concern is that no rules prevent banks from contracting two parties, for example SPU and Askrindo, to cover a 50% loan risk twice. Thus the bank has

35 For example, SOE offer employment and income opportunities.


24

successfully sold its entire risk. At least one party did not decline the possibility that this could happen.

Based on experience

- credit insurance or guarantee companies, in particular those with the mission to support SME, do not work profitable: claims and costs are higher than premium incomes;

- the highest overall profitability is achieved if the company does not fulfill the mission, namely if it would only administer funds and not engage in the insurance activity.

Having these facts in mind, the question is whether competition in this sector results in improved efficiency and lower losses to justify the existence of competing state owned companies in this line of business.

On one hand, aggressive marketing may increase income, and internal cost reduction programs may keep expenses within limits. On the other hand, efforts are doubled, e.g., with each company having its own office and branches in the same cities combined costs are higher. Some regions may be underserved as it does not pay to establish an office for one company whereas it would if all companies together share in one office or one office would sell the entire range of products.

4.3.4 Bank loan insurance and credit guarantee companies as profit earners

It is argued that the present set-up invites moral hazard, results in losses and probably in not fulfilling the mission to assist a great number of SME.

In order to achieve the profit targets, the management has several choices:

- Looking for the most profitable market segment; The companies will abide guaranteeing and insuring SME loans. They are less profitable due to high transaction costs.

- Taking higher risks in an already risky business; Experience shows that it is possible to manage a credit insurance company for several years profitably. But it is predictable that credit insurance companies will need to be re-capitalized one day. This day will come earlier if the company engages in higher business risks, both those from underwriting and those from fund management. Losses will not result in the closing of the company (moral hazard!). The government will not give up the product credit insurance. It will intervene with new funds. This is a burden for the taxpayer.

- Reducing the underwriting activity to a minimum; Income from investments, like interest from deposits, allows to always paying a dividend. No additionality is created and operational costs can be kept at a minimum. It would have been a better choice for the government to liquidate the CGC and use the proceeds to reduce debt. The company mission is not fulfilled and therefore it should be closed.


25

0

4 ,0 0 0

8 ,0 0 0

1 2 ,0 0 0

1 6 ,0 0 0

2 0 ,0 0 0

R p b il l io n

1 2 3 4

P la n ta t io n S e rv ic e sM in in gH u s b a n d ryF is h e ryA g r ic u ltu re

4.3.5 Imbalances in risk exposure

The problems of credit guarantee and insurance companies shall be demonstrated with actual imbalances.

Until September 2001, SPU could exceed its premium target by 29%. However, the composition of the portfolio looks extremely dangerous and should call for immediate attention. Out of six economic sectors (five are based on primary production) only one achieved more than 100% of the target. None of the others achieved more than 17%. More than 96% of total premium income is derived from the plantation sector, in particular oil palm plantations. During the initial years debtors do not have to repay the loan (grace period). It is easy for SPU to show, even substantial, profits for a number of years before claims start to reduce the reserves.

ASEI reported also imbalances. Export credit insurance cover for the sector ‘paper products and office supply’ alone amounted to 68% of the portfolio. How incomes and claims unpredictably change from year to year was demonstrated with income and claims from export credit insurance and working capital credit insurance 1999 and 2000 (see figure in chapter 3.1.

The private PKPI also admitted that up to 70% of the portfolio concerns oil palm plantation.

Figure 9. Portfolio imbalances, SPU 2001 (amount of loans guaranteed)

Business Plan

1: Plan 2001: non-plantation sector

2: Plan 2001: plantation sector

Realization until 09/2001:

3: non-plantation sector

4: plantation sector


26

5 RECOMMENDATIONS

5.1 Consolidation of state-owned CGC and CIC enterprises

It is proposed that a pre-feasibility study should constitute the benefits and hidden problems of consolidating the credit guarantee and insurance activities of all state-owned companies in one powerful and resourceful company with assets close to Rp 2 trillion ($200 million). It is proposed that the government should implement the recommendations forwarded in this study.

