Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 6579-IND

STAFF APPRAISAL REPORT

INDONESIA

BRI/KUPEDES SMALL CREDIT PROJECT

April 7, 1987

Projects DepartmentEast Asia and Pacific Regional Otfice

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENT

Currency unit = Indonesi.an rupiah(as of February 1987)

US$1.0 = Rp 1,630

FISCAL YEAR

Government of Indonesia - April 1-March 31Bank Rakyat Indonesia - January 1-December 31

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

ADB - Asian Development BankASKRINDO - PT Aseransi Kredit Indonesia (Credit Insurance Company of

Indonesia)BAPINDO - Bank Pembangunan Indonesia (Development Bank of Indonesia)BBD - Bank Bumi DayaBDN - Bank Dagang NegaraBEII - Bank Ekspor Import InternationalBI - Bank IndonesiaBIMAS - Bimbingan Massa! (an integrated program for crop

intensification)BK! - Badan Kredit Kecamatan (Rural Credit Institutions)BNI 1946 - Bank Negara Indonesia 1946BPKP - Agency for Financial and Development SupervisionBRI - Bank Rakyat IndonesiaBULOG - Board of Logistic AffairsCPIS - Center for Policy and Implementation StudiesGDP - Gross Domestic ProductGOI - Government of IndonesiaHB - Handling BankKIK - Kredit Investasi Kecil (Small Investment Credit Program)KMKP - Kredit Modal Kerja Permanen (Small Permanent Working Capilal

Program)KTN - Cooperatives, Farmers and Fishermen Credit DepartmentKUPEDES - Kredit Umum Pedesan (General Village Credit Program)MOF - Ministry of Finance of the Government of IndonesiaPDFCI - Private Development Finance Company of IndonesiaPPAR Project Performance Audit ReportPUD - Village Unit Development DivisionRDB - Regional Development BankSEDP - Small Enterprise Development ProjectSIMPEDES - Simpanan Pedesan (Village Savings Program)SOE - Statements of ExpenditureSSE - small-Scale EnterpriseTABANAS - Tabungan Nasional (Small Saving Program)USAID - United States Agency for international Development

IoP omcL41 U. ONLY

INDONUPIA

BRI/KUPEDES SMALL CREDIT PROJECT

Table of Contents

Page No.

LOAN AND PROJECT SUMKARY ........................................... iii

I. SECTORAL ASPECTS

A. The Financial Sector..................................... 1Level of Development and Scope for Financial

Institutional Framework.e.......... ................. 2Financial Sector Reforms and Subsequent

B. Small-Scale Enterprises and Rural Activities.,......... .... 5

C. Bank Objectives, Strategy and Role in the FinancialS e t o r .0 0 0 a 0 . ... .a .. a .. ..... ...... ...... ............ .... 8

II. PRESENT STATUS OF THE BENEFICIARY AND THE KUPEDES PROGRAM

A. Sank Rakyat Indonesia--Institutional Aspects............& 10B. The BRI Unit Desa System and KUPEDES Program............. 14

Background ......................... 14organization ............................. isScope and Terms of KUPEDES Lending.................... 16KUPEDES Lending Operations........... .**** *.... 18Characteristics of KUPEDESLending.................... 19Funding of Unit Desas and Resource Mobilization ....... 20Unit Desa Administration and Financial Operations ..... 21Financial Position and Performance of Unit Desas...... 22

This report is based on the findings of an appraisal mission in October1986. Mission members were Victor Agius (mission leader), Hugh Murphy andCharles Magnus.

I This document has a restricted distribution and may be used by recipients only in the performameof their official duties. Its contents may not othLrwise be disclosed without World Bank authorization.

Page No

II. THE PROJECT

A. Project Rutionale, Objectives and Content................ 26B. Projected Resource Kequirements and the

Credit Component ...... . . . . . . . . . ....... ........ ..... . . . . . 26C. Technical Assistance and Training Needs of the Unit Desa

System - The TA Component................................ 29D. Project Cost Estimates and Financing Plan................ 32

E. Features of the Loan..................................... 32Lending Arrangements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .e. . . 32Loan Administration................................... 33

F. Projact Benefits andRisks............................... 35Benefits ................................. *************. ........... .35Risks ..... .. ... .... *..........e..........eoe.......... ........ .35

IV. AGREEMENTS AND RECOMME1NDATION.....o..........o..............o......es 36

ANNEXES

1. Documents Available in the Project File2. Bank Rakyat Indonesia

Table 1: Audited Balance Sheets, 1980-85Table 2: Audited Income Statements, 1980-85Table 3: World Bank Croup/ADB Funds to BRI, 1972-85

3. Bank Rakyat Indonesia Unit Desa Policy Statement4. Bank Rakyat Indonesia Unit Desa Strategy Statement5. BRI Unit )esa System

Table 1: Summary of Actual KUPEDES Lending Operations, 1984-June 1986Table 2: Balance Sheets, 1984-June 1986Table 3: Income Statements, 1984-June 1986Table 4: Analysis of KUPEDES Loan Portfolio, 1984-June 1986Table 5: Projected KUPEDES Lending Operations, 1986-90Table 6: Projected Resource Requirements/Funds Utilization of BRI Unit

Desa System, 1986-90Table 7: Projected Income Statements, 1986-90Table 8: Projected Balance Sheets, 1986-90

6. Cost Summary of USAID Technical Assistance to BRI7. Draft Terms of Reference: Research and Planning Advisor8. Formula for Calculation of Relending Rate from GOI to BRI9. Rationale for Disbursement Formula Adopted for BRI/KUPEDES Small Credit

Project10. Estimated Cumulative Disbursements of the Proposed Loan

CHARTOrganizational Structure of BRI Headquarters

MAPIBRD NO. 11038R1

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INDONESIA

BRI/KUPEDES SMALL CREDIT PROJECT

Loan and Project Suwary

Borrower: Republic of Indonesia

Beneficiary: Bank Rakyat Indoneria (BRI)

Amount: US$101.5 million equivalent

Terms: Twenty years, including five years of grace, at the standardvariable interest rate

RelendingTerms: The proceeds of the loan would be onlenL to BRI for a 20-

year term, including five years of grace, at a variableinterest rate equal to the average cost of BRI's customerdeposits (excluding noninterest-bearing deposits from G0I orOI-owned entities). BRI would also pay commitment feesequal to those under the loan. The Government would assumethe foreign exchange risk and onlend the rupiah equivalentof the loan to BRI. Subborrowers would pay a fixed interestrate of 1.0% per month for loans for investment purposes and1.5% per month for loans for working capital purposes,calculated orn the original subloan amount.

ProjectDescription: The project has the specific objectives oft (a) supporting

BRI's efforts to esvelop the Unit Desa (sub-branch) systeminto a financially viable network that is able to providecredit on a nonsubsidized basis to all creditworthy smallborrowers, to molilize savings and to provide other bankingservices; (b, facouraging BRI to improve its resourcemobilization efforts so that it could eventually fundKUPEDES loans out of deposits it raises (KUPEDES is a smallcredit program operated by BRI through the Unit Desasystem); (c) reducing BRI's reliance on SI liquidity creditsfor the KUPEDES program; and (d) improving the overallinstitutional :apability of BRI as well as for the KUPEDESprogram.

The project consists of two components: (a) a creditcomponent for general purpose financing in all sectors. Atotal of US$100.0 million of the proposed Bank loan would befor KUPEDES lending so as to eliminate BRI's reliance onBank Indonesia (BI) liquidity credits and to enable suchscarce resources to be used for other priority developmentprojects given Indonesia's severe financial constraints; and

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(b) a technical assistance component to assist B31 inimproving its institutional capability as it relates to theKEPEDES program. A total of US$1.5 million of the proposedBank loan would complement an ongoing USAID technicalassistance package (US$10.0 million).

The project provides support to a market rate-based creditscheme designed to meet the needs of small borrowers. Themajor project risks are a deterioration in the KUPEDES loanportfolio and bureaucratization of the credit procets (e.g.,introduction of lending targets). Being conscious of theserisks, BRI is taking concrete steps towards developing acomprehensive training prograw for staff and is institutingimprovements in internal controls and monitoring of UnitDesa performance.

Estimated Costs: Local Total…(US mlon) ----

Total KUPEDES LoanDisbursements 1,006.2 100.0 1,106.2

Total Technical Assistanceand Training 8.2 11.5 19.7

Total Project Cost 1,014.4 111.5 1,125.9

Financing Plan:

IBRD Loan (first generation funds) - 101.5 101.5Incremental Unit Desa savingsmobilization 69.0 - 69.0

USAID Technical Assistance Loan - 10.0 10.0GOI/BRI 19.7 - 19.7Repayments of previous KUPEDES loans 925.7 - 925.7

Total Financing 1,014.4 111.5 1,125.9

EstimatedDisbursements:

Bank FY 1988 1989 1990 1991 1992__ _ (US$ mln) … ----- ___

Annual 15.3 25.7 35.5 18.0 7.0Cumulative 15.3 41.0 76.5 94.5 101.5

Rate of Return: Not applicable.

INDONESIA

BRI/KUPEDES SMALL CREDIT PROJECT

I. SECTORAL ASPECTS

1.1 Background. Indonesia's economic performance has been seriouslyaffected by the weakness in the oil market since 1982 and particularly by theprecipitous decline in oil prices in 1986. Net oil/LNG export earnings fellfrom an estimated $6 billion in 1985/86 to about $2 billion in 1986/87. Theoverall terms of trade declined by about 35% durin; the year. These develop-mnts led the Government of Indonesia (GOI) to implement a comprehensive setof measures to stabilize the economy. It adopted an austere budget for1986/87, reduced the development expenditure budget by 24Z, and introduced anumber of steps to liberalize the trade regime and to spur nonoil exportgrowth. On September 12, 1986, GOI also devalued the rupiah bv 31% (IMFmethod) and has since initiated steps to contain the concomita.it impact whichsuch a devaluation would otherwise have on inflation. Further, the recentlyannounced budget for 1987/88 is also very austere.

1.2 Indonesia's medium-term prospects are likely to continue to be con-strained by balance of payments difficulties. The need to raise moreresources domestically, and to enhance the efficiency of the utilization ofscarce resources, therefore becomes more acute. Improvement in the financialintermeliation process is an essential element in the effort to increase themobilization of domestic savings and to enhance the effic.ency of resourceuse, This is a challenging task, yarticularly in a large. country likeIndonesia where the rural sector - represents some 80% of the totalpopulation, 50% of the gross domestic product (GDP) and nearly 60% of totalemployment. The proposed project provides support to GOI in meeting thischallenge.

A. The Financial Sector

Level of Development and Scope for Financial Deepening

1.3 The Indonesian financial system is still at an early stage of devel-opment. The ratio of broad money to GNP is about 19.5%, low compared to thosein Malaysia (58.51), Thailand (50.6%) and Korea (35.2%). The share of timeand savings deposits to total deposits is about 66%, significantly less thanin Malaysia (80.91), Thailand (93.8%) and Korea (81.3%). Long-term financialassets in Indonesia are less than 10% of total assets. Access to bankinginstitutions is limited, particularly in rural areas. There is, therefore,

1/ For the sake of convenience the definition of "rural" throughout thisreport includes provincial towns and cities. Although they might other-wise be considered "urban" they are included because of the underdevel-oped nature of financial institutions at this level.

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considerable scope for increasing financial savings and improving financialintermediation.

1.4 Expenditure surveys and related data show a high savings propensity(about 20% of household income) in rural areas, with savings concentrated inthe top income quartile. Despite this, financial savings are low. As aresult of the low level of financial development, rural households often holdtheir savings in nonfinancial assets, ranging from paddy stocks to jewelry toland. Limited access to banking institutions has been one main reason limit-ing the amount of finance that enters the formal financial system.

Institutional Framework

1.5 The Indonesian financial sector comprises a banking system with theCentral Bank, Bank Indonesia (BI), at the apex, five state-owned commercialbanks, 79 private national commercial banks, 10 foreign banks, a state devel-opuent bank (Bank Pembangunan Indonesia--BAPINDO), 26 regional developmentbanks (RDBs) and three nonbank financial institutions principally engaged inmedium- and long-term lending and equity participation. A capital market hasalso begun to develop. It remains very small and only a few companies havegone public. There is little activity in bonds.

1.6 BI has played a particularly important role in Indonesia's financialsystem, far exceeding that of most other central banks. In addition to normalcentral banking functions, BI has traditionally lent directly to publicenterprises for certain large-scale investments and indirectly to priorityeconomic sectors through special rediscount facilities ("liquidity credits"),which are funded out of nLew money and government deposits. BI has been theprimary source of funds for the private sector (particularly for small-scaleborrowers), providing 30% of 'he total private sector credit and nearly 60% oflong-term private sector credit. As a result of the ongoing financial sectorreforms (paras. 1.11-1.15), in the long run BI is expected to concentrate onits central banking functions, particularly in the areas of financial andmonetary policy formulation and bank supervision, with a smaller role relativeto what it has done so far in direct banking activities.

1.7 The five state commercial banks,2/ one of which is Bank RakyatIndonesia (BRI), the beneficiary of the proposed Bank loan, dominate the com-mercial banking system. They control almost 40% of total bank assets (BIaccounts for 42%) and for about 70% of the total assets of the deposit moneybanks. The original mandate of these banks called for sectoral specializa-tion. In practice, the diversification of GOI-sponsored official developmentand credit programs, funded out of BI liquidity credits and for which thesebanks have been the major channels, have blurred sectoral distinctions. It is

2/ These are Bank Dagang Negara (BDN), Bank Negara Indonesia 1946 (BNI1946), Bank Rakyat Indonesia (BRI), Bank Ekspor Impor International(BEII) and Bank Bumi Daya (BBD). BDN, BNI 1946 and BRI are participatingin the Bank's Export Development Project--Ln. 2'02-IND (President'sReport No. P-4308-IND).

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expected that, in future, the subsidy-based, official development creditprograms funded out of liquidity credits will constitute a smaller proportionof these banks' activity. Thia trend was hastened by the 1983 financial sec-tor reforms (para. 1.11). Since then, the state banks have become much moreactive in resource mobilization, with time deposits increasing from Rp 2.1trillion in 1983 to Rp 5.2 trillion at the end of 1985. One of the statebanks' greatest challenges is to reduce thuir costs of financialintermediation which average around 7% of total assets. These relatively highcosts are due to overstaffing, large loan losses, the large number of smallloans and a low degree of automation. Most of the banks are now implementingaction plans to modernize their organization, information and accountingsystems, and to increase efficiency.

1.8 Private banks represent the fastest growing segment of deposit moneybanks, having aggressively expanded their share of total bank credits fromabout 10X at the end of 1983 to approximately 20% by June 1986. They alsoaccount for almost 30% of all time and savings deposits. Despit. their rapidgrowth and profitability, the private banks tend to concentrate on short-termworking capital loans to major clients, and still operate almost exclusivelyin urban areas.

1.9 In addition to BAPINDO and the three national nonbank term lendinginstitutions, there are the RDBs which, alLhough designated as developmentbanks, have concentrated on providing commercial banking services andtreasury-type functions to regional governments. The quality of these banksvaries widely. In general, they require considerable strengtheuing to enablethem to play a greater role in meeting the demand for financial services intheir respective regions.

1.10 There are also a multitude of secondary banks (including fourprivate and one state-owned savings banks), 156 market banks, over 3,500village banks, over 2,000 paddy banks and many other semifQrmal financialinstitutions. Although their role at the national level is almost negligiblein terms of resources mobilized, their impact on the specific communities inwhich they operate is very significant.

Financial Sector Reforms and Subsequent Developments

1.11 Until June 1983, the financial system was tightly controlled by theauthorities with GOI channelling its financial savings into the banking systemthrough low-interest, BI liquidity credits in pursuit of a variety of develop-ment objectives. BI set the deposit and lending rates of state banks, estab-lished credit ceilings for all banks, and guided the allocation of creditthrough the liquidity credit mechanism. In June 1983, GOI introduced a majorreform of the financial sector aimed at opening up the economy through stimu-lating private financial savings, improving resource allocation and red-icingthe dependence of the banking system on BI liquidity credits. The state bankswere thus free to set their deposit rates; credit ceilings were eliminated forall banks. In addition, the number of special priority programs qualifyingfor (and the state banks' access to) new BI liquidity credits was substanti-ally reduced. Subsequently, direct BI intervention in the day-to-dayoperation of the state banks 'las reduced significantly and its direct lending

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to q4asi-governmental bodies and state-owned enterprises was replaced bylending through the state banks. As a result Qf the dcregulation, BI wasrequired to replace quantitative gui4elines with market tools for exertingmonetary control.

1.12 These reforms had dramatic impact on the banking system. Nominalinterest rates on deposits paid by the state banks increased from a range of6-122 to a range of 16-18%. There was a rapid rise in state banks' deposits,particularly time deposits. Rupiah time deposits, which had grown at about40% annually between June 1981 and June 1983, leaped by 80% in the yearfollowing liberalization. There was also a shortening of the maturitystructure of rupiah time deposits, reflecting the narrowing of interest ratedifferentials among various deposit categories and heightened expectations ofdevaluation risk. The proportion of deposits with maturities of less than 24months increased sharply, from 59% of total time deposits at the end of 1982,to 93% at the end of 1984, to 93.4% in February 1986. Given these changes inthe cost and structure of funding, the lending rates of state banks alsoincreased and the availability of nonpriority (i.e., non-BI liquidity creditfunded) term loans was drastically curtailed. The nominal lending rates ofstate banks on nonpriority loans rose from about 13% to around 18% for terml-ns and 21% to 24% fo.- workiif capital, representing real interest ratesranging from around 9% to 15Z.3 To some extent, these rates also reflectedthe relatively high intermediation costs of state banks. With the removal ofcredit ceilings, private banks have increased their share of bank credit(para. 1.8) and an active money market has emerged.

1.13 Since June 1983, GOI has also undertaken a number of other measuresto promote further the development of an efficient financial system. Thus, in1984, as part of the thrust to reduce credit subsidies, it encouraged BRI todevelop the Kredit Umum Pedesan (KUPEDES--Village Credit) program, on a marketrate-basis, to replace the subsidized BIMAS credit program and extend theavailability of credit to all small borrowers in rural areas. GOI alsoencouraged BRI to place more emphasis on savings mobilization in these areas.

1.14 More recently, GOI has taken a number of steps to improve corporateaccess to the capital market, particularly by enlarging the list of firmseligible to float securities in the market. In addition, COI is now preparinglegislation to update the legal framework covering the operation of pensionfunds, insurance and banking.

1.15 These changes have been beneficial to the development of thefinancial system, although a number of concerns have emerged. These issues,and possible strategies to deg} with them, form the main focus of the Bank's1985 Financial Sector Report._ The most important issue is the adverse

3/ Inflation in Indonesia averaged about 9% for the period 1983-1986.

4/ Indonesia: Policies and Prospects for Long-Term Financial Development,Report No. 5501-IND, July 1985.

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impact of the increased cost and limited availability of term funds on invest-ment activity. To address this concern, GOI's strategy is to encourage compe-tition in the financial system in order to lower intermediation costs, and tostrengthen the balance of payments position by liberalizing the traderegime. Because of the open capital account, domestic interest rates are notonly determined by international interect rates and domestic inflation butalso by exchange rate expectations. A stronger balance of payments positionwould reduce the speculative premium needed to hold rupiah assets and thusshould lead to lower interest rates. Other issues dealt with in the FinancialSector Report include the need to improve the efficiency of the state banksand to lower their administrative costs, particularly by making them moremarket oriented, and the need to increase domestic resource mobilization.

B. Small-Scale Enterprises and Rural Activities

1.16 Host small-scale economic activities in Indonesia, particularly inrural areas, are undertaken as individual or family enterprises without theuse of hired labor, with the family shifting its labour and working capitalamong various activities to take advantage of opportunities available. Apartfrom agricultural production, these activities include the processing andmarketing of agricultural produce, trade, cottage level industries, and workin private or public construction.

1.17 The most recent data indicate that the total number of small anter-prises, including those engaged in farming, fisheries, forestry and livestock,exceeds 27 million. Most are small, are located in rural areas and employ anaverage of fewer than two persons, often family members. Over a quarter ofthe labor force is self-employed. Small enterprises probably accouint forabout 75Z of total employment in Indonesia, with the majority being engaged inagricultural and trading activities. Small farms produce the bulk of staplefood output and a significant proportion of export crops such as rubber,coffee and pepper. In manufacturing, the contribution of small entrepreneursis greatest in domestic resource-based industries, such as rice milling,bakery products and furniture. Much of the road transport is carried out byindividual private operators. In construction, most projects are also under-taken by small enterpreneurs. Small wholesale and retail traders are essen-tial intermediaries between producers and consumers, financing and holdingstocks of raw materials and finished products. A number of surveys also4.ndicate that small traders have beer. an important source of informal creditin rural areas to farmers who have limited access to formal credit.

1.18 Credit for Small Borrowers. Financial services outside the largecities, especially those for small credit and small savings, are provided by avariety of formal, semiformal and informal financial intermediaries. Ingeneral, the formal intermediaries can be classified as follows:

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Averago loanGeographical focus Type of Program size/range Main features

Village BKK-type rural $40/ No collateral;financial institu- $15-$140 40-65Z interesttions operated rate; savingsby provincial limited.governments

Kecamatan BRI Unit Desas- $250/ Collateral; 2)-31X(Subdistrict) KUPEDES/SIMPEDES $70-$1,230 interest rate;

savings program.

Kabupatan KIK/KMKP $3,150/ Limited colla-(District) $1,230-$18,400 teral; ASKRINDO

ir urance; 12Xi erest rate.

Provincial cit.es Private/state banks $3,500+ Collateral; 20-30% interestrate; varioussavings schemes.

1.19 At the lowest level (by loan amount) are the Badan Kredit Kecamatan(BKK). Each BKK is an independent village credit institution that is locallyadministered and financially autonomous, operating under the iuspices of theprovincial government. The BKKs were started in 1972 in Central Java and havesince been replicated in some other areas. The main characteristics of BKKcredit operations are: little paperwork, no collateral, and reliance on localsocial pressure for repayment; a post system operating at village markets, whichcompensates for the limited mobility of most villagers; and the willingness ofborrowers to pay the high interest rates necessary to cover the costs of such aprogram. BKK loans are very small and finance mostly market traders. Savingsfacilities are usually available only to borrowers. The results of the BKKprogram to date indicate a productive use of assets, a relatively low level ofloan delinquency, and an overall level of profit sufficient to enable the pro-gram to be financially viable.

1.20 At the higher level are two BI programs: the Kredit Investasi Kecil(KIK--small invebtment credit) and the Kredit Modal Kerja Permanen (KMKP--smallworking capital credit). P e Bank has provided a total of $350.65 million insupport of these programs.- The KIK/KMKP programs are subsidized by GOI

6/ Credit 785-IND for $40.00 million; Loan 2011-IND for $106.00 million; andLoan 2430-IND fir $204.65 million.

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through low interest rate funding and liberal insurance provision to thehandling banks. The interest rate to final borrowers on KIK/KHRP loans is 12%p.a. Both programs have as objectives the promotion of small-scale enterprises(SSEs) and more equitable income distribution. KIK/KHKP loans are availablethrough the full service branches of state and of some private banks which areusually located at the district level. As such, KIK/KHKP loans are not readilyavailable to many rural borrowers given the long average distance to the nearestfull-service branch. Also, there is an effective mir.imum loan size of Rp 2 mil-lion. The upper 'Limit is Rp 30 million.

1.21 Although the KIK/KMKP programs have had a positive iyyact in terms ofvalue added and employment creation, the costs have been ;iigh.- Because of theemphadis by the authorities on achieving a high level of disbursement, and theextent of insurance coverage provided by GOI through PT Asuransi KreditIndonesia (ASKRINDO--the state-owned credit insurance company), the handlingbanks (HBs) did not, in general, apply rigorous creditworthiness criteria fortheir selection of clients and, once the loans ran into difficulties, did nothave sufficient inc etives to institute systematic and aggressive loancollection efforts.- The low spread accruing to the HBs also meant that HBshad little intrinsic financial interest in the KIK/KMKP programs. For the samereasons, following the 1983 reforms when BI slackened its pressure for a sus-tained high level of lending, both new approvals (net of refinancings) and loansoutstanding stagnated. The Bank, as part of its supervision effort on SEDP IIIand its ongoing dialogue with GOt on financial sector issues, has been urging arevision of the major parameters of the KIK/KMKP programs, in particular,increasing or.'ending interest rates and modifying credit insurance provisions,on which GOI has not acted. In the interim, the Bank should support other moreeconomically viable programs for small borrowers, such as the KUPEDES program(para. 1.22).

1.22 The KUPEDES credit program initiated by BRI in 1984 is the mostimportant nationwide scheme for small credit below the KIK/KMKP programs. It isoperated through some 2,500 Unit Desas (subdistrict based sub-branches) of BRIand bridges the gap between the services provided by the BKK and the KIK/KMKPprograms. The parameters of the Unit Desa system are established at the lowerend by KUPEDES' minimum loan size, collateral and paperwork requirements, whichexceed those of the BKK, and the distance from many villages to the subdistrict-based Unit Desa. At the upper end, KUPEDES is separated from the KIK/KMKP levelby the long distances to the district level based bank branches which make

7/ The subsidy cost of the KIK/KMKP program for 1985 has been estimated bythe Bank at US$231.4 million. The largest element of this cost was$150.0 million to cover ASKRIND) insurance claims relating to nonpaymentof loans.

8/ Survey evidence suggests that the program was seen by the HBs as a "BI"program with participation being mandatory and justified on the basis ofits "developmental mission" rather than as a program that would beinherently attractive to them. On the borrowers' side, there is evidencethat the program was perceived as one with an associated "grant" element.

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KIK/KMKP loans, the good service records of the Unit Desas and the effectiveminimum loan size for the KIK/KMRP loans. The market for KUPEDES loans isclearly defined and does not overlap with that of the subsidy-based KIK/KMKPprograms (para. 1.20). In addition, the countrywide coverage of the Unit Desasystem and the large asset base 'of BRI mean that there is a tremendous untappedpotential for savings mobilization offered by this network at the small saverlevel. The system also has potential for developing other banking services,e.g., cash transfers and other savings instruments. Moreover, KUPEDES loaninterest rates are not subsidized, and are set at a level to cover intermedia-tion costs and to yield a profit. Experience to date shows that loan collec-tions under KUPEDES are good and that the savings mobilization efforts have beensuccessful. As of June 30, 1986, there were slightly more than 1.1 millionborrowers in the KUPEDES program. About 25% were engaged in agriculture, 2X insmall industry, 72% in trade and processing, with 1% in other activities. Thesecategories, however, are not necessarily representative of loan utilizationsince KUPEDES is a general purpose lending activity. Section IIB of this reportdescribes in detail the development and characteristics of BRI's Unit Desasystem.

C. Bank Objectives, Strategy and Role in the Financial Sector

1.23 The Bank has been assisting GOI in its effort to modernize the economyand position it for long-term growth. The Bank is also supportive of governmentpolicies and programs aimed at promoting improvements in income distribution andpoverty alleviation. Within this broader framework, the Bank objectives in thefinancial sector are to support reforms aimed at increasing resourcemobilization and improving resource allocation. These objectives have beenpursued through a continuing dialogue on macroeconomic and sectoral issues, aswell as through support to specific projects and concomitant policy measures.The proposed project supports a market-based credit program, which also activelypromotes savings mobilization, and provides institution-building assistance toBRI.

1.24 A major thrust of the Bank's recent involvement in the financialsector has been through economic and sector work. The 1985 Financial SectorReport outlines the follow-up needed to complement the 1983 financial sectorreforms, particularly, a further reduction in the scope and extent of thesubsidized BI liquidity credits and an increase in the efficiency of the statebanks to reduce intermediation costs. The design of the proposed project isconsistent with these recommendations in that it envisages the phasing out of BIliquidity credits for the KUPEDES program and complements efforts already under-way, within the context of the SEDP III Project and an ongoing USAID TA project,for improving the efficiency of BRI. Complementary to the proposed project, theBank has initiated a stuly of the numerous rural and agricultural credit schemes(most of which are subsidized by GOI) and related institutions to see how theycould be rationalized, and what measures are necessary to improve resourcemobilization and allocation in the rural sector.

1.25 To date, the Bank Group has provided a total of $837.6 million in 13operations far fi;aancing investment through financial intermediaries. Thesecomprise seven DFI loans/credits, six to BAPINDO ($367.4 million) and two 'o the

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Private Development Finance Company of Indonesia (PDFCI - $25.0 million), threeloans/credits for small enterprise development ($350.7 million), one credit forrural credit ($30.0 million) and one loan for the development of the exportsector ($64.5 million).

1.26 The success in meeting the objectives of the Bank's lending operationsin the sector has been mixed. The most recent Project Performance Audit Report(PPAR) No. 6403, covering the Bank Group's relationship with BAPINDO over theperiod 1979-83, noted that while BAPINDO has made some progress in terms ofinstitutional development, this fell short of mutual expectations and BAPINDOcontinues to face substantial problems. The PPAR made a number of recommenda-tions for improvements. BAPINDO is now undertaking a comprehensive portfolioreview, undertaking a comprehensive reorganization, and strengthening itscapital base through an infusion of equity from GOI. PPAR No. 3862, on thePDFCI project (Ln. 1363-IND), found that while the loan proceeds weretransferred to sound industrial projects, performance on the broaderinstitutional and policy goals was disappointing, largely because of therestrictive overall policy environment in the financial sector prior to the 1983reforms.

1.27 The three Small Enterprise Development Projects (SEDP--Cr. 785-IND,Ln. 2011-IND and Ln. 2430-IND) have substantially been completed. Theseprojects appear to have had a positive impact on employment (at $2,750 ofcapital investment per fulltime job) and income distribution. Their costs,however, have been very high, largely due to a substantial subsidy element(para. 1.21). While GOI has not yet responded to the Bank's advice on changingthe parameters of the KIK/KMKP programs in order to lower the subsidy costinvolved, it has supportea the KUPEDES program which is free from thedistortions affecting KIK/KMKP.

1.28 The lessons learned from these operations will be helpful to theBank's further involvement in the sector. Thus, under the proposed project,funds will be onlent at market rates that will allow the intermediary to earn aprofit if it can maintain sound portfolio quality. Also, there is no targettingof borrowers which could distort the basis for credit decisions by theoperational staff of BRI involved in the lending process.

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II. PRESENT STATUS OF THE BENEFICIARY AND THE KUPEDES PROGRAM

A. Bank Rakyat Indonesia - Institutional Aspects

2.1 Background. BRI has been the main institutional source of ruralcredit in Indonesia. Founded in 1896, it was established in its present formas a fully state-owned bank under Law No. 21 of December 18, 1968. Today, BRIis Indonesia's second largest of the five state-owned banks. As of December 31,1985, it had total assets of Rp 5.68 trillion (US$3.4 billion equivalent). Interms of branch offices and personnel, BRI is the largest with an organizationalnetwork of 15 regional offices, 296 branch offices and 2,510 village units andemploying almost 32,000 people.

2.2 BRI's original statutory mandate calls for it to (i) assist Govern-ment in implementing national agricultural policies and rural developmentprograms; (ii) undertake commercial banking activities, primarily short- andmedium-term lending to farmers, fishermen, small-scale industries and traders;and (iii) supervise secondary rural banks ir accordance with BI directives.In the regulated banking environment that existed up to June 1983, BRI wasthus called upon to act as the ma;n channel for most of the Government-sponsored credit programs for the rural and small-scale sectors. Most ofthese programs were based on BI's subsidized liquidity credits (para. 2.9),and the narrow spreads allowed BRI did not cover its costs relating to theseprograms. Under several of these programs (such as BIMAS), BRI had little orno say in client selection. As a result, BP slowly developed into arelatively bureaucratic and slow-moving institution reliant upon BI for mostof its funding, operating at high costs with little profit (para. 2.10).These policies also led to high loan arrears. Since most program loans wereguaranteed by Government, BRI had little incentive to push loan collectionefforts, particularly since the costs associated with such efforts wererelatively high given the small size of most loans (para. 2.8).

2.3 Strategy Following the June 1983 Reforms. These reforms had pro-found implications for BRI. It was suddenly called upon to mob.lize substan-tial resources directly from the public for lending purposes and to operateprofitably in an increasingly competitive market. BRI's management, under itsnew President-Director, started putting together a strategy which would enableit to effect a turnaround and become a broad-based, sound and comerciallyviable bank. This strategy called for: (a) diversification of income-generating activities to ensure BKT's short-term financial viability; (b) acomprehensive review of its organiz&tion and procedures to improve internalefficiency and productivity; and (c) a product profitability analysis todetermine which activities to pursue, modify or drop so as to maximizeprofitability.

2.4 BRI is well into the process of implementing this strategy. Build-ing on its strong resource base and large branch network, it has diversifiedits clientele to include a number of strong and profitable corporate as wellas Government accounts, such as BULOG (Board of Logistic Affairs) (para. 2.7).It has dropped unprofitable activities (such as BIMAS) and started otherprograms which can be operated profitably on a market basis. Part of this

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effort has been to make its existing Unit Desa system financially viablethrough the introduction of the KUPEDES loan program and the SIMPEDES savingsscheoe.

2.5 Today, BRI can best be described as an organization in the processof fundamental change. While the initiatives of the past three years consti-tute progress in the right direction, the scope for further improvements issubstantial and presents a zormidable challenge to BRI management. The pro-posed project is designed to support and assist BRI in this process.

2.6 Management, Organization and Staffing. With its head office inJakarta, BRI operates an extensive branch and office network reaching down tothe village level. BRI a organizational structure is shown in Chart 1. BRI'sBoard of Managing Directors comprises the President-Director and four ManagingDirectors, all appointed by the Government for five-year renewable terms.BRI's President-Director is a former senior official of BI. The Board isresponsible for implementing the policies set by the Ministry of Finance (MOF)and BI, and is in charge of all aspects of the management of the bank. Agovernment-appointed Board of Supervisors (made up of three members) overseesBRI's Board of Managing Directors. While BRI has a well-structured regionaland branch network, its overall organization procedures and methods need to bemodernized. Hence, under Loan 2430-IND (SEDP III), BRI engaged an experiencedbanking team to: (i) carry out an in-depth evaluation of BRI's organization,operations and product profitability/strategy; and (ii) recommend institu-tional, operational and marketing/strategy changes (including an action planfor implementing these recommendations). This $3.0 million effort started inJuly 1986. Phase 1, an in-depth diagnosis for identifying the main aspects tobe studied, was completed to the satisfaction of BI in December 1986. Phase2. an in-depth review of those specific areas, is expected to be finished bylate 1987. This will be followed by implementation of changes decided upon.

2.7 Financial Condition. BRI's financial position in recent years isgiven in Annex 2, Table 1. During 1981-85, BRI's assets grew at an averageannual rate of almost 312, reaching Rp 5.68 trillion as of December 31985. Much of this growth occurred in 1984 as a result of the BULOC -account being transferred from BI to BRI as the implementing bank: Rp 1.6trillion, or 702 of the Rp 2.3 trillion increase in assets during the year,represented BULOG loans. Adjusting for the extent of BI liquidity funding,BRI's loan-to-deposit ratio in 1985 was about 75X, which is sound. Overall,BRI's asset and liability/equity structures seem reasonably matched. As ofDecember 31, 1985, 80.92 of BRI's assets and 77.92 of its liabilities wereshort-term.

2.8 As shown in Table 2.1 below, loans account for approximately 752 ofBRI's total assets.

I/ Under this program, loans are made to finance working capital needed byBULOG for the buying/stocking/selling of paddy/rice, second crops andhybrid seedlings.