The proposal to combine loan insurance activities in one central company and several regional companies is not new. It has been forwarded to the government on previous opportunities.36 No serious reason was mentioned or could be found why these companies should not be consolidated.37

The advantages of a combined Indonesian Credit Insurance and Guarantee Company are striking:

- Reduced risks: particular imbalances matter less;

- Savings and synergies: using same facilities;

- Increasing outreach, impact and income: increased viability of new offices;

- Higher likeliness of cost covering, reduced danger of failure;

- More combined expertise and efficient staff development measures;

- Attractiveness for clients and promoters: a strong, more reliable partner;

- Advantages for SME applying for bank loans: increased access and competence;

It is proposed that a model or a system should be developed that concentrates expertise in a main office with presence on local level. The set-up should allow including those local institutions or efforts in this credit supplementation system that will be established by several, but not all, autonomous provincial governments as their instrument to support the local economy.38 The presentation on the following page may give a vague idea on how this flexible system might look like.

The advantages and disadvantages of a slim credit complementation scheme against a personnel-intensive approach need to be further analyzed and evaluated. The scope of tasks of a new CIC/CGC has to be defined.

It is proposed that, based on experience abroad and in Indonesia and based on a pilot project, costs and benefits of CIC/CGC collecting overdue SME loans should be verified. In case of a predetermined event, e.g., the loans are classified "doubtful" based on BI criteria, the insurance should

36 Based on interviews with the management of the companies. See also Urata: "The credit supplementation business is

regarded as being highly risky. It is important to integrate between the insurance credit system conducted by Askrindo and the guarantee system conducted by Perum PKK and or guarantee companies in order to eliminate the duplication.”

“It is proposed that front line activities should be assigned to the credit guarantee company (SPU). Askrindo would insure the guarantee obligations of the credit guarantee companies. Thus an integrated and comprehensive credit insurance system insures automatically all guarantees made."

37 Personal reasons are certainly strong as the proposal implies that a number of directors and commissioners will loose their posts.

38 It is questioned that every province will make available Rp 10 billion to establish a CGC. These institutions can only survive if net claims can be kept below 2%. For more details see Annex 6.


27

Provincial Government Central

Government Banks

Other financ Institutions

Donors

I Equity Equity Equity

I Deposits Tech. Assistance

I

I Provincial I program/fund

LAsJamdit Lembaga Asuransi dan

Jaminan Kredit Deposits "2nd-tier (SME)

Bank"

I

V

Deposits

Provincial LAsJamdit

Non-bank financial institution

Bank

Bank

SME SME SME

LAsJamdit = Credit Insurance and Guarantee Institution

Consolidation of credit insurance and credit guarantee activities of state-owned companies and institutions, among others ASEI, Askrindo, SPU and BEI*).

The consolidated company should receive equity and funds from central and provincial government, commercial banks, and donors.

The funds of this company should be deposited with LAsJamdit shareholding banks (upon their request, up to a certain maximum) and with the "SME” bank (second-tier). This second-tier bank forwards these funds to implementing and executing financial institutions as liquidity assistance for the implementation of SME programs.

_______ *) Bank Ekspor Indonesia offers guarantees but no such activities take place at present; BEI is proposed to focus its activities to become the "second-tier (SME) Bank", a bank that channels funds to targets (SME) through executing banks thus taking over the role BI played before. Reason for this proposal is the equity strength of the company, an untapped potential. See also: ADB TA SME Background report on the Second-tier Bank, December 2001.

- pay the claim,

- take over collateral,

- take over loan recovery,

- negotiate with the debtor, achieve either a new loan agreement or

- start the process of seizing and liquidating collateral.

The Korean example with the CGC expanding their business to closely related activities like credit information, training of entrepreneurs (prevention of default), debt “inkasso” and others should be studied with regard to its adaptedness to Indonesian conditions, among others the availability of BDS providers.

Figure 10. Concept for an integrated national and regional CIC/CGC system


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It is prosed that commercial banks should become shareholders in a CIC/CGC. In order to attract banks one should offer them access to funds thus allowing them to strengthen their liquidity position. For instance, Bank A participated with Rp 100 billion and may therefore demand that the CIC/CGC places funds up to Rp 200 billion with Bank A (twice the amount banks keep as equity). A balance sheet of such a CIC/CGC could look like the one below:

LAsJamdit (Lembaga Asuransi dan Jaminan Kredit)

Balance Sheet

(Rp billion)

Aktiva Pasiva

Cash etc. 50 Other liabilitites 200

Placements Subordinated loan (donor) 200

- Bank A 200 Equity and reserves

- Bank B

- Bank C

150

50

- Central government

- Regional government

500

150

Other placements 1,250 - Donor(s) 250

Other assets 300 - Bank A 100

- Bank B

- Bank C

Reserves, profit c/f

75

25

300

Total 1,800 Total ($180 million) 1,800

A more detailed elaboration of the arguments can be found in Annex 5.

5.2 Strengthening participation

a. Participation of local banks

It is proposed that banks and other financial institutions using the CIC/CGC services should participate in the equity of this company

- as a sign of commitment to support the institution;

- as supervisors in order to prevent inefficient use of funds and engagement in too risky business or in business contracts not based on purely commercial terms.

b. Participation of regional governments

The credit insurance or guarantee facility is a political tool. The decentralization process makes provinces and districts more powerful. Therefore, the CIC/CGC’s success or failure also depends very much on support from local authorities. However, not all provincial governments may wish to invest Rp 10 billion to establish a local bank loan guarantee company. These provinces might acquire shares in the consolidated company, a trust fund, a kind of profit center on local level, maybe set up and re-insured with the CIC for the implementation of special local level programs.

Box. 1. Tentative balance sheet of CIC/CGC


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c. Participation of donors39

A multinational guarantee company model can serve as one approach with a potential to reach SME. Guarantees require the intervention of governments and perhaps also the intervention of international development organizations to help create the conditions under which guarantees can work to increase SME lending and to develop a debt market in which securitized products can be placed. In view of the Basel II Accord, participation of international donors might decrease risk weighting of loans covered by such an agency. It is recommended that (an) international donor(s) should be convinced to engage in this company. The engagement could be in the form of direct equity, subordinated long-term loans at preferential rates, or as an international re-insurance facility. It is expected that a foreign donor would insist on books being audited by an internationally acknowledged company thus adding credibility to the company. The donor(s) and the accompanying international expertise would very much increase the confidence of local and international banks in the capacity of this new company and bring support to the entity.

d. Settling BI’s equity participation in Askrindo

The consolidation of CGC and CIC is also an opportunity to settle the issue of BI's 55% majority ownership of Askrindo.40 Being the country's independent monetary authority, one may not want BI to be engaged in commercial enterprises. For instance, BI's share might be taken over by banks being proposed to become shareholders.

e. Financing BI’s Askrindo equity transfer

Many banks may feel to be too much burdened if they are asked to take over BI's share in Askrindo. They may not be sufficiently attracted by the proposed liquidity facility amounting to twice their investment in the CIC/CGC alone. Following options are offered:

- Installment payments over a period of three to four years;

- Higher insurance or guarantee fees for banks being not shareholder of the CIC/CGC;

- Introducing a 0.025% levy on loans41 for four years, which banks may charge to their debtors if they deem it appropriate; for comparison Korean banks pay 8 times as much.

5.3 Improving coordination with BI

a. Credit insurance, risk weight and loan loss reserves

BI does not accept credit insurance or guarantee as qualified collateral. The opportunity of consolidating the credit insurance companies should be performed in a way that Bank Indonesia accepts the insurance or guarantee certificates as a credit risk reducing collateral. In other countries guaranteed loans will be accorded a 50%, 20% (Malaysia) or even 0% (India) weightage.42 It is of utmost importance that Indonesian banks should also

39 In 1997, KfW assessed Askrindo in view of a cooperation. 40 According to Law on BI No. 23/1999, Art. 64, BI is only allowed to invest in companies if it is urgently required to support

BI's function. BI's share in Askrindo may be worth some Rp 300 billion. 41 Loan portfolio of all banks: > Rp 300 trillion x 0.025% = Rp 75 billion; for comparison, banks in Korea pay 0.2% annually

to support the Korean Credit Guarantee Fund (KCGF); see: Andi Ikhwan, Hiemann, Wolfram: Pengalaman Internasional... 42 The Reserve Bank of India as per Circular DBOD No. BP. BC. 128/21.04.048/00-01 dated June 7, 2001, has advised that

”advances guaranteed by Credit Guarantee Fund Trust for Small Industries will attract zero risk weight for the guaranteed portion and that no provision needs to be made for the guarantees portion in case the advances become non-performing


30

be attracted with the facility of lower risk rating of insured or guaranteed loans. This facility allows the CAR (capital adequacy ratio) to improves and, in case of delinquency, a lower amount for loan loss reserves has to be set aside. Profits will be higher, or losses less. Thanks to low weightage banks can increase intermediation and give more loans to SME and even earn more.

b. Participation in credit information system

CGC and CIC regret that they are not connected to Bank Indonesia’s credit information system. In contrast, it is easier to obtain information about businesses abroad for an insurance or guarantee company that becomes partner in an international business information exchange network. In future, it is recommended that the planned credit information bureau supplies the finance industry with relevant data and a score indicating the risk of sectors and clients so that pricing of risk premiums can be based on objectively verifiable indicators.