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Table 2.1: SUMKARY OF BRI LENDING AND BOUROWING OPERATIONS, 1981-85(Rp billion)

As of December 31 1981 1982 1983 1984 1985

Total Assets 2,053.0 2,378.3 2,887.2 5,182.1 5,676.1

Total Loan Portfolio /a 1,556.4 1,945.4 2,269.0 3,953.0 4,223.1Of which: Short-term 857.0 1,060.5 1,302.4 3,040.1 3,216.3

Total Liabilities 1,999.3 2,322.6 2,827.9 5,096.8 5,576.8Of which:BI short-term liquidity 284.0 431.4 497.2 2,034.7 1,938.3BI long-term liquidity 453.4 772.5 908.7 952.0 977.6BI long-term loans 68.1 123.6 38.8 38.0 33.4

Subtotal BI 805.5 1,327.5 1,444.7 3,024.7 2,949.3

Customer deposits (of lessthan one-year maturity) 806.3 562.9 945.6 1,559.6 1,875.5

Customer deposits (of morethan one-year maturity) 86.9 119.6 82.0 10.9 39.6

Subtotal deposits 893.2 682.5 1,027.6 1,570.5 1,915.1

Government loans 55.1 63.1 71.2 100.1 104.3

/a Net of provision for bad debts.

As of December 31, 1984, working capital loans accounted for 80% of BRI'sportfolio, with investment loans 16.4% and other loans (primarily to BRIemployees) 3.6%. BRI carries the direct credit risk on only about 40% of itsloan portfolio. The rest (mainly financed out of BI liquidity credits) isguaranteed or insured by GOI (or GOI-owned agencies). Such loans (e.g.,KIK/RKKP) account for most of the nonperforming assets which in 1984 amountedto about 38X of total loans. While this level of nonperforming loans is high,it does not threaten BRI's financial viability given the underlying GOIguarantees. Nevertheless, the effect of this poor portfolio is institution-ally debilitating, particularly on staff morale. BRI is therefore reducingthis type of lending and improving collection efforts. It is also providingadequate provisions and write-offs of delinquent loans for which it bears thedirect credit risk. Thus, in 1985, it made Rp 43.1 billion in provisions andwrote off Rp 32.2 billion. Like the other state banks, BRI's capitalizationlevel is very low with paid-in capital of only Rp 300 million (authorized inthe Law of Establishment of BRI); as of December 31, 1985, retained earningsamounted to Rp 27.3 billion and reserves totaled Rp 72.1 billion (excludingloan loss provisions of Rp 122.2 billion). Since Government appropriates 45%

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of annual net after tax profits, BRI has not been able to build up its capitalbase through profit accumulation. Given its status as a fully government-owned bank, this low level of capitalization has not been a cause for greatconcern. However, since Government intends for the five state-owned comer-cial banks to operate on an increasingly independent and profit-oriented basis(para. 2.3), it is considering, as part of banking reforms currently beingprepared, strengthening the capital base of these banks, including BRI.

2.9 BI liquidity credits have funded an increasingly larger portion ofBRI's total loan portfolio since 1981, although this trend was reversed in1985. BRI has made considerable progress in its efforts to increase customerdeposits, which increased by 50X in 1983 (from Rp 682.5 billion as of December31, 1982, to Rp 1,027.6 billion as of December 31, 1983) and by another 86Zover the next two years (reaching Rp 1,915.1 billion as of December 31, 1985).

2.10 Financial Performance. BRI's income statements for the period1980-85 are summnaLized in Annex 2, Table 2. An overview of BRI's financialperformance is presvented in Table 2.2 as follows.

Table 2.2: INDICATORS OF BRI'S FINANCIAL PERFORMANCE, .981^85

1981 1982 1983 1984 1985

Average Total Assets (Rp billion) 1,762.8 2,215.6 2,632.8 4,034.7 5,429.1

Average Loan Portfolio (Rp billion)1,301.0 1,831.0 2,203.4 3,217.4 4,204.8

Average Borrowings (Rp billion) 1,508.4 1,913.4 2,308.3 3,619.4 4,832.1

As a Z of Average Assets(a) Income from lending 8.7 8.9 9.2 10.0 9.9(b) Other income 1.3 0.9 1.3 1.2 1.2(c) Gross income 10.0 9.8 10.5 11.2 11.1(d) Financial expenses 2.3 2.8 3.6 5.3 5.5(e) Gross spread (c-d) 7.7 7.0 6.9 5.9 5.6(f) Salary and personnel expenses 4.2 3.3 3.7 2.8 2.6(g) Administrative expenses 1.8 1.9 1.8 1.2 1.4(h) Prcvision for bad debts 1.3 1.5 0.8 0.7 0.8(i) Profit before tax 0.4 0.3 0.6 1.2 0.8(j) Net profit 0.2 0.1 0.3 0.8 0.5

Lending MarginTk) Income from lending as Z

of Average Loan Portfolio 11.8 10.7 11.0 12.5 12.8(1) Financial expenses as Z

of Average Borrowings 2.7 3.3 4.1 5.9 6.2(m) Spread on Lending (k-l) 9.1 7.4 6.9 6.6 6.6

Provision for Bad Debts as Zof Outstanding Loan Portfolio 4.3 4.5 4.3 2.7 2.8

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Net profits as a percentage of average total assets in 1984 and 1985 (0.8X and0.51, respectively) improved significantly over the 0.21 and 0.1X registeredfor 1981 and 1982, respectively. However, this improved profitability wasmainly due to non-interest income, su:h as foreign exchange transactions andthe government subsidy for BIMAS losses, and rot to adequate margins on itsloan portfolio which declined from 6.41 of average total assets in 1981 to4.41 in 1985, reflecting the large amount of priority loans on which BRI couldnot adjust its interest rates despite the increase in overall deposit costs.Despite significant success by BRI in reducing high personnel and administra-tive costs (from 6.0X of average total assets in 1981 to 4.01 in 1985), thesecosts need to be further reduced. To increase future profitability, BRI willhave to improve operating efficiencies, expand general lending and move intoother high income areas of banking activity. This is recognized by BRI'smanagement. The KUPEDES lending program, discussed in Section B below, is oneexample of this new direction.

2.11 Project Aid Credits/Loans. Since 1972, BRI has participated innumerous projectr funded by bilateral and international financial institu-tions, especially those related to the agricultural and rural sectors. As ofDecember 31, 1985, the outstanding amount of these loans/credits wasRp 286.9 billion (US$253.9 million equivalent). As shown in Annex 2, Table 3,the Bank Group has provided funds to BRI in the amount of $82.0 millionthrough five credits and two loans; ADB has made eight i?ans in the amount of$106.2 million. Two loans approve4 by the Bank in 1986- will provide another'41.5 million to BRI. In addition, BRI has been a participating bank in theKIK/KMKP programs which have beezt partially financed with World Bank Groupfunds (para. 1.20); over 50% of these funds were channeled through BRI.

B. The BRI Unit Desa System and KUPEDES Program

Background

2.12 In 1970, upon the establishment of BIMAS 3/ as a national program,BR! was asked by Government to establish a Unit Desa (village sub-branch) sys-tem to administer BIMAS credit. The Government provided an administrativesubsidy and later covered the operational losses of the Unit Degas. (Adetailed description of the origin and development of Unit Desas, and theirrelationship to the BIMAS program, is available in the Project File.)

2/ Ln. 2702-IND, Export Development Project, and Ln. 2773-IND, FisheriesSupport Services Project.

3/ The BIMAS program was aimed at improving agricultural production andpractices through the provision of physical inputs, technical assistanceand short-term credit through BRI Unit Desas at an interest rate of 12%p.a. This rate was substantially below market rates. BI/GOI bore up to75Z of the credit risk atid provided an administrative subsidy to BRI tocover the operating costs of the Unit Desas.

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2.13 By 1983, GOI recognized that the BIKAS credit program had outlivedits usefulnss. Costs far exceeded possible benefits (in 1983, lossesamounted to Rp 12.6 billion). With the discontinuation of BIKAS, BRI facedthe choice of either abandoning the Unit Desas (since their operations wouldno longer be subsidized by GOI) or changing their role and function to makethem profitable. BRI chose the latter,course for various reasons. First, theKredit Mini and Kredit Midi programs 4/ had shown that there was a large loandaimand for 8.1 kinds of village entrepreneurial activities. Second, Unit Des&staff had !iready learned how to administer small credit programs; disbandingthe system completely would therefore be wasteful and result in substantialstaff layoffs,

2.14 Thus, with the close assistance of the MOF's Center for PvAicy andImplementation Studies (CPIS), BRI initiated the Kredit Utum Pedasan(KUPEDES), a new general-purpose credit program, as the main credit functionof Unit Desas. The terms and conditions of KUPEDES loans are described inparas. 2.20-2.24. BRI's long-term goal was to develop the Unit Desa systeminto a nationwide Iub-branc% system, integrated within the overall BRI struc-ture, which would be profitable. Each Unit Desa would operate as a profitcenter, making loans and raising deposits, with staff being paid a bonus,based on annual financial results, to encourage good merformance. It was alsodecided that, henceforth, Unit Desas would no longer participate in adminis-tered credit programs. Kredit Mini and Kredit Midi were terminated at the endof 1983, and KUPEDES operations began in February 1984. To help BRI initiateKUPEDES, the Covernment provided a grant of Rp 66.7 billion and MOF directedBI to provide initial liquidity credit of Rp 143 billion (para. 2.28).

Organization

2.15 The Head Office. BRI's Board of Managing Directors is the mainauthority for establishing policy regarding Unit Desa activities. Policydirectives are then communicated from the Board through the regional officesand branches to their respective Unit Desas. In the context of preparationfor the proposed project, BRI prepared a draft Unit Desa Policy Statement anda draft Unit Desa Strategy Statement formally outlining the overall goals andoperational objectives of the Unit Desa system as evolved over the past twoyears. These statements were discussed with the Bank during appraisal and werefinalized at negotiations (Annexes 3 and 4, respectively). The adoption ofthese statements by BRI's Board of Managing Directors is a condition of loaneffectiveness. It was further agreed that neither the Policy Statement northe Strategy Statement would be amended in a material way without prioragreement of the Bank (para. 4.3).

2.16 Since February 1986, overall responsibility for Unit Desa operationsrests with the Village Unit Development Division (PUD) that was created within

4/ Established in 1973 and 1979, respectively, these programs made creditavailable to small borrowers outside of the BIMAS program, primarily foroff-farm economic activities. Under Kredit Mini, the loan ceiling wasRp 200,000; under Kredit Midi, the maximum loan limit was Rp S00,000.

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the Cooperatives, Farmers and Fishermen Credit Department (KTN). Also, toensure coordination of policy matters affecting the Unit Degas, a workingcommittee has been established. It is chaired by the President-Director ofBRI with the Chief of KTN as its secretary and includes the heads of eightdepartments. This arrangement for coordinating Unit Desa operations issatisfactory.

2.17 Management information is primarily relayed through standardizedreports. In addition, the MOF's CPIS consolidates and analyzes information onoutstanding loans, disbursements, delinquencies and write-offs. Rural creditexperts within the CPIS have also helped to design a system for preparingmonthly financial statements that consolidate information received from theUnit Desas. These functions were assumed by PUD at the end of 1986. Inaddition, the PUD will also be responsible for instituting a more efficientmonitoring system. Financing has been approved out of the aforesaid USAID TAproject to strengthen the capacity of the PUD to undertake these tasks.

2.18 Regional. and Branch Offices. The regional and branch offices play amajor role in supervising and monitoring Unit Desa operations. The regionaloffices oversee the operations of the branches. Typically, a regional officeis responsible for about 10-15 brAnches. Branch offices have the primaryresponsibility for monitoring and supervision of day-to-day Unit Desa activi-ties. Branch offices consolidate financial information on their respectiveUnit Desas. Each branch has supervisory staff whose exclusive job is to visitand monitor Unit Desa operations, cash balances and financial controls. Mostanalyses of Unit Desa performance are undertaken at the branch level, althoughthe Unit Desa itself collects data and summarizes it in monthly reports. Therecent introduction of computers in PUD is expected to help staff analyze dataon a national, regional, and branch level more efficiently. BRI also plans tostudy the possible computerization of field offices. Overall, the presentinformation system for Unit Desa operations is adequate and should beconsiderably improved once new systems, nnw being prepared, come on stream.

2.19 The Unit Desa. Each BRI Unit Dcsa is staffed by four persons,including a Manager, a Loan Officer, a Bookkeeper and a Cashier. There arenow some 2,510 Unit Desas with total employees numbering 12,735. The typicalUnit Desa employee is a high school graduate with three to five years'experience with BRI. While Unit Desa staff are generally quite competent, BRIconsiders that additional training is necessary to enable the system to meetthe expanding demands for credit, savings and other banking services.

Scope and Terms of KUPEDES Lending

2.20 Eligibility. KUPEDES loans are made directly to individuals, notthrough groups as was the case in the BIMAS programs. The main criterion forlending decisions is the creditworthiness of the borrower. Initially, KUPEDESloans were exclusively for directly productive activities. Fixed incomeearners, without s'ch activities, were not eligible for such loans. InNovember 1986, BRI widened the scope of the KUPEDES program to include loansfor purposes other than directly productive activities in order to meet thedemand for such credit, a demand which is being largely met by the informalcredit market. However, to ensure that the preponderant emphasis remains on

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financing entrepreneurial activities, BRI agreed, at negotiations, to includein its Unit Desa Policy Statement a declaration that new loans for purposesother than directly productive activities would not exceed 5X of new loanapprovals.

2.21 BRI requires borrowers to provide proof of income sources and/or acertification of their business activities. Most rural families engage in anumber of different activities, including agriculture, trading, cottageindustry, etc., depending on the time of year. The borrower will list oneactivity as the purpose for the loan. The purpose of most loans (around 70X)is stated as trading, often related to basic consumer goods. The Unit Desastaff review the cash flow from that activity and select an appropriaterepayment schedule. Where the borrower is engaged in several activities, theloan application is evaluated on the basis of that which has a regular cashflow. All applications for loans require a cosigner who is normally theapplicant's spouse.

2.22 Loan Size. The minimum size KUPEDES loan is Rp 25,000. Inpractice, few loans of less than Rp 100,000 have been made. The maximumKUPEDES loan amouni, which was raised in April 1986 from Rp 1 million to Rp 2million, is generally available only to repeat customers who have promptly andfully repaid previous loans.

2.23 Collateral. All borrowers must provide collateral sufficient tocover the value of their loans. While land, buildings or any other propertymay be accepted, most borrowers use land. A borrower is classified on thebasis of his repayment record, and this establishes the person's limit forsubsequent loans. Since the legal system for realizing collateral in case ofloan default is long and complicated, the documentation of collateral for eachloan is more for the purpose of establishing the borrower's ability andserious intent to repay than it is to provide a basis for legal action.

2.24 Repayment Schedules. Repayment schedules for working capital loansrange from three to 24 months, with or without grace periods of three to ninemonths. Single balloon payments for three- to 12-month maturities are alsoavailable. Repayment schedules for loans for investment purposes range up toa maximum term of 36 months, including grace periods.

2.25 Interest Rates. The approach to setting interest rates for KUPEOESloans is different from that in previous official credit programs for smallborrowers where the focus was to provide credit to the subborrowers at anominally cheap rate. With KUPEDES, the emphasis is on (a) prompt delivery ofcredit, and (b) ensuring the soundness of the financial intermediary. Theunderlying assumption is that for small borrowers, access to credit is moreimportant than the interest rates involved. This basic rationale and thedecision to move gradually away from subsidized GOI funded credit programs,meant that BRI had to: (a) set deposit rates sufficiently high to ettractsavings; and (b) set lending rates sufficiently high to cover its funding anJoperating costs, and yet earn a reasonable profit. In establishing onlendinginterest rates, BRI and the CPIS based their calculations on the need toensure that the Unit Desa system would break even with about Rp 200 billion inloans outstanding. On this basis, BRI set an onlending rate of 1.5% per month

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for working capital loans, calculated on the original loan amounts, and 11 permonth for investment loans, similarly calculated. Thip,differential wasconsidered necessary to encourage investment activity. / Thees rates stillapply. During negotiations, it was agreed that modification of this interestrate structure would be made only after consultation with the Bank(para. 4.1). Since onlending rates are stated in terms of interest on theoriginal amount borrowed rather thtn on the declining talance, the effectiveannual interest roes are 31.7Z for working capital loans and 21.5Z forinvestment loans._ While these rates are admittedly higher than currentmarket (effective) rates for larger loans (which range from 17X to 221), theycompare favorably to rates charged by other lenders to smaller borrowers(including BKK, private banks and local money lenders). In addition to theseinterest rates, there is a penalty charge of 0.51 per month (also calculatedon original loan amounts) collected monthly for failure to pay loan install-ments on time. This is returned to borrowers who have paid all installmentson time.

KUPEDES Lending Operations

2.26 Volume of Lending. During the period February 1984 to June 1986,total KUPEDES disbursements 7/ amounted to Rp 719.9 billion; loans outstandingas of June 30, 19b6, were Rp 285.1 billion. The total number of loans madeduring this same period was 2.2 million (Annex 5, Table 1). KUPEDES lending,on an average quarterly bais, is summarized in Table 2.3 below.

Table 2.3: AVERAGE QUARTERLY KUPEDES DISBURSEMENTS

January-June1984 1985 1986

Loan disbursements 41.1 83.8 110.2(in Rp billion)

Number of loans ('000) 159.8 248.0 286.0

5/ To ensure that Unit Desa staff are neutral in deciding between workingcapital and investment loans, BRI introduced an internal transfer pricesystem for funds used for investment purposes (para. 2.30) so that thespread to the Unit Desas on both types of loans is similar.

6/ For loans with grace periods, the effective interest rate is keptbasically the same: as for the standard one-year loan with no graceperiod.

7/ In KUPEDES, approvals and disbursements are treated synonymously.