5.4 Review regulations

The MoF regulation 486/1996 on CGC does not prevent management by unqualified persons and risk taking beyond common sense. Rules and mechanisms should be put in place before the government allows the establishment of new CGC. It is proposed that the regulations should be re-formulated and amended in a way that it fits for all companies engaged in credit guarantee and credit insurance.43 The government may endow one company in which it keeps a major share with special features as a commitment to keep it in the market. Careful attention should be given that cross-subsidies are not used to compete with enterprises that do not enjoy special facilities.

5.5 Government programs or schemes

The following actions should be implemented because they have the potential to contribute to more loans for SME.

a) It is recommended that the CI/CG-companies' target should be re-oriented. The development mission should be a more emphasized and respective program or products should be developed and socialized.

b) Once the institutional set-up has been reformed the government should look into fields in which special engagement is required. Traditionally, governments support start-ups and enterprises with insufficient collateral.

c) It is proposed that the government shall investigate the possibility to introduce a scheme in which it takes over 80% of court costs and other administrative expenses (those fixed and levied by the government) arising in connection with the legal enforcement of repayment of insured or guaranteed loans to SME. Banks regard legal loan recovery procedures to be time-consuming, costly and outcomes unpredictable. The rationale behind this proposal is:

assets.” The maximum loan amount for which the regulation is valid, is Rs 2,500,000 (about $50,000). Source: www.creditguarantee.org.in/circular1.htm

43 At present, the regulation is not applicable for Askrindo as credit insurance company and it explicitly mentions Perum PKK , predecessor of SPU, as an institution for which the regulation is not applicable (Par. 15).


31

− Firstly, it would be easier to determine when the bank can claim funds, namely once the files have been forwarded to courts, the respective government authorities.

− Secondly, all delays and costs in the legal process of liquidating collateral are the responsibility of the government.

− Thirdly, this facility will encourage banks to extend loans to SME because of less hassle and a higher predictability of risks (costs).

− Fourthly, it introduces a behavior of engaging in legal actions rather than relinquishing rights on grounds of a weak and system that seems to more protect interests of debtors.

− Fifthly, the government proves its commitment to law enforcement, a signal still badly missed in the business environment.

Therefore, the Ministry of Finance may just transfer support for SME credit supplementation to the Ministry of Justice to settle court bills. The money remains in the government pockets.

d) The government may also consider subsidy for costs and expenses in connection with the appraisal of a loan guarantee request (fixed fees in connection with issuing a guarantee).

e) Promotion of guarantees should not be aimed at banks only. It is suggested to inform the public, in particular SME also through BDS provider and extension service, about bank loan guarantees and insurance. If they are not properly informed about the availability of these facilities, they will hardly demand it.

The government should not

− introduce compulsory insurance for particular schemes; the decision to insure a loan or back it with a guarantee should entirely rest with the executing bank;

− subsidize the running costs of guarantee fee or insurance premiums (running costs).

5.6 Regional CGC

Critics argue that regional or provincial CGC serve only as an alibi for well-connected people to acquire a credit guarantee and subsequently a loan they otherwise would not have obtained.

The issue has been raised to keep credit insurance centralized and to decentralize credit guarantee.44 The central CIC would act as a re-insurance company of these CGC thus almost copying the Japanese credit supplementation model.

Some provincial governments were already heard announcing their intention to set up their own CGC as a tool to enhance local development. This does most probably not create a problem in locations that are not yet directly served by CGC or CIC. In regions where Askrindo and SPU established already offices, the situation may pose some

44 See: Urata; with respect to the Japanese credit supplementation system one should have in mind huge continuous

subsidies (deficit 1999: more than $1.7 billion) supporting a volume of SME loans that is bigger than all guaranteed bank loans in all other countries in the world. For more details see: Andi Ikhwan, Pengalaman International Penjaminan Kredit kepada UKM (International Experience on Credit Guarantees to SME), Background Report ADB TA SME


32

problems that need to be solved. One may perhaps compromise on that the new CGC serve, for example,

- different areas (according to district, region north or south of the capital, etc.)

- different clientele (guarantees for loans up to Rp 500 million - more than Rp 500 million, individual loan guarantee - corporate company loan guarantee, etc.)

- different sectors (small-scale industries - others)

- etc.

Figure 11. Basic considerations regarding the establishment of regional CGC

Criteria Comment

Establishment of Regional CGC (RCGC)

Very much acceptable if no CGC provider available; Coordination required, if national CGC provider already present;

Outreach of PCGC Distance to borrowers is small, risk assessment competence for small enterprises on local level is high, suitable for SME loans; outreach and impact depend on funds allocated from the provincial budget;

Principle of large number

Can be achieved if many small loans (for SME) are covered, however, this is a relatively costly proposition due to unit transaction costs;

Trust of banks in local CGC

Probably quite limited in view of problems experienced with big national companies in the past; for small loans probably acceptable, in particular if the CGC is re-insured;

Capital risk and loan loss provision allowance

Less likely as a small independent entity, may depend on sovereign support;

Professionalism May be problem, it is already a bottleneck in Jakarta;

Viability Questionable unless the local government is committed and makes always-available fresh funds before profits deteriorate and claims exceed premium revenues (Are local governments and legislators aware that CIC/CGC will most likely need continuous financial support?);

In any case, competition in the loan insurance and guarantee business means less scale, less overall expertise, higher inefficiency, higher portfolio imbalances (risks) and finally the danger of higher losses for all parties. SME as a target group will not find this procedure advantageous. For instance, for one loan they may have to buy cover from the provincial CGC, for other products they may need a guarantee from the national company. Therefore, constructive cooperation, a one-door-service, is a must.

A rough look at the viability of provincial CGC for SME development reveals that for many provinces, establishing a CGC may not be a sustainable proposition. If net claims exceed 1.6%, a RCGC will need subsidies (see Annex 6)45. Provincial governments have,

45 The rough, “on-the-back-of-an-envelope” calculation indicates that an RCGC with Rp 20 billion equity can cover 1,406

loans (average outstanding Rp 142 million). About 20 staff are required to run the entity, most of them loan portfolio officers. Nationwide, about 53 such RCGC could initiate lending to some 74,500 SME with a volume of Rp 10.6 trillion. At 1%, premium income would amount to Rp 106 billion. This compares with Askrindo’s 2000 earnings for credit insurance amounting to some Rp 13 billion and SPU’s combined income of just Rp 776 million premium nationwide from agriculture, fishery, husbandry, mining and services during the first nine months in 2001.


33

however, a tool to improve income and achieve profits from local CGC. They can exert moral persuasion and press for that loans extended by their Provincial Development Banks (BPD) are insured whenever possible. Credit guarantee premiums may turn into a hidden tax. Being simultaneous owner of a bank and owner of a CGC may pose a moral hazard. This fact should find consideration when drafting a concept for local and national credit supplementation.

With regard to RCGC it is proposed that attention should be given to the following:

- Improved government regulations including regulations on prudent management and enhanced supervision are required.

- Management should not origin from bureaucrats and passes a fit and proper test.

- Compulsory re-insurance is recommended.

- A financial stay-by facility for re-capitalization should be available.

- The RCGC should cooperate with local BDS providers, an activity that could be financially assisted by the government because it reduces loan risks without distorting the market.

It is suggested that provincial governments should not establish their own RCGC unless the financial and management questions are resolved. Instead, they should participate with equity in the national credit supplementation scheme. This participation can be used as a trigger to initiate the presence of CGC in all provinces. The province may also allocate special trust funds and its adherent rules to the local branch of the national CIC/CGC system to be used for particular programs in the framework of the local economy development plan.

5.7 Recommendations regarding private bank loan guarantee companies

It is not recommended that the government should in any way support a private competitor in bank credit supplementation with special facilities as requested during different discussions with PKPI representatives. Any new investor has to be aware of the uneven rules of the game that give one state co- or majority-owned enterprise in this sector an exclusive competitive advantage, namely the right to survive. There is no level playing field. If the government would extend this right to private companies then this would mean a license to print money.

Despite the disadvantage of being not bailed out by the government, private companies have a chance to grow and survive against this one company, for instance

- if they earn profitable contracts procuring premiums that are higher than those of competitors; such contracts are normally based on personal relationships and favors (“sweet deals”46);

- if the proposed consolidated CIC/CGC system is not properly supervised and managed so that service like prompt, unbureaucratic settling of claims renders the private company more competitive;

- if private companies obtain a market niche for which special knowledge and expertise is required and not available with the competition;

- if private companies offer new products for which the market has demand;

- etc.

46 About insuring zero-risks, i.e., loans to plantation during construction, see Chapter 2.2 d)


34

The government should make it clear and stick to that it never will bail out a failing private CGC (unless the government does not care about its credibility).