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On an average quarterly basis, disbursewnt incresed by 104S during 193b(over 1984), while growth for 1986 (based on disbursement for the first sizmonths) wya a more modest 322. In terms of number of loans, the increase ingrowth in 1985 registered 551, declining to 151 (based on the first sixmonths) for 1986.

Characteristics of KUPEDES Lending

2.27 Since the introduction of the KUPEDES scheme, data generated by theSRI and statistics from a number of surveys undertaken by CPIS provide thefollowing characteristics of KUPIDES loans.

(a) Type of Loans. As of June 30, 1986, 93Z of loans outstanding repre-sented working capital loans. It is not clear why investment loansdo not comprise a larger portion of the KUPEDES portfolio. Consid-ering the desirability of encouraging investment for productivepurposes, BRI agreed during appraisal that one study which would beundertaken by the Research and Planning Division is the identifica-tion of measures (other than arbitrary targets or quotas, whichwould adversely affect the neutrality of Unit Desa staff in makingcredit decisions) which may be needed to induce greater demand forKUPEDES loans for investment purposes. At negotiations, BRI agreedto furnish the results of this study to the Bank by March 31, 1988,and to prepare a plan of action by June 30, 1988, acceptable to theBank, for implementing the recommendations of this report.

(b) Average Size and Maturity. As indicated in Table 2.3 above, theaverage size of KUPEDES loans remains relatively small, havingincreased from Rp 257,000 in 1984 to Rp 338,000 in 1985 toRp 385,000 during the first six months of 1986. Survey data showsthat less than 15X of KUPEDES loans are larger than Rp 500,000,while only about 5X are less than Rp 100,000. During the periodJanuary-June 1986, survey findirgs show that, in terms of maturity,12-month working capital loans accounted for 571 of loans made bynnmber, and 45Z by amcunt extended. Eighteen- and 24-month workingcapital loans accounted for another 161 and 141, respectivelyt bynumber, and 182 and 211, respectively, by amount.

(c) Geographic Distribution. As of June 30, 1986, 752 of KUPEDES out-standing loan portfolio was concentrated in Java. This reflects thefact that approximately 622 of Indonesia's population lives on Javaand that the level of economic activity that is relatively higherthan in other islands. While 641 of total BRI Unit Desas arelocated in Java, BRI has Unit Desas operating in 14 of the 15provinces in which it has branches.

(d) Access of Woman to KUPEDES loans. From sample surveys, BRI hasfound that approximately one-fourth of all borrowers and three-fourths of all cosigners are women. This evidence supports thethesis that most KUPEDES loans a,near to benefit family unit, (para.2.20). Under the proposed project, monitoring and evaluati n datawould be disaggregated as to gender in order to measure atr evaluatethe particpation of women in the KUPEDES program.

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Funding of Unit Desas and Resource Mobilization

2.28 KUPEDES loans are funded out of three sources: BRI equity allocatedto Unit Desa activities, BI liquidity credits, and savings mobilization:

(a) Equity. This consists of the proceeds of a Government grant to BRIfor the Kredit Mini program for Rp 66.7 billion which in 1984 wasreallocated to funding KUPEDES loans. BRI distributed this grantequally among the Unit Desas as "an equity contribution" ofRp 19.0 million each.

(b) Liquidity Credit from BI. This consists of: (i) the conversion ofRp 43.0 billion originally made for the purpose of funding theKredit Midi program; (ii) the initial Rp 100 billion of liquiditycredit available to BRI for KUPEDES; and (iii) additional liquiditymade available by BI once KUPEDES loan outstanding reachedRp 250 billion, on the basis of Rp 50 billion in liquidity creditfor each Rp 75 billion increase in KUPEDES lending outstanding.Under this formula, BRI was comitted to providing at least one-third of the incremental resource requirements for KUPEDES out ofits own funds. The interest rate on BI liquidity funds was 15%i.e., the average rate payable by state banks on deposits),excepting amounts utilized for investment purposes where the ratewould be 3%. Since a working capital/investment blend of 75/25 wasassumed, BI charged BRI 12% (the average rate) for the sake ofconvenience with an understanding that there would be an adjustmentat a later stage. However, both BRI and BI have now agreed on asingle consolidated rate of 12% on the full amount of the liquiditycredits (para. 3.5).

(c) Savings Mobilization by the Unit Desas. The Unit Desas provide twomajor savings instruments: TABANAS and SIMPEDES. Tabungan Nasional(Small Savings--TABANAS) is a national savings scheme sponsored byBI and available to depositors in all banks, both state and private.The interest rate is 15% on the minimum monthly balance up toRp 1 million and 12Z for higher amounts. Under TABANAS, withdrawalsare restricted to two per month. Simpanan Pedesan (Village SavingsProgram--SIMPEDES) is a new savings instrument introduced by BRIthrough the Unit Desas. During an 18-month trial period, SIMPEDESwas tested in a two-phase pilot project and expanded nationwide inAugust 1986. SIMPEDES interest rates, calculated on the basis ofminimum monthly balances, are 0% on balances of less than Rp 25,000,9% on balances from Rp 25,000 to Rp 200,000, and 12% on talancesabove Rp 200,000. The saver is permitted unlimited withdrawals.This is considered the key factor behind the success of the program,although experience to date shows very few people actually making

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two or more withdrawals in a single month. Associated with theSIMPEDES program is a lottery system for prizes. In addition toTABANAS and SIMPEDES accounts, Unit Dess offer time deposits withmaturities ranging from three months to one year and checking (Giro)accounts, which are held primarily by local government agencies.

As of June 30, 1986, these resources in the Unit Desa system amounted toRp 343.0 billion as follows:

Resource Rp (billion)

[redit Mini (Equity) Grant 66.7Converted Kredit Midi 32.7BI Liquidity Credit 150.0TABANAS (Unit Desas only) 63.3SIMPEDES 15.5Deposits and Giro 14.8

Total 343.0

Unit Desa Administration and Financial Operations

2.29 Until 1984, the Unit Degas operated as windows of BRI branchoffices. For BRI to turn the Unit Desas into separate financial entities thatwould operate as profit centers, it needed to set up s-stems to enable them tofund their operations and to identify their respective costs and profits.This entailed: (a) reconstruction of each Unit Desas's financial statements;(b) setting up a mechanism to enable each Unit Desa to fund its loanoperations, irrespective of the amount of deposits it could raise; (c) amechanism to allow the Unit Desa to invest excess funds; and (d) allocating aspart of the Unit Desa's overhead costs the branch's cost of supervising it.

2.30 In reconstructing the financial positions of each Unit Des&, allBIMAS assets and liabilities were transferred from the Unit Desa books to therespective branches, white Kredif Mini and Kredit Midi assets were left withthe Unit Desas and Rp 19.0 million in equity was allocated to each Unit Desa(para. 2.28). Also, Unit Desas were required in future to set up reserve forbad debt equal to the total amount of loans more than three months overduefrom the final loan payment date. Recently, this rule has been modified.While it will apply for setting aside provisions for Kredits Mini and Midi,the reserve for bad debt for KUPEDES loans must be kept equal to either loansmore than three mopths overdue or 2.5% of loans outstanding, whichever isgreater. In addition, loans one year overdue are to be written off, althoughloan collection efforts relating to such loans would continue.

2.31 Additional funds required by a Unit Desa for lending purposes beyondits equity (Rp 19 million) and the deposits it was able to raise, could beborrowed from the branch at an interest rate of 15% for working capital and at3% for investment loans. Recently, these rates were increased to 17% and 5%,respectively, with the objective of encouraging the Unit Desas to mobilizesavings. (The 2% spread to the branches resulting from this modification in

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the onlending rates to Unit Desas is placed in a Unit Desa Development Fund.The fund is used to finance expenses related to overall Unit Desa programssuch as training.) If a Unit Desa raises more deposits thin it can lend out,the excess funds can be depo ited in the branch at an interest rate of 17X(the extra 22 above the 15% 'ABANAS rate is drawn by the branch from the UnitDesa Development Fund). This provision gives Unit Desas an extra incentive toraise savings, and protects "net savings" Unit Desas from automaticallyincurring losses. Thus, the system has a built-in mechanism to encourage sav-ings mobilization (deposits are cheaper than borrowed funds); at the sametime, those units whose savings exceed loan demand are not penalized for suc-cessfully mobilizing resources.

2.32 BRI Auditing and Internal Control. BRI staff involved in internalauditing total approximately 68C persons with 110 persons at the head officeand 570 in the regional offices. At the regional office, auditing is per-formed by teams normally consisting of five persons each. Team assignmentsare rotated at least twice a year. Priority is normally given to audit ofbranch operations, but audit teams try to visit each Unit Desa at least twicea year. This is not always possible, however, and audit team visits toindividual Unit Desas are generally infrequent. Therefore, the financialreview and supervision of Unit Desas is mainly performed by the branch manage-ment. In some isolated Unit Desas, cash reconciliation and other routinefinancial control checks are accomplished only on a weekly basis. BRI'smanagement is most concerned to improve the capability of its staffresponsible for supervising Unit Desa activity. The proposed project includesassistance to BRI for this purpose. In addition, financial controlshortcomings are being addressed through the USAID TA project (para. 3.7).The plan of action in this regard was reviewed by the Bank and is consideredappropriate. External auditing at BRI is performed by the Government's Agencyfor Financial and Development Supervision (BPKP). BPKP's audit teams visitall BRI regional and branch offices but only audit Unit Deias on a samplebasis.

Financial Position and Performance of Unit Desas

2.33 Financial Position. The Unit Deuas' financial position over thepast two and one-half years is presented in Annex 5, Table 2. BetweenMarch 31, 1984, and June 30, 1986, total assets increased from Rp 178.8 bil-lion to Rp 358.7 billion, growing at an annual rate of 68.1X in 1985 and 38.8%(on an annualized basis) in 1986. KUPEDES loans, which represented 622 oftotal assets as of year-end 1984, accounted for 76% and 79% of total assets asof December 31, 1985, and June 30, 1986, respectively. Cash in the branches,Unit Desas' surplus loanable funds, has steadily declined (as a percentage oftotal assets) during the same period: from 272 to 211 to 17%. On the lia-bilities side, TABANAS and SIMPEDES savings have increased twofold betweenDecember 31, 1984, and June 30, 1986, from Rp 38.6 billion to Rp 78.9 bil-lion. Despite this success, however, the increase in the KUPEDES portfoliohas outpaced the increase in savings, and BRI needs to rely on external (i.e.,outside of BRI) resources to meet KUPEDES loan demand, at least for the periodcovered by this project (para. 3.4).

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2.34 Financial Performance. There has been steady improvement in theUnit Desas profitability (Annex 5, Table 3). After losses of Rp 25.0 billionfor 1984 and lp 0.9 billion for 1985, the Unit Desas registered a profit ofRp 4.8 billion for the first half of 1986, a return on average total assets(annualized) of 2.91. Other financial indicators for the Unit Desa systemduring the first 30 months of KUPEDES operations are sumarized in Table 2.4below.

Table 2.4: INDICATORS OF UNIT DESAS' FINANCIAL PERFORMANCE,1984-JUNE 30, 1986

19861984 1985 Jan-June /a

Average Total Assets (Rp billion) 89.4 239.6 329.6

Average Loan Portfolio (Rp billion) 69.0 191.8 273.1

Average Borrowings (Rp billion) 62.5 176.1 253.7

As a X of Average Assetsa) Income from lending /b 20.4 20.8 23.6(b) Other income /c 4.9 3.7 2.5(c) Gross income 25.3 24.5 26.1(d) Financial expenses 4.9 8.2 9.2(e) Gross spread (c-d) 20.4 16.3 16.9(f) Salary and personnel expenses 34.0 13.8 11.3(g) Administrative expenses 4.9 1.8 2.0(h) Provision for bad debt 9.4 1.0 0.7(i) Profit/loss /d (28.0) (0.4) 2.9

Lending Kargini TIncome from lending as S of

Average Loan Portfolio 26.5 25.9 28.5(k) Financial expenses as X of

Average Borrowings 7.0 11.2 11.9(1) Spread on lending (j-k) 19.4 14.7 16.6

Provision for Bad Debt as Xof Outstanding Loan Portfolio 6.7 4.3 3.7

Salary and Personnel Expensesas x of Average Loan Portfolio 44.1 17.3 13.6

/a Annualized.Th Income adjusted to exclude IPTW reserve expense.71 Includes interest on Unit Desa cash deposits in the branches.71 Before taxes. Unit Desa annual profits (losses) are appropriated by BRI.

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An adequate lending spread and control of personnel expenses were the keyfactors enabling the Unit Desas to reach a position of profitability. In1984, personnel accounted for 59% of total expenses (including financial). In1985, the increase in personnel expenses was kept below 10, while personnelexpenses as a percentage of total expenses fell to 45X. For the first half of1986, personnel expenses increased by approximately 12! (on an annualizedbasis), while as a percentage of totel expenses, they fell to 38Z.

2.35 Quality of Portfolio. The success of the KUPEDES program to date isfurther evidenced by a very satisfactory collection performance and lowarrears. As of June 30, 1986, only Rp 10.3 billion, or 3.6X of the KUPEDESoutstanding portfolio, was in arrears (Annex 5, Table 4), with arrears definedas any payment of principal overdue by one day or more. As of June 30, 1986,only Rp 2.7 billion, or less than 1X of the outstanding portfolio, was inarrears of more than one day beyond final installment due dates. For theremaining Rp 7.6 billion classified as arrears, however, there is no detailedaging classification.

2.36 Measures to Prevent Deterioration in Portfolio Performance. Much ofthe Unit Desas' success in keeping KUPEDES loan arrears low is the result offinancially prudent lending procedures, close follow-up of borrowers, andclose monitoring by the branches and senior BRI management. However, arrearshave been creeping upwards, from 0.5! of the outstanding portfolio as ofDecember 31, 1984, to 3.6! as of June 30, 1986. While still low, BRImanagement is most concerned to ensure that this trend is halted and thatapart from stressing increased supervision by the branches, it is also takinga number of initiatives to ensure a sustained high level of loan collec-tions. These are:

(a) Since BRI Unit Desa staff are paid bonuses of up to one month whichare directly related to the financial performance of the Unit, anincrease in arrears, which would result in an increase inprovisions, would negatively impact on profitability and, hence, theamount of the bonus for which they would qualify. Thus, as of theend of 1986, each Unit Desa is required to maintain as provision ofbad debts the larger of (i) 2.5% of the outstanding KUPEDESportfolio, or (ii) the amount of principal three or more monthsoverdue after the final installment due date. Principal more thanone year overdue after the final installment due dates must bewritten off;

(b) Introduction of new portfolio performance measures which wouldbetter identify trends in arrears. For logistical reasons, it maytake some time to introduce these measures to the 2,500 Unit Desassince it is first necessary to ensure the present systems andinformation requirements are fully understood by all Unit Desa staffbefore changes are made. Adequate training must be arranged for allstaff prior to the introduction of new procedures and information.Training for Unit Desa staff is being addressed under the USAIDsupported technical assistance program;

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(c) BRI head office is also reviewing the results of a number of proce-dures currently being used by different branches in dealing withproblem arrears (e.g., mandatory cessation of lending to newclients, but not to those who have promptly paid back previousloans, for all Unit Desas with arrears in excess of a specificlevel, e.g., 5Z). It is expected that the most successful of thesewould be adopted as standard operating guidelines for the entireUnit Desas system; and

(d) BRI's head office is also actively studying other aspects related tothe arrears problem. A recent survey was conducted to identify theprofile of clients who are most likely to default. Also, a recentsurvey indicated that 50% of all arrears are concentrated in 22 ofthe 296 branches. BRI has formed special teams from the head officeand the regional offices to identify lessons learned.

2.37 This shows BRI to be very active and motivated in ensuring that theexperience of high arrearages under previous credit programs is notrepeated. To enable the Bank to provide timely guidance, however, in case ofan unforeseen rapid portfolio deterioration, BRI agreed, at negotiations, toconsult with the Bank and to draw up within three months time a time-boundaction program, acceptable to the Bank, for dealing with arrears once theyreach a level of 8% over a six-month period (para. 4.1). BRI also agreed atnegotiations to add to its Unit Desa Strategy Statement a clause stating thatmaintaining sound portfolio quality would receive management's highestpriority and that arrears (of three months or more past final installment duedate) of 6% or more would be considered unsatisfactory performance. Shouldthis level of arrears be reached, BRI management would evaluate the overallprogram and organization of the Unit Desas with a view to redesigning ongoingprograms, organization and prccedures to ensure the continued financialviability of the Unit Desa System on an autonomous basis (para. 4.1).

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I;I. THE PROJECT

A. Project Rationale, Objectives and Content

3.1 Project Rationale and Objectives. In accordance with GOI policyreforms to deregulaie the financial system, spur resource mobilization,restrict the scope of BI liquidity credit programs and enhance the access ofcreditworthy small borrowers to credit, the proposed project aims at assistingBRI to strengthen its Unit Desa system through which the KUPEDES program isoperated. As discussed in Section IIB, KUPEDES represents a dramatic depar-ture from the heavily subsidized credit programs that have characterized muchof the lending directed to many sectors in Indonesia, especially to small-scale borrowers. The proposed project has the specific objectives of:(a) promoting BRI's efforts to develop the Unit Desa system into a financial.yviable sub-branch network that is able to provide credit on a nonsubsidizedbasis to all creditworthy small borrowers, to mobilize savings, and to provideother banking services; (b) encouraging BRI to improve its resource mobiliza-tion efforts so that it could eventually fund KUPEDES loans out of the depo-sits it raises; (c) reducing BRI's reliance on BI liquidity credits for theKUPEDES program and thus contributing to a release of such resources forfinancing other high-priority development projects during a time of severefinancial constraints; and (d) improving the overall institutional capabilityof BRI overall as well as for the KUPEDES program.