The question of allowing private CGC re-insuring their risks with a company that enjoys special status, i.e., with the government-supported CIC, needs special consideration. The problem arises once the CIC considers the risks of private CGC being too high. In principle, the re-insurance contract should be based on professional terms. The agreement should allow discontinuation under predetermined conditions. A private CGC should always face the possibility of bankruptcy.


35

6 ANNEXES

Annex-1. List of Indonesian bank loan insurance companies

PT Penjamin Kredit Pengusaha Indonesia (PKPI) "sebuah lembaga penjamin kredit untuk UKMK"

Menara Duta, 7th floor, Jl. HR. Rasuna Said Kav B-9 Kuningan-Jakarta 12910 T.: 521-0263

PT Asuransi Kredit Indonesia (Askrindo)

Gedung Askrindo Jl. Angkasa Blok B-9, Kav. No. 8 Kota Baru Bandar Kemayoran Jakarta 10720 T.: 6546471 www.askrindo.co.id

Perusahaan Umum Sarana Pengembangan Usaha "berfihakan kepada dan untuk memberdayakan UKMK"

Gedung PEKAKA Jl. Angkasa Blok B-9 Kota Baru Bandar Kemayoran Jakarta 10720 T.: 6540357 www.perum-sarana.com

PT Asuransi Ekspor Indonesia (ASEI) Sarinah Bldg. 13th floor Jl. M. H. Thamrin 11 Jakarta 10350 T.: 3903535 www.asei.co.id

PT Bank Ekspor Indonesia (Persero) Jakarta Stock Exchange Bldg. Tower II, 8th fl. Jl. Jend. Sudirman, Kav 52-53 Jakarta 12190 T.:52990887 www.bexi.co.id

USAID LPG (Loan Portfolio Guarantee) Contact person in Indonesia: Ms. Llana Lubis c/o USAID, American Embassy Jl. Merdeka Selatan Jakarta T.:34359314


36

Annex-2. CIC/CGC product models

The insurance industry distinguishes three credit supplementation models:

Individual model Credit guarantee companies apply this model. Before signing the loan contract the credit guarantee company (CGC) will perform its own credit appraisal. Based on this result it will decide case-by-case whether or not a guarantee will be attached to a specific loan. This model enables the CGC keeping its risk (and therefore its premium) low despite much higher costs due to the duplication of appraising loans. The CGC might offer a high cover, even up to 90%, provided bad debt collection is taken over.

However, there is an insurmountable conflict. Banks do not see the necessity to insure low-risk loans, those that the CGC would accept to cover. The number of high-risk loans a bank will engage in is limited to loans where the bank cannot assess the risk or is already highly exposed to a particular risk. Thus there are not too many opportunities for CGC to conclude contracts.

Most probably, the CGC will prefer to guarantee loans with high amounts rather than small loans to small entrepreneurs due to different relative transaction costs. The transaction costs could be decreased with a credit information bureau delivering a set of data allowing reliable risk rating. CGC find it profitable to cover standard loans in the framework of business linkage projects.

Portfolio model CGC and lender agree on particular loan categories and risks, which are eligible for insurance. The bank decides on whether or not to attach a guarantee to a particular loan and informs the CGC afterwards. The CGC delegates approval power to the bank. Therefore, the guarantee should not exceed 80%.

The portfolio model can result in problems arising from different perceptions concerning the question whether a particular loan belongs to those eligible or not. The advantage of low operational costs is balanced by the disadvantage of a higher default rate. The number and volume of loans that could be secured under this model is much higher if compared to the case-by-case model.

Automatic model All loans are insured within an eligibility category regardless of risk level of each loan. This model is also called "Whole Turnover" or WTO. The advantage of this model is achieving large numbers to spread the risk and to minimize administrative costs. Because it is easy to handle, this model can be found in connection with public program loans. However, based on experience, compulsory insurance schemes provoke moral hazard and often-heavy losses on part of the insurance company.


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Annex-3. Premium charging policies of banks

Credit guarantee makes sense if the bank or client consider risk reduction benefits to exceed insurance premiums. In Japan, fees are not added to interest rates because the bank's risk is reduced. The risk reduction equalizes extra risk plus cost of insurance (see No. 6 below). This view is not shared unanimously. Other countries, like Malaysia, stipulated interest caps out of social considerations: Small loans command a lower interest and insurance premium rate.

The banks have several alternatives to charge the insurance premium or to incorporate the premium in their interest rate (indirect charge to debtor). It needs to be stressed that a risk valued at 3% can be compensated by an insurance that costs less. The reason is the different assessment of risks. The different assessment is based on different individual experience and mitigation techniques with risks.