3.2 Project Content. The project would comprise two components: (a) aUS$100.0 million credit component for general purpose financing in allsectors. This is expected to meet BRI's requirements for funds for KUPEDESloans, other than those which it expects to raise through savings mobiliza-tion, and is equal to the amount of BI liquidity credit that BRI would other-wise require for the period. The component would finance small-scale enter-prises in all sectors including manufacturing, agriculture, trade andservices, and would be committed by the Bank on the basis of the formuladescribed in para. 3.11; and (b) a technical assistance component (includingtraining) aimed at strengthening BRI's institutional capability to implementthe KUPEDES program. Bank funds (US$1.5 million) would complement USAIDfinancing for an on-going technical assistance program (para. 3.7) and wouldassist BRI in (i) developing the capacity to design, implement and analyzestudies for monitoring and evaluating systematically the lending and depositmobilization activities of Unit Desas, and (ii) strengthening the capacity ofBRI in supervision, accounting and auditing for activities related to the UnitDesas.

B. Projected Resource Requirements and the Credit Component

3.3 Operational Projections and Resource Requirements. ProjectedKUPEDES lending operations for 1986-90 (Annex 5, Table 5) are based on pastexperience, with future disbursements reflecting the composition of previousKUPEDES loans (by amount and maturity). The projected average annual increasein KUPEDES loans outstanding of Rp 116.0 billion over this five-year period

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appears sustainable. Annual disbursements during 1986-90 are projected toincrease at an average annual rate of slightly less than 272, with the yearlyincrease declining from about 421 in 1986 to 17% in 1990. The portfoliooutstanding would grow at corresponding rates, from Rp 229.0 billion as ofDecember 31, 1985, to Rp 808.1 billion as of December 31, 1990. (As ofJune 30, 1986, the portfolio outstanding was Rp 285.1 billion.)

3.4 As shown in Annex 5, Table 6, BRI will place substantial emphasis onexpanding its resource mobilization efforts through TABANAS and SIMPEDES whichare expected to increase 4.5 times--from Rp 68.7 billion as of December 31,1985, to Rp 310.0 billion by December 31, 1990. As a percentage of the out-standing RUPEDES portfolio, TABANAS and SIMPEDES savings will increasesteadily from 30.0% to 38.41 during this same period. However, despite thesteadily growing impo-tance of this savings mobilization effort. the UnitDesas will continue to need additional resources to meet pr^iected KUPEDESdemand through 1990.

3.5 Under the proposed project, Bank fundb would replace BI liquiditycredit. In order to match Unit Desa system funding requirements more closelywith available funds and to reduce demand on scarce GOI resources, BRI agreedthat: (i) any liquidity credits it drew down afte; March 1, 1987, would berepaid to BI within one year of the date of effectiveness of the proposedloan; and (ii) it would not avail itself of any new liquidity credits as longas there remain undisbursed funds under the credit component of the proposedBank loan. BI and BRI also reached the following agreements regarding theterms on the outstanding liquidity credits (Rp 193 billion): (i) an interestrate of 12%; and (ii) a fixed amortization schedule of 28 equal quarterlypayments (of Rp 6,893 billion) beginning in the first quarter of 1989. Atnegotiations, BRI agreed that these terms would not be amended without theBank's consent.

3.6 Projected Financial Positions and Financial Results. Projected UnitDess income statements and balance sheets for 1986-90 are given in Annex 5,Tables 7 and 8, respectively, while selected ratios of financial performanceare summarized in Table 3.1 below.

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Table 3.1: PROJECTED INDICATORS OF UNIT DESAS' FINANCIAL PERFORMANCE,1986-90

1986 1987 1988 1989 1990

Average Total Assets (Rp billion) 292.6/a 401.7 509.6 619.6 731.9

Average Loan Portfolio(Rp billion) /b 296.1 403.3 519.2 636.7 752.8

Average Borrowings(Rp billion) 249.7 313.5 395.8 483.0 575.6

As a X of Average Assets(a) Income from lending /c 27.8 29.0 29.7 30.0 30.3(b) Other income 0.5 0.4 0.3 0.3 0.3(c) Gross income 28.3 29.4 30.0 30.3 30.6(d) Financial expenses 10.4 10.7 10.8 11.1 11.4(e) Gross spread (c-d) 17.9 18.7 19.2 19.2 19.2(f) Salary and personnel expenses 12.8 10.7 9.7 9.2 8.3(g) Administrative expenses 1.9 1.6 1.7 1.7 1.6(h) Provision for bad debt 4.3 4.2 5.0 4.0 4.3(i) Profit (1.1) 2.2 2.8 4.3 5.0

Lending Margin5jJ Income from lending as X

of Average Loan Portfolio 27.5 28.9 29.2 29.2 29.4(k) Financial expenses as X

of Average Borrowings 12.2 13.7 13.9 14.3 14.5(1) Spread on lending (j-k) 15.3 15.2 15.3 14.9 14.9

Provision for Bad Debts es Zof Outstanding Loan Portfolio 3.3 4.0 5.5 5.5 5.5

Salary and Personnel Expenses 12.7 10.7 9.5 8.9 8.1as Z of Average Loan Portfolio

/a Excluding cash deposits in branches.7i Before provision for bad debts. As such, average KUPEDES loan portfolio

is larger than average assets, since total assets as presented in thebalance sheets are net of provision for bad debts.

/c Income adjusted to exclude IPTW reserve expense.

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Total assets are expected to increase at an annual rate of about 21Z, fromRp 300.5 billion as of December 31, 1985, to Rp 787.7 billion as ofDecember 31, 1990, with the KUPEDES loan portfolio (net of provision for baddebts) accounting for over 952 of total assets. TABANAS and SIMPEDES savingswill account for an increasing proportion of the Unit Desas' total borrowedfunds: from 28.12, as of June 30, 1986, to 49.8X, as of December 31, 1990.While a net loss of Rp 3.3 billion is projected for 1986, this is dueprimarily to BRI's recently introduced policy of requiring a provision for baddebt equivalent to at least 2.5% of KUPEDES loans outstanding at the end of1986, increasing to 5.5% by the end of 1988 (para. 2.30), thus ensuringadequate reserves in case of future deterioration in portfolio quality. Netincome for 1987 is projected at Rp 8.9 billion, increasing to Rp 14.3 billion,Rp 26.5 billion and Rp 36.2 billion in 1988, 1989 and 1990, respectively. As areturn on average assets, the corresponding percentages are 2.22, 2.82, 4.32and 5.02. These projections assumed that, in addition to the 5.52 provisionfor bad loans, 22 of all KUPEDES loans are eventually written off and that a40% increase in staffing will be required. These assumptions appear prudent.

C. Technical Assistance and Training Needs of theUnit Desa System - The TA Component

3.7 While the Unit Desa system has made rapid progress since 1987, thereis still scope for improvements in the overall control and direction of UnitDesa policies and operational guidelines as well as for training of the largenumber of staff involved in Unit Desa activities. BRI has secured assistancefrom USAID in the form of a technical assistance project for this purpose.This project, which was reviewed by the Bank during appraisal and found to becomprehensive and well-conceived, is in its early stages of implementation.This is complemented by the technical assistance component included under theproposed project. The scope of the USAID project and the Bank TA componentare described below.

(a) The USAID Technical Assistance Project. This amounts to US$10.0 andcomplemented by US$8.0 million equivalent in counterpart funds. Theproject focuses on:

(i) Training. BRI's training facilities currently consist of acentral training center with 11 professional staff in Jakartaand 15 regional (provincial) training centers staffed with 60professionals. The Jakarta training center handles trainingfor senior and central BRI staff. The provincial trainingcenters, which have a combined annual capacity of 3,000students, are not adequate to cope with training of over 13,000Unit Desa staff in the various aspects of the KUPEDES creditscheme, the SIMPEDES savings programs, or on operational andaccounting details, as well as in possible new Iroducts,particularly since BRI and USAID estimate that an average ofthree weeks of formal training for all staff over the nextthree years would be needed.

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To support this trainirg, the U3AID assistance includes thefinancing of two long-term policy and training advisors forthree years ($1.6 million) who would develop training materialsand train trainers. The advisors will work with thE BRI train-ing division on all aspects of curriculum development, programadministration and support, and personnel policy. To provideadequate training staff, BRI will recruit 21 new regionaltrainers within BRI.

(ii) The establishment of five regional centers for Unit Desatraining. USAID would finance up to 50S, or $1.7 million, ofthe cost of constructing training centers in Padang,Yogyakarta, Surabaya, Bandung and Ujung Pandang. Whencompleted, these will have the capacity to train effectivelyall 13,000 Unit Desa staff in three years. Until the newbuildings are ready, outside space will be rented. USAID willalso fund 501 of the first year's operating costs for theinitial three-year period, up to $1.5 million.

(iii) Accounting, Automation and Audit. Additional advisory supporton these aspects consisting of 7.5 man-years of technicalassistance ($1.5 million) is also included, as well as up to$2.5 million for financing the purchase of communication andautomation equipment for Unit Desa activities and $1.2 millionfor research on the rural finance sector.

Thus, overall, the USAID projects meets the training requirements ofBRI for Unit Desa staff in respect of training, accounting and MISsystems. Bank supervision missions will periodically obtaininformation on the USAID TA project.

(b) The TA Component Under the Proposed Project. This component (US$1 5million) has two major objectives:

(i) strengthening the capacity of BRI's Research and PlanningDivision to corduct its own evaluation of and special studieson most aspects of Unit Desa activity. The principal functionsof the division, which consists of 47 staff members including12 professionals, are to undertake special studies as requestedby BRI management and to monitor and evaluate operations.Because of the large number of Unit Desas and the high volumeof small operations (both on the credit and on the savingsside), the best way to determine how existing programs arebeing implemented and how to introduce new products or changesin existing ones is through sample surveys. It is, therefore,necessary for BRI to build such a capability in-house. Fundsout of this component would enable BRI to hire a full-timeResearch and Planning Advisor (36 man-months) plus 28 man-months of short-term specialists. The advisor's task would beto transfer to BRI staff the capacity to design, execute andanalyze studies useful to BRI management. At negotiations, BRIprovided to the Bank a shortlist of five candidates for this

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position and agreed to employ the selected candidate byOctober 31, 1987 (para. 4.1). The terms of reference for thisposition are presented in Annex 7. The short-term specialistswould be engaged, as needed, to undertake such studies as: (a)identifying and marketing new banking instruments; (b) design-ing and implementing borrower-level economic impact studies inrural areas; (c) compiling profiles of rural savers andborrowers for marketing purposes; and (d) designing new loansupervision and collection control systems. BRI staff in theResearch and Planning Division would also receive on-the-jobtraining by the full-time advisor and by the specialists insurvey design and methodology, statistics and data analysistechniques. Approximately $100,000 of Bank financing isallocated for the overseas training of SRI staff involved inmonitoring and evaluation operations; and

(ii) improving the capability of BRI's field auditors andsupervisory staff for Unit Desa operations. US$500,000 isallocated for this purpose, representing 701 of the total costof training field Ltaff (located at BRI branches and regionaloffices) in the areas of supervision and audit of Unit Desas.This training is considered essential to ensuring continuedsatisfactory portfolio quality and overall performance of UnitDesas, and complements the USAID-financed training (whichfocuses on Unit Desa staff).

Table 3.2 below outlines the costing for this component.

Table 3.2: THE TA COMPONENT--ESTIMATED EXPENSES(US$ '000)

TotalAdvisor/specialist/activity Man-months cost

Planning and Researchadvisor 36 500

Short-term specialists 28 400

Subtotal 64 900

Overseas training - 100

BRI Field Auditors TrainingCosts - 714/a

Total Cost 1,714

/a 70Z financed by IBRD.

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D. Project Cost Estimates and Financing Plan

3.8 The nature of this project precludes a statement of costs in termsof the total investment financed by the subprojects and a firm plan forfunding these costs. The size of the proposed credit component is based onBRI's projections of disbursement for KUPEDES loans, assuming no rerourceconstraints, through September 1989. The component will finance a proportionof the increase in KUPEDES loans outstanding, which is expected to representabout 10% of the total amount of new KUPEDES loans disbursed during the period(para. 3.11). BRI would finance the remaining need out of its own resourcesand existing "rolled over" BI liquidity credits. Table 3.3 below outlinesBRI's KUPEDES loan financing and technical assistance needs, and theassociated financing plan.

Table 3.3: ESTIMATES OF BRI KUPEDES LOAN FINANCING AND TECHNICALASSISTANCE REQUIREMENTS AND FINANCING PLAN

(July 1987-September 1989)(Rp billion)

Local Foreign /a Total

Total Cumulative KUPEDES Disbursements 1.640.1 163.0 1,803.1

Financed by:IBRD first generation funds - 163.0 163.0Incremental savings mobilizationby Unit Desas 112.5 - 112.5

Incremental BRI other 18.7 - 18.7Repayments of previous KUPEDESloans 1,508.9 - 1,508.9

Total technical assistance needs 13.3 18.8 32.1

Financed by:IBRD - 2.5 2.5USAID - 16.3 16.3GOI/BRI 13.3 - 13.3

/a At exchange rate of US$1.0 = Rp 1,S30.

E. Features of the Loan

Lending Arrangements

3.9 The proposed Bank loan of US$101.5 million would be lent at standardcountry terms to the Republic of Indonesia. The Government would assume the

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foreign exchange risk and onlend the rupiah equivalent of the loan to BRI fora period of 20 years, including a five-year grace period since there is a needto augment the pool of resources available for loans for small enterprises.BRI would pay an interest rate equal to the average cost of BRI's customerdeposits (excluding noninterest-bearing deposits from GOI or COI-owned enti-ties). Based on August 1986 data, this arrangement would result in a minimumrelending rate to BRI of about 11% p.a., which is highly positive in realterms. The rate would be adjusted every six months, subject to a floor equalto the rate on the Bank loan plus a fixed spread of 1.75%. (See Annex 8 fordetails of the formula.) Since deposit rates in Indonesia are market deter-mined and capital flows are generally unrestricted, the formula for calculat-ing the cost of funds to BRI would indirectly include an element to cover theperceived foreign exchange risk; the difference between the Bank's lendingrate and the relending rate charged by GOI can be considered a premium forbearing the foreign exchange risk. BI would be responsible for calculatingthis rate on the basis of the most recent quarterly data available to it. Atnegotiations, GOI confirmed its agreement to these interest rete provisions aswell as to the method of interest rate calculations. The Government will alsocharge BRI a commitment fee on the undisbursed balance of the loan equal tothe commitment fee payable by GOI to the Bank. The signing of a subsidiaryloan agreement, satisfactory to the Bank, between BRI and GOI is a conditionof effectiveness of the proposed loan.

3.10 Onlending Terms. The interest rates to subborrowers of KUPEDESloans would be equal to 1.0% per month for loans for investment purposes and1.5% per month for loans for working capital purposes, calculated on theoriginal subloan amount. The effective annualized interest rates would there-fore be about 21.5% p.a. for investment subloans and about 31.7% p.a. forworking capital loans. These rates, which are highly positive in real terms,are needed to enable BRI Unit Desas to cover their costs of operation, includ-ing a provision for loan losses of about 5.5% of outstanding loans, andprovide a reasonable return to BRI. Modifications to the onlending interestrate structure would be done only after consultation with the Bank(para. 4.1). In passing on the funds from the proposed loan to the UnitDesas, BRI would continue to apply the present internal transfer pricingsystem and ensure that the cost of these funds to the Unit Desas is at leastequal to the highest interest rate payable on customer deposits at the UnitDesa level. This feature is designed to ensure that the proposed project doesnot undermine incentives of the Unit Desas to increase resource mobilizationefforts. At negotiations, BRI also confirmed that at least 501 of the spreadbetween the onlendiing rate from GOI and the internal transfer cost to the UnitDesas would be credited to the Unit Desas Development Fund (para. 4.1).

Loan Administration

3.11 Disbursement. Loans made under KUPEDES are very small. There is nodirect foreign exchange component (regarding the credit component). There-fore, the proposed disbursement formula is based on an imputed foreignexchange content ar.d takes into consideration the need to maintain the incen-tives for BRI to sustain its efforts to mobilize savings. For the creditcomponent, the Bank loan disbursements would be based on the higher ofeither: (a) 10% of disbursements on new KUPEDES loans approvals during a

- 34 -

quarter, with a ceiling of 65X of the total increment in the KUPEDES loanportfolio outstanding during the first year of the project and 60% thereafter;or (b) 501 of the increment in the total KUPEDES loan portfolio outs:anding.This arrangement is designed to encourage BRI's resource mobilizationefforts. (Annex 9 gives the rationale for and further explanation of theproposed disbursement formula.) BRI would submit quarterly requests forreimbursement with Statements of Expenditure (SOE) consisting of supportingdocumentation on ICUPEDES loan disbursements and repayments during the quarterplus the beginning and ending outstanding balances of the KUPEDES loanportfolio. All KUPEDES operations from the first day of the quarter in whichthe proposed loan is signed would be eligible for reimbursement. DisburseLentunder the technical assistance component would be for 1001 of consultant costsagainst standard documentation, except for contracts valued at less than$100,000 which would be claimed under SOE. Disbursement for the localtraining of Unit Desa supervising staff in auditing/supervision would be basedon 701 of eligible expenditures and would be claimed under SOEs. Based onprojected KUPEDES lending operations (paras. 3.3-3.4), the credit componentcould be disbursed in as little as three years. However, to allow for (i) thelag between disbursement at the Unit Desa and receipt of the SOEs by the Bank,and (ii) a less-Ehan-projected KUPEDES loan approval rate, a disbursementperiod of five years has been assumed for the project, based on the standarddisbursement profile for IDF projects in the East Asia and Pacific Region(Annex 10). The technical assistance component would be disbursed over athree-year period.

3.12 Procurement. Under the KUPEDES program, subloans are very small,averaging less than US$250 equivalent, and have no direct foreign exchangecomponent; competitive bidding procedures would be impractical. Goods andservices pro:-dred with subloan proceeds would be acquired through normalcommercial channels available to the borrowers. Consultant services financedwith the Bank's loan proceeds would be provided in accordance with the Bank's"Guidelines for the Use of Consultants by World Bank Borrowers and by theWorld Bank as Executing Agency." Terms of reference and the appointment ofall consultants financed by the Bank under the project would be subject toprior Bank approval.

3.13 Auditing and Reporting. BRI's accounts and SOE documentation wouldbe audited by BPKP, which is acceptable to the Bank. The report of theexternal auditor, in English, would be submitted to the Bank annually and nolater than nine months after the end of BRI's fiscal year. These auditingrequirements would encompass three areas: BRI's annual accounts; the SOEsperiodically prepared by BRI for reimbursement under the proposed loantdetailing the quarter-by-quarter disbursements, repayments, and beginning andending balances of the outstanding KUPEDES loan portfolio during the period ofloan effectiveness; and confirmation that reimbursements claimed by BRI are inrespect of the KUPEDES program only and are consistent with the terms ofagreement with the Bank. These audit arrangements were confirmed atnegotiations. BRI will £lso be required to submit quarterly progress reports,acceptable to the Bank, covering Unit Desa operations, as well as a ProjectCompletion Report within six months following the project.

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F. Project Benefit. and Risks

Benefits

3.14 BRI's efforts to convert the Unit Desas into a profitable bankingoperation are consistent with the Bank's goals in the financial sector. Theproject would provide, during its implementation period, about 62.0X of thefunds needed to ensure that the growth of KUPEDES is not constrained by lackof resources. KUPEDES represents a dramatic departure from the heavilysubsidized credit programs that have characterized much of directed lending inIndonesia. Its success could have a strong demonstration effect vis-a-visexisting priority credit schemes and could lead to changes, long advocated bythe Bank, aimed at reducing the subsidy cost of these schemes. Also, for thefirst time, resource mobilization is a specific and important objective; theproposed loan would help reinforce BRI actions in this regard. The projectwould also assist BRI in improving its systems and operational capabilities.In addition, the project provides strong support for a scheme providing smallcredit to the lower socio-economic levels of society, within the context of afinancially viable operation. The project can also provide a learningexperience for the Bank in structuring this type of very small credit program.

Risks

3.15 The project faces two risks. The first is that of a deteriorationin the KUPEDES loan portfolio, particularly as the program expands. Thesecond is that of the KUPEDES credit process becoming bureaucratized as itmoves from relatively simple procedures, which do not target specific borrow-ers, to more intricate application procedures, including specific lendingtargets. Such a development could stifle the program and distort the basisfor making KUPEDES loans, as well as give scope for i..creased irregularitiesby Unit Desa staff. BRI is most conscious of these risks and is developing(with the assistance of the USAID and the Bank) a comprehensive training pro-gram for staff and improvements in internal controls and monitoring of theUnit Desa performance. The project provides support to BRI's policy to oper-ate the Unit Desas as autonomous profit-oriented sub-branches which will nolonger participate in administered credit schemes. Given these efforts, theenergy and dedication of BRI management to making the Unit Desas a viable cor-mercial operation, and COI's continuing commitment to developing a more openfinancial system, the potential benefits of this project outweigh the risks.

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IV. AGREMKENTS AND RECOMMENDATION

4.1 During negotiations, the following agreements and understandingswere confirmed v'ith BRI:

(a) mod4 fication of the interest rate structure for KUPEDES loans tofinal borrowers woult be done only after consultation with the Bank(para. 2.25);

(b) a study would be undertaken by the Research and Planning Division(with the assistance of the advisor in survey techniques and method-ology, who will be recruited under the technical assistance cor-ponent of the proposed Bank loan) to identify measures that may beneeded to induce greater demand for KUPEDES investment loans (para.2.27). The study would be completed by March 31, 1988, and a time-bound plan of action based on the study would be submitted to theBank by June 30, 1988 (para. 2.27);

(c) BRI would incorporate into its Unit Desa Strategy Statement a clausestating that maintaining a sound portfolio quality would receivemanagement's highest priority and that arrears of three months ormore past final installment due date of 62 or more would beconsidered unsatisfactory performance. Should this level bereached, BRI management would evaluate the overall programs andorganization of the Unit Desas with a view to redesigning ongoingprograms, organization and procedures to ensure the continuedfinancial viability of the Unit Desa system on an autonomousbasis. In the event that arrears of one day or more should exceed82 over a six-month period, BRI would furnish the Bank within threemonths, information relating to actions taken and its action plan toreduce such arrears (para. 2.37);

(d) no further BI liquidity credits for KUPEDES lending would beobtained as long as there remained undisbursed funds under thecredit component of the proposed Bank loan (para. 3.5);

(e) any drawdowns on additional BI liquidity credit between March 31,1987, and loan effectiveness would be repaid over a period not toexceed one year (para. 3.5);

(f) the agreement between BI and BRI concerning the repayment by BRI ofliquidity credits outstanding as of March 1, 1987, would not bechanged without the Bank's agreement (para 3.5);

(g) the position of Research and Planning Advisor would be filled byOctober 31, 1987 (para. 3.7);

(h) BRI would allocate to the Unit Desa Development Fund at least 502 ofthe margin between the cost to itself of the Bank loan proceeds andthe onlending rate to the Unit Desas (para. 3.10);

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(i) the formula for disbursement of Bank proceeds for KUPEDES loans(para. 3.11); and

(j) the arrangement for asnual audit and quarterly reporting(para. 3i3).

4.2 During negotiations, agreements and understandings were reached withGovernment on the lending terms to BRI (para. 3.9).

4.3 Conditions of loan effectiveness are as follows:

(a) adoption of the Unit Desa Policy Statement and Unit Desa StrategyStatement by BRI.'s Board of Managing Directors. The Statementswould not be amended without prior agreement of the Bank (para.2.15); and

(b) the signing of a subsidiary loan agreement, satisfactory to theBank, between GOI and BRI (para. 3.9).

4.4 Recommendation. Subject to the above conditions, the project issuitable for a loan of $101.5 million to the Republic of Indonesia for 20years, inc?ading a grace period of five years, at the standard variableinterest rate.

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ANUE I1Page -1

INDONESIA

BRI/KUPEDES SMALL CREDIT PROJECT

Documents Available in the Project File

A. Bank Rakyat Indonesia (BRI)A.1 Annual Reports, 1983 and 1984A.2 Auditor's Report on the Financial Statements of BRI for the Years

ended December 31, 1985 and 1984A.3 BRI--Background MaterialA.4 BRI Development StrategyA.5 Organizational Charts

B. The BRI Unit Desa System and KUPEDES

CeneralB.1 Background: KUPEDES and the Unit Desas of BRIB.2 Draft (White Cover) SARB.3 KUPEDES, "Developing Small Enterprises to Boost Ezport" (The

Jakarta Post, May 16, 1986)

OrganizationB.4 Instruction of the President of Indonesia; Number 4 of 1973

Concerning The Village UnitB.5 Description of "Kredit K.T.N." DepartmentB.6 No. of Unit Desas and Posts, by WilayaB.7 No. of Unit Desas and EmployeesB.8 Allocation of Unit Desas--Wilaya Report Format to PUD

OperationsB.9 Application Forms for KUPEDES LoansB.10 BRI Circular: KUPEDES Rescheduling and Credit Reserves for Debtors

in Arrears (draft dated May 23, 1986)B.11 BRI Circular: Arrangements for Bonus Payments (dated May 1, 1986)B.12 BRI Circular: Administration of KUPEDES rrears (undated 1986)B.13 BRI Circular: Reporting Requirements for Unit Desas (dated

February 20, 1984)B.14 BRI Circular No. NOSE: C-255-KTN/11/86 dated November 8, 1986, re:

Exporting Eligibility Criteria for KUPEDES BorrowersB.15 Bound Collection of BRI Circulars (in Bahasa) Regarding

Administration of Unit Desa System, issued between January 30, 1984and June 17, 1985

B.16 Effective Interest Rates for KUPEDES LoansB.17 Source of Loans prior to KUPEDESB.18 Loan Size Distribution of KUPEDES LoansB.19 Total KUPEDES Borrowers (by No. and Amount)B.20 Sragen Branch Monthly Report (May 1986 and June 1986)B.21 Report--BRI Unit Desa Kanwil BRI DIY (May 1986)B.22 Report--December 1985 Kanton Cabang Sragen

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Page 2

3.23 Wates Branch Report (May 1986)3.24 Tabana Branch Report (June 1986)B.25 Report--KUPEDES as of 03/31/86-PUD to WilqyasB.26 Terms and Conditions of KUPIDES Loans--Sample SurveyB.27 Total Unit Desa Savings Mobilization, May 1986 (compiled from

Wilayas' Reports to PUD)B.28 PUD Report to BI (April 1986)B.29 Pakem Unit Desa (Wates Branch) 1984 and 1985 Balance Sheets and

Income StatementsB.30 Wates Branch (Aggregated) Unit Desa Financial Position for 1984 and

1985B.31 Month-by-Month Financial Position of UDs (aggregated) and Ratio

Analysis (1983-85)B.32 Profit Kargin on Total KUPEDES Lending Program, on Unit Desa Basis

as of March 31, 19868.33 Unit Desa Breakeven Analysis for 1986B.34 Portfolio Performance by WilayaB.35 New Reporting Forms to be used by Unit Desas (effective mid-1986)B.36 Unit Desa Projections prepared by BRI8.37 The Unit Desa Development Fund3.38 BRI's Letter of February 12, 1987, re: Conditions of Loan

Negotiations

C. Technical Assistance for BRI Unit DesasC.1 Monitoring and Evaluation Component: KUPIDES/Rural Banking System

Project--Bank Rakyat Indonesia (DAI, dated July 31, 1986)C.2 "SAID Proposal: Financial Institutions Development Amendment

(Project No. 497-0341)

ANNEX 2-40 Tablee

INDONESIA

BRI/KUPEDES SMALL CREDIT PROJECT

Bank Rakyat Indonesia

Audited Balance Sheets. 1980-85(Rp billion)

As of December 31 1980 1981 1982 1983 1984 1985

ASSETSCurrent AssetsCash on hand 39.7 52,1 58.7 63.1 97.9 155.1Due from Bank Indonesia 269.9 262.4 253.1 279.6 399.6 442.5Due from other banks 40.6 34.7 35.3 110.1 83.4 43.6Notes 9.2 3.7 2.8 12.2 29.0 54.4

Short-term loans 514.6 895.2 1,110.1 1,360.6 3,118.5 3,304.2Less: Reserve for bad debts 24.8 38.2 49.5 58.2 78.4 87.9

Net Short-Term Loans 489.8 857.0 1,060.5 1,302.4 3,040.1 3,216.3

Assets in foreign currency 160.4 118.9 52.2 111.9 292.2 362.9Other current assets 7.5 3.5 6.4 14.1 259.4 318.3

Total Current Assets 1,017.1 1,332.4 1,469.3 1,893.4 4,201.6 4,593.1

Long-Term AssetsLong-teri loans 461.5 730.6 926.2 1,009.8 945.8 1,041.1Less: Reserve for bad debts 22.2 31.2 41.3 43.2 32.9 34.3

Net Long-Term Loans 439.3 699.4 884.9 966.6 912.9 1,006.8

Equity participation 1.4 1.2 1.3 2.7 3.0 3.2

Total Long-Term Portfolio 440.7 700.6 886.2 969.3 915.9 1,010.0

Net fixed assets 14.8 20.1 22.S 24.5 64.7 74.0

Total Long-Term Assets 455.5 720.7 909.0 993.8 980.6 1,084.0

TOTAL ASSETS 1,472.6 2,053.0 2,378.3 2,887.2 5,182.1 5,676.1

IABILITIES AND EQUITY--u-rrent-a esDemand de-posits 633.6 691.5 425.8 602.4 1,006.4 942.4Time deposits 8.1 8.6 12.1 194.4 364.7 667.6Savings deposits 79.2 106.2 125.0 148.8 188,5 265.5Accounts payable 42.3 78.2 59.2 148.6 121.9 148.1Liquidity credits from B 191.6 2R4.0 431.4 497.2 2,034.7 1,938.3Due to other banks 22.3 84.6 69.5 90.8 33.3 21.5Foreign currency liabilities 76.0 29.5 101.0 23.9 39.3 80.6Other current liabilities 18.4 53.1 19.5 21.0 206.8 357.8

Total Current Liabilities 1,071.5 1,335,8 1,243.8 1,727.2 3,995 7 4,421.8

Long-Term LiabilitiesEIrliquidlty ered-ts 199.7 453.4 772.5 908.7 952,0 977.6Loais from SI 32.6 68.1 123.6 38.8 38.0 33.4Government loans 37.7 55.1 63.1 71.2 100.1 104.3Time deposits 80.6 86.9 119.6 82.0 10.9 39.6

Total Long-Term Liabilities 350.5 663.5 1,078.8 1,100.7 1,101.1 1,154.9

EquityPai -up and reserves 48.1 50.1 52.5 50.8 54.7 72.1Retained earnings /b 2.4 3.6 3.2 8.5 30.6 27.3

Total Equity 50.5 53.7 55.7 59.3 85.3 99.4

TOTAL LIABILITIES AND EQUITY 1,472.6 2,053.0 2,378.3 2,887.2 5,182.1 5,676.1

/a Each year, net profits are appropriated to various reserves and the Government; i.e.,retained earnings are not accumulated.

AEPIDMarch 1987

ANNEX 2Table 2

INDONESIA

BRI/KUPEDES SMALL CREDIT PROJECT

Bank Rakyat Indonesia

Audited Income Statements, 1980-85(Rp billion)

1980 1981 1982 1983 1984 1985

Income

Interest 95.4 143.9 187.3 231.9 381.7 507.0Commissiqns and fees 7.2 9.8 9.4 10.0 20.7 32.6Foreign exchange transactions 6.2 15.4 5.7 7.3 21.0 37.8Other operating income 12.3 7.3 13.2 19.5 28.0 27.4

Subtotal operating income 121.0 176.4 215.6 268.7 451.4 604.8

Nonoperating income 0.4 0.2 0.4 6.9 0.5 2.0

Total Income 121.4 176.6 216.0 275.6 451.9 606.8

Expenses

Interest charges on borrowings 29.2 40.3 62.7 95.2 212.4 299.2Salaries and other personnel expenses 37.7 74.7 73.6 96.3 112.0 143.2Other operating and miscellaneous expenses 18.7 27.6 36.6 41.6 44.0 69.5Depreciation 2.8 3.3 3.9 4.2 5.4 6.0Provision for bad debts 28.8 23.2 32.4 22.3 29.2 43.1Nonoperating expenses 0.1 0.6 1.0 0.5 0.6 1.3

Total Expenses 117.2 170.0 210.3 260.1 403.7 562.3

Net Income Before Taxes 4.2 6.5 5.7 15.4 48.2 44.5

Less: Provision for taxes 1.8 2.9 2.5 6.9 17.6 17.2

Net Income 2.4 3.6 3.2 8.5 30.6 27.3

AEPIDMarch 1987

- 42 - A 12

SKIMIIPRODS SALL CODIT PROJ8CT

Sonk SRakCt tndonesti

World WOhroADI uid to StI. 1972-45

Loam/credit no./ Year Amount ofproject title appraised loon/grant Purpose

The World ik CGrouLUA tL116MTo fono Develorn!t Asoo-

cr IwND, Smliholder ond Private 1973 7.63 Rehabilitation and devolopment of tea industry in WestRctate Tea Project Java.

Cr 984-1ND. Pmallholder Rubber 1980 15.00 (a) To ralee income of ellholder families.Developmnt Project (b) Increeas Indonesiase foreign exchange earnings from

rubber.(c) Build institutional framework and data boee for the

national emallholder rubber program.

Cr S27-1ND, Rurel Credit Project 1976 30.00 Ixpannion end improvement of supply of long-tarm creditto emllholdere in agriculture. livestock, fieheries andrelated subsectors.

Cr 355-IND, Beef Cattle Developmnt 197? 3.10 To introduce modern ranching toechnology to increase beef/Project cattle produetion.

Cr 480-IND, Fisheries Credit Project 1974 6.50 To accelerate Borrowers progrm to increaee productionfrom its fisheries resources for both domestic conoump-tion sod export to provido increased employmsnt opportu-nities and inco_e.

Subtotal IDA 62.40

ISID (Internatlonal Sank for Recon-ruct on *nd Dv eopmInt)Ln lo,-u. rnlrW Uroen Development 1978 3.64 Provide basic services aimd at lmproving the health and.

Project environmntal conditions of low-income neighborhoode.

Ln 1898-lND1 Smallholder Coconut 1980 16.00 To provide credit to smallholders for nonfarm coconutDevelopmnt Project developmnt.

Subtotal IBID 19.64

Subtotal World lank Group 82.04

AD8I 'AesenftD velep_nt gnk)c5 tVS-De soo -nnn Live- 1984 51.80 Procuremnt of livestock.

stock Development Project

Ln 474-1ND. Sunterc VieheriTa 1960 4.50 To assist the rural poor, in perticular the artieonalDevelopmnt Project fishlenen and flh farmors.

Ln 566-IND, Second Irion Jays Fish- 1982 0.77 Developmnt of coestal fishermen.eries Developmnt Project

Ln 598-1ND0. rackiehwater Aquacul- 1982 2.30 (a) To Increase producton of shrimp and milkfish fromture Developmnt Project brackiehuater aquaculture.

(b) To improve socioeconomic condition of emall-scelet_mbk farmAre by Increasing their incomes.

(c) To generate foreign exchange earnings from shrimpexport.

Ln 444-1ND, South Kalimantan Live- 1979 15.00 To Increase the number of cattle/oats In South lalimen-stock Development PZ,ject ten Province, supply breeding and draft *nimels to trtam-

aigrents end smlholders.

Ln 197-IID, Seat Java ACticultural 1983 2.70 To achieve two objectives via. Increasing rice and subsi-Credit Project diary food crop production and developing WUDD0 /a and

La 537-lND1 Sumter& Livestock 1981 2.60 (a) Improve the incom and nutritional level of theDevelopment Project poorer people in the project area.