Figure 12. Calculation models for fixing loan interest rates

No Loan type Cost of funds

Margin Base lending

rate

+ Extra risk

+ Cost of risk cover

- Risk reduction

Charge to debtor

1 Normal loan 15% 2% 17% 0% 17%

2 Risky loan 15% 2% 17% 3% 20%

3 Risky loan with cover 15% 2% 17% 3% 1% -3% 18%

4 Risky loan with cover 15% 2% 17% 3% 1% -1.5% 19.5%

5 Risky loan with cover 15% 2% 17% 3% 1% -1.5% 20%

6 Risky loan, with cover, Japan47

15% 2% 17% 3% 1% -4% 17%

Explanation:

No 2: The bank takes over the risk and charges directly higher interest rates. A 3% higher margin may allow that approximately one in about thirty non-collateralized loans will not be recovered

No 3: With insurance, the bank considers the loan risk equivalent to the loan risk of normal loans. The cover balances the extra risk. The extra cost is charged to the client.

No 4: In fact, the 1% premium covers only 50%-60% of the loan risk so that risk reduction amounts to only about 1.5%.

No 5: The bank covers the risk and enjoys risk reduction48; insurance is profitable for the bank.

No 6: The bank values risk reduction very high. The risky, but insured, loan yields a lower margin than a no-risk loan without insurance because the bank bears the cost of the cover. The value of risk reduction is higher than the risk itself making the loan "safer" as a no-risk loan!

The presentation above misses one important point, namely the impact of loan supplementation on risk weighting of the loan for CAR calculations and on loan loss reserves. In Indonesia there is no impact.

47 Urata, p.47:”In Japan it is common to discount the interest rates on loans that have credit guarantees.” 48 Bank NISP, Bandung, follows a different strategy. It charges simply a higher interest rate and explains this to the client

with the higher loan risk as collateral requirements are not entirely fulfilled. Without knowledge of the client the bank buys cover from the USAID initiated Loan Portfolio Guarantee scheme. The bank staff is convinced that the repayment morale is high especially because the client is not informed about the insurance (no moral hazard).


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Annex-4. Risk management

The Guarantee Fund for SME (GFSME), Philippines, developed and applies risk management principles and tools described below:

Risk management system

The following are the basic objectives:

- Quality over quantity: preferring enterprises that contribute to economic growth;

- Internal viability: independence from continuing subsidies from national government its viability being based on the strength of its SME market;

- Credit guarantee as a development policy instrument;

Strategic features

Risk dispersal strategies or portfolio management start with segmentation. Accounts should be classified according to

- industry (not more than 30% in one investment area),

- loan size,

- borrower type,

- collateral cover, and

- originating bank.

An analysis of the different groups should be reflected in policies for pricing, accreditation of banks, incentives for banks and identification of industries with low risk.

Flexibility and market sensitivity require continuous review of guidelines and policies based on consultation with banks and tapping their market expertise.

The accredition should not be limited to commercial banks but also include rural banks, multifinance corporations, venture capital raisers and NGO.

The most important benchmark figures should be available for a range of debtors:

- current ratio - debt-equity ratio - return on investment Projects below standard receive lower guarantee cover, e.g. 60% instead of 75%. Borrowers equity must not be less than 20% of total project cost.

Loan range: minimum Peso 50,000 ($1,000), maximum depending on collateral cover:

Collateral Cover Loan Limit

< 30% Peso 10 million

>30% - <70% Peso 20 million

>70% Peso 40 million ($800,000)


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The borrowers' track record is given considerable weight. In the absence of track records, GFSME looks into the particular market segment, its development and prospects.

Annex-5. Assessment of a consolidated CIC/CGC

A consolidation of the state-owned credit insurance and guarantee companies offers a number of advantages. Strength attracts more attention.

Lower risks of a consolidated company

One reason for consolidating the state-owned credit insurance and credit guarantee companies is based on risk considerations. The probability that one out of three companies fails is much higher than the probability that a consolidated company would fail. The risk to encounter financial problems is smaller with a large company. Imbalances as they are difficult to prevent at present would less matter.