(b) Herd expansion and improvement.

Ln 577-IID0 Second Agricultural 1982 26.35 (a) To strengthen and expand the operation of KUDs toCredit Project serve the needs of the farmrs.

(b) To promote participation of rural people in themlinstrean of developmet.

(c) To distribute benefits of developmnt to a widersegmnt of the rural population.

Subtotal ADS 106.22

Totel World Sank Group/ADS 188.26

/a UODO - developmnt agency unit In charge of purchasing/marketing paddy/rice. and procurement end distribution offarm inputs. It Is a proeoperntive unit.L KUD - village-lovel agricultural cooperative.

AIPIDKarch 1987

March 1987

_ 43 -

ANNEX 3

INDONESIA

BRI/KUPEDES SMALL CREDIT PROJECT

Bank Rakyat Indonesia Unit Desa Draft Policy Statement

BRI regards the provision of a broad range of banking services asessential to promote rural economic development. BRI's basic objective forthe Unit Desas is that they become true financial intermediaries that are ableto moet the needs of the rural people for a wide variety of banking services--not only credit, but also savings and other financial services--whileremining financially viable, able to operate without government or any othersubsidy. BRI's management of the Unit Desas will be guided by the followingprinciples:

(a) Rural credit should be available to any rural enterprise run by acreditworthy person or to any creditworthy person. Credit shouldnot be targetted to particular activities chosen by someone otherthan the loan applicants. The final decision on loan applicantsshould be made by the bank based on sound banking considerations.Loans made by Unit Desas for purposes other than directly productiveactivities would not exceed 5% of all new loans.

(b) Interest rates on credit must be sufficient to cover all costs,including the cost of unsubsidized funds, operating costs and loanlosses, and also provide a profit margin in order that the BRI UnitDesas will remain financially sound and be able to develop theiractivities.

(c) The BRI Unit Desas should offer a broad range of savings instrumentsto encourage savings mobilization. These instruments shouldnormally offer positive real rates of interest structured accordingto the ease of withdrawal under each instrument.

(d) The BRI Unit Desas should introduce other banking services as theseare needed by the rural people but should calculate carefullywhether their costs in providing these services can be covered.

(e) Convenient and ready access to banking services, which lowerstransaction costs to the borrower or saver, is important indecisions by rural people to participate in the services offered byformal financial intermediaries. The people look at total cost ofborrowing, not interest cost alone, when deciding whether to borrowcapital for their enterprises. They look at interest received minustr nsaction costs in deciding whether to save in a financialinstitution. The BRI will attempt to provide Unit Desa services asclose to the villages as is economically possible.

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ANNEX 4Page 1

INDOVESIA

BRI/KUPEDES SMALL CREDIT PROJECT

Bank Rakyat Indonesia Unit Desa Draft Strategy Statement

1. Funds Mobilization

In addition to providing credit to the rural communities, the BRIUnit Desa also needs to mobilize financial resources from the ruralcommunities. The potential for funds mobilization from the rural areas islarge.

To mobilize these rural based funds, it is necessary to provideinstruments thatt meet several conditions including:

(a) instruments must be very liquid (unlimited withdrawals);

(b) instruments must offer positive real interest rates.

In order to provide an instrument that satisfies these conditions, anew savings program was developed by the BRI called "SIMPANAN PEDESAAN"(SIMPEDES) or Village Savings Program. This instrument provides the twoconditions noted above, and in addition offers a lottery with prize drawingsheld every six months. Separate lotteries are held in each Kabupaten(District). This new scheme was tested successfully in 13 pilot branchesbefore going nationwide in June 1986.

In addition to the "SIMPEDES," the Unit Desas also offer other typesof savings instruments such as GIRO (demand deposits); DEPOSITO BERJANGKA(Time Deposit); and TABANAS (passbook savings).

2. Reallocation of Resources

The initial locations of the BRI Unit Desas were based on the BIMASrice intensification program. Because of this, most locations were in agri-cultural areas with irrigated rice production.

With the redefinition of the Unit Desas in order to make themcomplete banking units offering lending, deposit, and other services to awide-based rural clientele, it has been necessary to reallocate the staff andfacilities according to redefined economic and geographic regions. A largenumber of unit desas have been moved to locations that are more central torural economic activities, especially near market centers.

To continue to provide service to outlying areas and tap specialareas with high savings or lending potential, a new village post system hasbeen developed. Posts are located in the desas (villages), and operate aswindows of the BRI Unit Desas, which are in the Kecamatans. These posts areopen between one and 5-1/2 days per week, and are operated by a mobile team,

- 45 -

ANNEX 4Page 2

consisting of one bookkeeper and one cashier from the BRI Unit Desa Induk(Unit Desa main office).

3. Incentives

BRI Unit Desa staff are now required to operate as professionalbankers. The quality of their judgment and the diligence with which theyperform their duties will determine the success of the Unit Desa. Toencourage good performance, a special incentive system has been adopted forUnit Desa staff. This incentive is primarily based on profits. 102 of UnitDesa profits are available to be paid as staff incentives (proportional to thebasic employee salary).

There is also an additional incentive on savings. One half of 12(0.5Z) of savings mobilized in the rural areas is added to the above incentiveon profit. The total of the two types of incentives are given up to a maximumof one month's salary.

4. BRI Unit Desa Development Fund

As an incentive to mobilize savings, the branches charge 22 morethan the TABANAS savings interest rate for liquidity credits given to UnitDesas, and they pay 21 more than the TABANAS rate on Unit Degas' surplussavings placed in the branches. Branches with a net balance of the amountcharged or liquidity credits provided to the Unit Desa over the amount paid onsavings placed with the Cabang will transfer this amount to the Unit DesaDevelopment fund at the BRI head office. Those branches with a deficit willdraw the amount from the Unit Desa Development Fund.

If there is a net balance in the centrally controlled fund, it willbe used for central expenditures in support of the Unit Desas such as:advertising materials for SIMPEDES, KUPEDES, and other services; payments forSIMPEDES prizes; the training of the Unit Dese staff and the branch super-visory staff; printing of Unit Desa operational manuals; providing officeequipment to the Unit Desas, etc.

5. Monitoring of the Program

Monitoring and evaluating the program is extremely important inorder to ensure a smooth operation and to ensure objectives are met. Thismonitoring and evaluating includes:

(a) A management information system designed to provide concise,critical information on lending, savings, arrears, profitability,numbers of borrowers and savers and other critical measuresaffecting the operations of the BRI Unit Dseas;

(b) The first line of monitoring authority is at the branch which isspecifically charged with the tasks of supervising the Unit Desasand correcting any problems they find in the operation of the UnitDesa. In addition, they have officers who analyze reports receivedfrom the Unit Desas and check records at the Unit Desa as well asspot checking records and procedures with clients.

- 46 -

ANIEX 4Page 3

(c) The second line of monitoring authority is the regional office whichhas the basic tasks of ensuring the Cabangs have understood and arecarrying out their monitoring and supervision responsibilitiescorrectly.

(d) The highest level of monitoring authority is at the head office.There is a special section charged with the tasks of analyzingreports on Unit Desa activities and keeping the Board of Directorsinformed of the current situation. They also arrange specialsurveys when the reports indicate problems may have arisen w.hichrequire more field study to be understood and corrected.

6. Strategy for Further BRI Unit Dena Development in the Future

The first phase of BRI Unit Desa Development during the 1984-1986period consisted of a large number of very fundamental changes in the natureof the BRI Unit Dena System including:

(a) Reconstructing the system of accounts to separate the Unit Desasfrom the Cabangs and make them accountable as individual profitcenters; (this change also involves charging the Unit Desas interestfor resources used and paying interest to the Unit Desas forresources mobilized and deposited with the Cabangs.)

(b) Reallocating the staff resources of the unit desas in order tocreate more strategic locations for the provision of bankingservices;

Sc) Introducing a new major lending program not targetted to anyspecific activity, but rather providing credit to any ruralenterprise run by a creditworthy person;

(d) Introducing new flexible savings services, especially through theintroduction of the new SIMPEDES program;

(e) Redefining the role and functions of the Unit Desa staff toencourage more professionalication and independent decision making;and

(f) Rewarding Unit Desa staff on the basis of performance through thecreation of a profit-based, as well as a deposit mobilization-based,incentive system.

This first phase has involved substantial change in the policiesaffecting Unit Desa development. The next phase of Unit Desa development,from 1987 to 1990, will be one of consolida.ing these fundamental changes. Inthis new phase, the emphasis will be on:

(a) Training: Well organized and comprehensive manuals will bedeveloped which cover Unit Desa administration, credit, savingsmobilization, and all other subjects necessary for the Unit Desa

- 47 -

AEX 4Page 4

personnel to fully understand their responsibilities and to performtheme in a relatively uniform way. Five regional training centersvill be activated to provide training to all Unit Des& employees,consisting of over 12,000 persons. During an initial three-yearphase, all employees will receive initial courses from 2 to 6 weeksin length, and all employees will regularly receive trainingupgrading of at least one week per year. Twenty-eight full timetrainers will be hired to staff these regional training centers.

(b) Operational Systems Developent: All administrative, reporting, a*raccounting systems will be upgraded. An emphasis will be made tocreate efficient systems with adequate controls. Special studieswill be undertaken to determine the feasibility of introducingautomated systems.

(c) Supervision: There will be a major effort to clarify and strengthenthe supervisory role of the Kantor Wilayah and Cabang. This willinclude increasing their staff's ability to analyze data from theUnit Desas and to understand and correct problems which arise inparticular Unit Desas. Supervision of the Unit Desas by staff fromthe Wilayah and Cabang should in the future be based on a problem-solving approach rather than rulesetting as in the past.

(d) Funds Mobilization: Efforts will be continued to increase savingsmobilization to enable a greater proportion of KUPEDES loans to befinanced out of these resources. Targets of at least 35X have beenset for 1987/1988 and 40Z for 1988/90.

BRI's management would implement such policies and procedures as areconducive to the Unit Desas' maintaining a sound quality portfolio. However,when arrears of three months or more past final installment due date reach 62of the total loan portfolio, this would be considered unsatisfactory perfor-mance and BRI's management would then evaluate the overall program and organi-zation of the Unit Desas with a view to redesigning ongoing programs, organi-sation, and procedures to ensure the continued financial viability of the UnitDesa System on an autonomous basis.

-48 - AMNC 5Table I

INDONESIA

BRI/KUPEDES SMALL CREDIT PROJECT

BRI Unit Des& System

Summary of Actual KUPEDES Lending Operations, 1984 - June 1986

Total Jan-Mar Apr-Jun Jul-Sep Oct-Dec Total Jan-Mar Apr-Jun1984 1985 1985 1985 1985 1985 1986 1986

8y Amount (in Rp billion)

Outstanding at beginningof period - 111.0 142.7 180.2 200.3 111.0 229.0 260.0

Plus: Disbursements 164.5 68.4 85.3 81.7 99,7 335.1 108.5 111.8

Less: Repayments 53.5 36.7 47.7 61.6 71.0 217.1 77.5 86.8

Less: Write-offs - - - - - - - -

Outstanding at end ofperiod 111.0 142.7 180.2 200.3 229.0 229.0 260.0 285.1

By Number (in '000 Loans)

Disbursements 639.4 223.3 251.0 235.3 282.3 991.9 290.4 281.7

AEPIDMarch 1987

- 49- ANNX 5

Table 2Page 1

INDONESIA

BRI/KUPEDES SMALL CREDIT PROJECT

BRI Unit Desa System

Balance Sheets, 1984 - June 1986(Rp million)

As of end of calendar quarter/year 1984 1985 I/1986 II/1986

ASSETSCash in Unit Desas 171 212 2,074 2,911Cash in Cabang (branch) 47,563 62,595 61,537 61,750

Loans OutstandingKUPEDES 110,698 229,029 260,062 285,066Kredit midi 15,900 7,098 6,412 4,679Kredit mini '0,410 7,736 7,338 5,611Other - 1,964 2,250 5,072

Subtotal loans outstanding 137,941 245,827 276,062 300,428

Less: Provisions for losses 9,167 10,524 10,513 11,225

Net Loans Outstanding 128,784 235,303 265,549 289,203

Other ReceivablesInternal 820 829 479 1,554External 59 99 84 96

Subtotal other receivables 879 928 563 1,650

Fixed Assets (Net)Land and buildings 624 653 600Vehicles 405 2,136 2,181Machinery, furniture and other 110 224 191

Subtotal fixed assets 1,386 1,139 3,013 2,972

Other assets 65 294 298 195

TOTAL ASSETS 178,848 300,471 330,034 358,681

- 50 -ANNU 5Table 2Page 2

As of end of calendar quarter/year 1984 1985 I/1986 II/1986

LIABILITIES AND EQUITYLiabilitiesGiro accounts 2,006 13,830 8,468 11,779

SavingsTABANAS 38,642 63,604 71,573 63,335SIMPEDES - 5,134 6,884 15,543Time deposits 690 2,018 2,442 2,970Certificates of deposit 84 134 92 53Other 766 153 177 150

Subtotal savings 40,182 71,043 81,168 82,051

Managed funds - 1,609 1,738 1,647

Loans (From Cabang)Investment 21,194 16,275 16,063 16,206Working capital 61,655 125,250 153,642 168,430Other } 929 566 1,624

Subtotal loans 82,849 142,454 170,271 186,260

ReservesIPTW ITABANAS interest } 3,661 8,539 12,232 16,277SIMPEDES interest )Time deposit interest 35 28 91 124Other - - - -

Subtotal reserves 3,696 8,567 12,323 16,401

Other liabilities - 269 223 127

Total Liabilities 128,733 237,672 274,191 298.265

EquityMinigrant 67,754 56,601 48,317 47,557Contributions for fixed assets 7,373 7,034 7,905 8,013Retained earnings /a (25,012) (936) 2,621 4,846

Total Equity 50,115 62,699 58,843 60,416

TOTAL LIABILITIES AND EQUITY 178,848 300,471 330,034 358,681

/a Retained earnings are appropriated by BRI at the end of each year.

AEPIDMarch 1987

-51 -ANNU 5Tabl 3

INDOMUSIA

URI/KUPIDRS SKALL CUDIT PROJECT

tI Unit Dns& Systes

Incomn Statoxontn, 1984 - June 1986tRp nXLL&On)

Jan-Mar Jan-Jun1984 1985 1986 1986

Revenuesintcrect Incomeunit Ds, Erundr deposited in Cabang - 7,639 1,312 3,273

CreditKUP!bES - Investnent 1,973 632 1,632KUPMDES - Working capital ) 59,458 22,117 47,452Krodit Midi 22,045 753 88 141Kredit Mini 341 68 84Other ) 1,102 168 254

Subtotal credit interest 22,045 63,627 23,073 49.563

fees and comissions 165 91 29 48Other operating income 1,327 801 247 538Nonoperatiag income 3,052 407 118 247

Total Revenues 26.589 72.565 24,779 53.669

ExpensesTnancnial Expencoc

Waung 561 13,761 3,644 9,664Giro accounts 11 82 35 63TABANAS 3,548 5,593 2,449 5,104SINPEDEBS Tim deposits 61 216 100 181Other 195 51 22 76IPTW reserves 3,974 13,971 4,975 10,736

Subtotal financial expenses 8,350 33.674 11,225 25.824

Insurance promium 18 36 26 26

Administrative and General ExpensesPersonnelSMlary nd wages ) 26,170 7,208 14,550Allowances 30 434 4,367 1,222 2,758Payments in kind ) 2,581 642 1,287Other ) 2 - I

Subtotal personnel 30.434 33,120 9.072 18,596

Rant 361 406 111 230

Op2ratin4 and Maintenance%n lces 1 710 1,605 348 696

Buillings I 284 136 276

Subtotal O&M 1.71O 1,889 484 972

Deprocistion 559 525 13 299Provisions for bed debts 8,381 2,368 238 1,123Texas 115 219 54 92

Other Wratin 2x nesurrxce supplisU an *nterials 921 1,038 362 722Supervision expnoses - 50 56 142Bonuses - - 516 793Other 670 166 1

Subtotal other operating expenses 1.591 1.254 934 1,657

Nonoperating expenses 82 10 1 4

Total Expenses 51.601 73,501 22,158 48.823

NET INCOME (25.012) (936) 2.621 4.846

MarID

March 1987

INDONESIA

BRI/KUPEDES SMALL CREDIT PROJECT

SRI Unit Des. Systeu

Analysis of KUPEDES Loan Portfolio, 1984 - June 1986(Rp dISInon3

As of end ofcalendar quarter/year 1984 1/1985 11/1985 111/1985 IV/1985 1/1986 II/1986Cumulattve asount

loaned 165.0 233.3 318.6 400.3 500.1 608.6 720.4Portfolio StatusTotal loans outstan1-

ing 111.0 142.7 180.2 200.3 229.0 260.0 285.1Total principal inarrears 0.5 1.0 2.0 2.9 4.8 6.8 10.3

1984 1/1985 II/1985 111/1985 IV/1985 1/1986 II/1986AS Z ot As 2 otX As Z of Asor szor As Xot As Z ofAging of principal outstanding outstanding outstanding outstanding outstanding outstanding outstandingarrears Ant. portfolio Ant. portfolio Amt. portfolio Amt. portfolio Amt. portfolio Ant. portfolio Ant. portfolioTotal /a 0.5 0.5 1.0 0.7 2.0 1.1 2.9 1.5 4.8 2.1 6.8 2.6 10.3 3.6More than one day butless than 3 monthsbeyond final due date n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.9 0.4 1.1 0.4 1.6 0.6More than 3 monthsbeyond final due date n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 0.3 0.1 0.7 0.3 1.1 0.4

/a Any Payment overdue by one day or more.

AEPIDMarch 1987

III

- hs -

-1 ft -i r

T i . $- 4 '. i

l- F. ^ $ $- S

II ft -

ft Xt X ' -

*s 4 '

ti t ft C - -

fi . o* - - A.