Higher profits of a consolidated company

A consolidated company can achieve higher profits than small individual companies through lower costs and higher income.

a) A consolidated company can save costs:

- One head office;

- Concentration of expertise;

- The acquired knowledge is available for a larger number of staff.49

- Joint activities like group staff training instead of individual training result in accelerated human resource development;

- Joint promotion like road shows, seminars, workshops;

- One negotiator for one client;

- More favorable re-insurance terms;

- Easier detection of misuse, fraudulent behavior and double cover;

- Increased risk management and market segmentation possibilities;

b) A consolidated company can earn higher income

- The rate to insure credits can be fixed by the company and does not need to be negotiated under competitive pressure;

- The company can negotiate more favorable terms for its investments;

- Offices are viable in locations that are not viable to be served by a small company. This will add more business and income;

- Increased cross-selling of products;

Advantages for SME

49 ASEI spent enormous amounts for training. The financial report 2000 states: - employee expenses: Rp 6,977 million - education and training expenses: Rp 1,101 million = 16%


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There are good chances that SME benefit from a consolidated insurance company:

- Banks will reconsider their hesitant approach towards credit insurance/guarantee if a strong, reliable insurance company offers the products. The consolidated company can afford to open more offices in order to better serve banks and increase business. In turn, it is supposed that banks will make more often use of credit guarantee facilities.

- In particular regarding individual credit guarantees, it is important that the insurance company office is in not a too far distance from the prospective client. The insurance officer cannot afford traveling too far if it concerns small SME loans because of transaction cost considerations.

- The average staff qualification in a large insurance company is higher due to job rotation possibilities. SME have a better chance to be professionally assisted.

- Services for banks and SME are improved. This will result in more loans to SME.

- The CIC/CGC could deposit funds with the proposed second-tier bank in order to make available liquidity for financing SME (see figure above).


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Annex-6. Abridged viability assessment of provincial or regional credit guarantee companies (CGC)

Additional loans with credit guarantee

No. of small enterprises (5-19 employees) # 640,000

Percentage of un-met loan request 47% # 300,800

Estimated additional access to loans with insurance 10% # 64,000

Average initial loan amount Rp mio. 200

Average outstanding loan amount Rp mio. 100

Total additional loans to small enterprises, outstanding Rp mio. 6,400,000

No. of medium enterprises (20-99 employees) # 70,000

Percentage of un-met loan request 47% # 32,900

Estimated additional access to loans with insurance 15% # 10,500

Average initial loan amount Rp mio. 800

Average outstanding loan amount Rp mio. 400

Total additional loans to medium enterprises, outstanding Rp mio. 4,200,000

Total additional SME loans # 74,500

Total additional average loan amount outstanding Rp mio. 10,600,000

Individual average loan amount outstanding Rp mio. 142

Capacity of regional credit guarantee company

Equity, minimum Rp 10,000 mio, average estimated Rp mio. 20,000

Cover gearing ratio 10 10 Rp mio. 200,000

No. of loans average outstanding/loan, Rp mio. 142 # 1,406

No of staff required average capacity, no. of loans 70 # 20

National scope: up to 53 CGC; x 1,406 = 74,518 loans; plafond: x avg outstanding x 2 = Rp 21.2 trillon; employment: up to 1,064 staff

Cost of one average CGC

Cost of staff, including overheads average p. year, Rp mio. 50 Rp mio. 1,000

Cost of office, travel, promotion, seminars , per month 30 Rp mio. 360

Claims (net after recovery: 2.2% - 2.2%x25% = 1.6%) 2.2% Rp mio. 4,400

Total costs 5,760

Income of one average GCG

Deposit or placement, in % of equity 90% Rp mio. 18,000

Interest and income earned on placement, net p.a. 15% Rp mio. 2,700

Recovery, % of claims 25% Rp mio. 1,100

Premium earned on underwriting/cover 1.0% Rp mio. 2,000

Total income Rp mio. 5,800

Surplus, annual Rp mio. 40


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Benchmarks, break-even point: Premium: 1,0% p.a.; claims: 2.2% (net after recovery: 1.6%); recovery: 25% of claims

Conclusions:

i) Considering the Indonesian environment, above assumed “BEP”- claim rates seem unrealistically low. Financial losses are likely.

ii) Recovery rates may reach 25% but it takes sometimes many years so that the net present value (NPV) of this amount is much smaller.

iii) Every percent decrease in deposit interest rate results in income decrease of Rp 180 million. The government would prefer if interest rates could decrease. Consequently, cost covering becomes less likely in future.

Documents

18 Credit Insurance and Credit Guarantees as Instuments to. · KIK/KMKP Kredit Investasi Kecil/Kredit Modal Kerja Permanen (Small Investment Loan/Small Permanent Working Capital Loan),