4l A- -' ' S

IAt . l 1 l ;

INDONESIA

3RI7KUPEDES SKALL CREDIT PROJECT

SRI Unit Den. Systes

Prolected Resource Require" nts/Funds Utiiliztion of SRI Unit Des. Syste. 1986-90(By quarter. Rp billion)

Actual rjceAs of end of quarter 1T 1i9 9 1 61V1986 1/119 96 11087 1111987 111/1987 iV/987 1/19f88 11/19118 111/1988 1V1/988 111989 17/1989 111/1989 IV/1989 1(1990 11/1"0 111/19"0 1v1rv1

Sources of FundsCowerm_-t/l3

tredit Ini sgrant 66.7 66.7 66.7 66.7 66.7 66.7 66.7 66.7 6r.7 66.7 66.7 66.7 66.7 66.7 66.7 66.7 66.7 .7 66.7Eredit midi 43.0 43.0 43.0 43.0 43.0 43.0 43.0 43.0 43.0 *3.0 41.0 .3.0 43.0 43.0 '3.0 43.0 *3.0 43.0 63.0St liquidity credit IS0.0 I50.0 150.0 350.0 150.0 150.0 150.0 150.0 150.0 150.) 150.0 143.1 136.2 129.3 122.4 I3S.5 108.6 101.7 94.9Subtotal 259.7 259.7 259.7 259.7 259.7 259.7 259.7 259.7 259.7 259.7 259.7 252.8 245.9 239.0 232.1 225.2 218.3 211.4 20.6

Seris (Unit Dess-Osn.rated Onl)TASARS 63.3 102. 125.0 127.5 130.0 152.5 375.0 177.5 180.0 197.5 215.0 217.5 220.0 240.0 260.0 262.5 265.0 287.5 310.0511W636. 35.5 Ciro 3I.8 8.3 15.2 9.' 13.0 9.1 16.7 10.3 14.3 10.0 18.4 11.3 15.7 11.0 20.2 12.4 17.3 12.1 22.2TIM deposIts mnd others 3.2 3.5 6.0 6.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 6.5 9.0 9.5 10.0 30.5 11.0 11.5 12.0

Subtotal 93.8 113.8 144.2 141.4 148.0 167.1 197.7 194.3 201.3 215.0 241.4 237.3 244.7 260.5 290.2 285.4 293.3 311.1 36.2hnasesd teods 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 I.f 1.6 1.6 1.6 1.6 1.6 1.6 1.6I1 nd mis1ing deposits rem-r.es 16.4 17.7 21.0 16.0 19.1 22.5 26.2 21.3 25.2 29.3 33.6 1..8 31.6 36.1 * 1.1 32.5 37.7 63.1 48.9Rremarv tor bed debts 11.2 14.7 11.6 12.3 14.1 16.0 18.3 21.3 24.5 28.0 31.7 33.3 35.0 36.5 38.1 39.7 61.3 42.9 6.4met prfits 6.8 (0.J) (3.3) 1.7 3.3 5.7 8.9 1.6 5.2 9.6 14.3 2.q 10.1 18.2 26.5 3.5 12.6 23.6 36.2 Iepreciation 0.3 0.5 0.6 0.2 0.5 0.7 1.0 0.2 0.5 0.7 1.0 0.2 0.5 0.7 1.0 0.2 0.S 0.1 1.0

Total Sources 387.8 607.9 635.2 632.9 646.3 673.3 513.4 *99.d 518.1) 543.9 583.3 554.9 569.2 592.6 630.6 588.1 605.3 636.4 600.6

285.1 313.8 362.1 369.6 3".97 628.8 658.0 687.2 516.8 566.3 575.9 605.7 635.5 64.3 693.1 721.8 750.6 779.6 on.3Eredit addm 5.6 5.0 0.7 0.5 0.6 0.2 - - - - - - - - - - - -Krndit 1di 6.7 6.0 1.5 1.3 3.1 0.5 - - - - _ _ - _ _ _ _ _ _Other 5.1 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2Subtotal 300.5 325.0 36.5 373.4 603.4 631.7 460.2 689.4 519.0 538.5 578.1 607.9 637.7 666.5 695.3 724.0 752.8 781.6 30-.3

woeing camh 2.9 5.7 7.2 7.1 7.2 '.2 9.5 9.7 9.9 10.5 11.7 11.9 12.0 12.8 14.1 14.3 14.5 15.4 36.9Woektag Mrygl /s 25.4 25.0 28.8 29.0 31.6 32.7 36.7 36.8 39.5 60.6 66.5 44.6 67.2 *8.0 52.3 52.1 55.0 55.8 60.6beeru requiruemut /b 7.1 6.1 8.0 7.5 t.2 9.0 11.1 10.2 11.0 11.6 13.6 12.6 13.2 13.8 IS.9 14.9 15.7 16.4 18.6Total Atelicatiome 335.9 361.8 390.5 617.2 650.6 *81.6 517.5 546.1 579.4 610.8 647.7 676.6 710.1 741.1 777.6 605.3 838.0 .2 906.2bt sseJ rce Availabled to Unit

Does Xet_ 331.9 66.1 4.7 15.7 (4.1) (8.3) (4.1) (46.3) (61.4) (66.9) (64.6) (121.7) (160.0) (368.5) (147.0) (217.2) (232.7) (236.8) (225.6)Plus: Accinieted dieabirsete

_er propmee I88D loan - - - - 16.1 33.2 51.3 70.4 90.4 111.4 133.6 141.6 163.0 163.0 163.0 163.0 136.0 163.0wb _esurces lecluditg 1IWO

erDni 51.9 "6.1 4.7 15.7 (4.1) 7.8 29.1 3.O) 9.0 23.5 47.0 11.7 0.7 14.5 16.0 (54.2) (69.7) (71.6) (62.6)

a Calculated at OX of t[be higbet monthly lose diebere t in the quarter plus 252 of Glro deposits and 22 of TA4A86S end SINPSDES deposits. UPEDES disabursomts are genrally and during the fi st part ofthe wonth. uila rspamts are roceived during tbe last balf.

'b Based o- reerv reqsir_mste to be _iotaiSed by Ul. In addition to 6orking cuab In the Unlit Deas.

lareb 1967

110S1A

BR/KIPS SMU 33CIDIT 13JCT

3al Welt De"a Spate

raR ctm l_a Sta te. 1960

Ve3h 335-mv ism-MT ja-n-Ju Jan-gap Jam-Mr Joe-Joe is,p Ja-mi Jan-jun jasm-na Jae-Mr j*_J J-

For the parted: 19" 19@ 1 1 1"7 190 7 1"7 1967 IN8 zga 1966 166 1969 3969 19i9 i90 19"0 990 199" I

WEP_ Towns depeeted tiCab.L 3.3 - - - - - - - - - - _ _ _ _ _ _ _ _

Ccot'IWO= - teatum 1.6 2.3 3.2 1.0 2.2 3.4 4.7 1.4 2.9 4.4 6.1 1.7 3.6 5.5 7.5 2.1 4.3 6.5 6.9

up=" - Wrking capital 47.4 72.4 102.5 33.1 64.2 106.5 147.5 43.9 90.4 I3 . 192.0 54.9 112.6 173.1 236.4 66.2- 135.1 206.9 231.6*redt dlAI/Ni 0.2 0.3 0.4 - - - - - - - - - - _ - _ _ _

Othr 0.3 0.5 0.6 0.2 0.3 0.5 0.6 0.2 O.! 0.5 0.4 0.2 0.3 0.5 0.6 0.2 0.3 0.5 6.6

Subtotal credit interest 49.6 75.7 106.7 34.3 70.7 110. 1352.6 45.5 93. 44.7 1y.7 56.8 116.5 179.1 24.5 30.5 13.7 213.9 291.1 v

Im deifseted f 1.6 2.3 0.8 1.6 2.5 3.5 1.1 2.2 3.4 4.7 1.4 2. 4.3 5.9 1.7 3.4 5.3 7.2Other *_cm 511 1.3 3.4 0.4 0.8 1.2 1.6 0.4 0.9 1.3 1.7 0.5 1.0 1.4 1., 0.5 1.0 1.6 2.1

Total a 53.7 76.2 110.4 35.4 73.1 114.0 157.9 46.9 97 149.4 205.1 56.6 120.2 164.6 252.3 70.6 144.2 220.6 360.3

l_ n9.7 13.3 18. 5.7 12.1 19.0 25.7 7.3 15.4 23.8 32.1 9.7 20.2 30.7 41.0 12.2 24.9 37.6 49.6Ctle accmto 0.1 0.1 0.1 - 0.1 0.1 0.1 - 0.1 0.1 0.1 - 0.1 0.1 0.! - 0.1 0.1 0.2PAS6NAS 1 . 6.7 $.9 2.3 4.4 6.6 9.5 2.9 5.6 6.6 12.2 3.5 7.1 10.8 14.9 4.2 8.5 13.0 17.9sKIOS 1 0.9 2.0 1.4 2.6 4.6 6.7 2.2 4.4 6.6 9.4 2.7 5.4 8.3 11.4 3.3 *.6 10.0 13.6TIM Its 0.2 0.3 0.5 0.2 0.3 0.5 0.7 0.2 0.5 0.8 1.1 0.3 0.4 1.0 1.4 0.4 0.6 1.2 1.7Otbhr 0.1 0.2 0.2 0.1 0.1 0.2 0.2 0.1 0.1 0.2 0.2 0.1 0.1 0.2 0.2 0.1 0.1 0.2 0.2lIlY rer,ea 10.7 19.4 27.5 6.9 16.4 23.7 39.8 11.9 24.5 37.9 52.0 14.9 30.6 47.1 64.3 16.0 36.6 56.3 76.6

Subtotal flnacial *upeaa.a 25.8 40.9 57.9 18.5 36.5 60.0 62.6 24.4 50.7 76.2 107.1 31.2 6".0 96.1 133.3 38.2 77.6 118.3 140.0

Peronel 16.4 28.0 37.6 10.0 20.5 31.7 43.0 11.5 23.6 36.2 49.5 3.2 27.0 41.4 S6.9 S.t 30.5 45.7 40.9epreciatim 0.3 0.5 0.6 0.2 0.5 0.7 1.0 0.2 0.5 0.7 1.0 0.2 0.5 0.7 1.0 0.2 0.5 0.7 1.0

Prewislee fer bad debts 1.1 5.0 12.6 3.0 7.1 11.6 16.7 J-6 11.7 16.4 25.6 5.6 11.7 18.1 24.9 7.3 15.1 23.2 31.5_mea4 (staff Slcautles) 0.6 0.6 0.6 0.9 0.9 0.9 0.9 2.5 2.5 2.5 2.5 4.1 4.1 4.1 4.1 4.7 4.7 4.7 4.7

Otber 2.2 3.1 4.2 1.1 2.3 3.4 4.6 1.3 2.5 3.6 5.1 1.4 2.3 4.2 5.6 1.5 3.1 4.6 6.1

Total t l _m" 48.8 78.3 113.7 33.7 69.6 108.3 149.0 45.5 91.5 139.8 190.6 55.7 110.1 166.6 225.6 67.1 131.5 197.2 26.2

Mr INIC 4.6 (0.1) (3.3) 1.7 .3 5.7 8.9 1.4 5.2 9.6 14.1 2. 10.3 16.2 26.5 3.5 12.6 23.6 36.2

Since Wm, is brrod from nd I O e tee to i the Cebg at the ne Interest rate. only net borrowin. are projected.ms actual data. iY defanlted is in tcld I ntetret revnue.

March 1987

INDONCSIA

SRI/KUPEDES SMALL CREDIT PROJC1T

SRI unit Desa System

Projtcted talance Sheets (by QuIrter). September 30. 1986 - 1990(llp billion)

Actual prlceAs of nd of calendar quarter/Year 111196 III/1986 IV11986 I/1987 JI/1987 ImI/1987 IV/1987 111988 -I/1988 III/1988 IV/198 111989 11/199 i119i 1989 WiN9 /i9"0 I/1"o 1I11/1"0 5/1

ASSETSCaih to Unit Des.. 2.9 5.7 7.2 7.1 7.2 8.2 9.5 9.7 9.9 10.5 11.7 11.9 12.0 12.8 14.1 14.3 14.5 15.4 16.9Ce ln Ceban (branch) /a 61.8 - - - - - - - - - - - - - - - - _

Lomme Owteteoii.5oES 285.1 313.6 362.1 369.6 399.7 428.8 458.0 487.2 516.8 546.3 575.9 605.7 635.5 644.3 693.1 721.8 750.6 779.4 808.1tedit midi 4.7 5.9 1.5 1.3 1.1 0.5 - - - - - - - - - - - - -Eredit tdi 5.6 6.9 0.7 0.5 0.4 0.2 - - - - - - - - - - - - -Othbr 5.1 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 .

Subtotal loans outstanding 300.4 326.8 366.5 373.6 403.* 431.7 460.2 489.4 519.0 548.5 578.1 607.9 637.7 666.5 695.3 724.0 752.8 7S1.6 810.3

Less: Provision, for loses. 11.2 14.7 11.4 12.3 14.1 16.0 18.3 21.3 24.5 28.0 31.7 33.3 35.0 36.5 36.1 39.7 41.3 42.9 44.4

Not Loan. Outsta_ding 269.2 314.1 335.1 361.3 399.3 415.7 441.9 468.1 494.5 520.5 346.4 574.6 602.7 630.0 657.2 684.3 711.5 736.7 765.9

Other Sucei-vble-

Isteral 1.5 j1.7 1.7 1.7 1.7 1.7 1.7 1.7 !.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7External 0.1

Subtot-l other rceivable. 1.6 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7

Pied Suets (not)Led and bulins 0.6 Vehiele 2.2 I 3.0 3.0 3.0 3.0 3.0 1.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0Machinery. turnture and other 0.2 )

Subtotal fixed anast. 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0

Other assets 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2

YOTAL ASSM 358.7 324.7 347.2 573.2 401.4 428.7 456.2 482.7 509.2 535.9 563.0 591.3 619.7 647.7 676.1 703.5 730.9 759.0 767.7

Actual ?ro1l.tadA. .8d of cale_-ar quarter/year 11/1 "6 /T7619 111/13g 1IV196 IV/19#7 1111981 11111987 TV/1"7 111988 1111988 11V1889 V198 11989 IIlit" IMR1989 IM t 1(90 U17/i0 HUM19 x90

Ciro accots 11.8 8.1 1S.2 9.4 13.0 9.1 16.7 10.3 14.3 10.0 18.4 11.3 15.7 11.0 20.2 12.4 17.3 12.1 22.2

911 35 1 102.0 125.0 127.5 130.0 152.5 175.0 177.5 180.0 197.5 215.0 217.5 220.0 240.0 260.0 262.5 265.0 287.5 310.0TIS' daeslta 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 10.0 30.5 13.0 13.5 12.0Cortificatee of de-olt 0.1 6Othwr 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2

subtotal savew 82.0 105.; 129.2 132.2 135.2 158.2 181.2 1U.2 187.2 205.2 223.2 226.2 229.2 249.7 270.2 273.2 271.2 299.2 322..

_agad f...,f . 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 3.6

!i.mA_tew tsb"z) 16.2 18.1 14.8 15.7 16.7 17.2 17.9 19.0 20.2 21.3 22.5 23.6 24.8 25.9 27.0 28.2 29.3 30.4 31.5Maikiag saital /a 16.4 L16.1 tL1.4 131.1 146.7 146.3 137.4 167.3 177.7 180.9 171.1 220.2 228.1 226.1 210.1 :72.4 276.3 268.8 24.6Other 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6

subtotal LoMAS 186.3 135.8 127.8 148.4 165.0 167.1 136.9 167.9 1".5 203.8 193.2 265.6 254.5 253.6 238.7 302.2 307.2 30.8 277.7

n lRV tt11.3 12.4 13.6 14.6 15.9 17.1 16.2 19.4 20.6 21.6 23.0 24.2 25.5 26.7 27. 2.1 30.3 31.5TAr886 Lategrat J 16.3 6.2 8.3 2.1 4.2 6.3 8.8 2.6 5.3 8.2 11.3 3.2 6.5 10.0 13.7 3.9 7.9 12.0 "6.5s lrm atarat 3Trm IaIoat lateruat 0.1 0.2 u.2 0-3 0.3 0.3 0.4 0.4 0.5 0.5 0.5 0.6 0.6 0.6 0.7 0.7 0.8 0.8 0.8

Subtotal r_serve 16.4 17.7 20.9 16.0 19.1 22.5 26.3 21.2 25.2 29.3 33.6 26.8 31.3 36.1 41.1 32.5 37.8 45.1 4".

Other liabilitlaw 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.3 0.1 0.1

Total LIaLitties 298.3 269.2 296.9 307.6 336.0 358.6 382.7 405.3 427.8 449.8 472.0 511.4 532.4 552.0 571.9 662.0 640.1 656.9 672.5

litfgr_4t *7.6 47.6 47.6 55.6 55.6 55.6 55.6 66.7 66.7 66.7 66.7 66.7 66.7 66.7 66.7 66.7 66.7 64.7 ".7Camtrthetisee for fined e.e 8.0 8.0 8.0 8.3 8.5 8.8 9.0 9.3 9.5 9.8 10.0 10.3 30.5 10.8 11.0 11.3 11.5 11.8 12.03t8aid_ eeradq /b 4.8 (0.3) (3.3) 1.7 3.3 5.7 8.9 1.6 5.2 9.6 14.3 2.9 10.1 18.2 26.5 3.5 12.6 23.6 36.2

Total vAIty 80.6 55.5 52.3 65.6 67.4 70.1 73.5 77.4 81.4 86.1 91.0 79.9 87.3 95.7 106.2 1.5 90.8 102.1 116.9

TSL LunLYTIUS A 30111 1 2 9

7 324.7 347.2 373.2 401.4 428.7 456.2 482.7 509.2 535.9 563.0 591.3 639.7 647.7 676.1 703.3 730.9 759.0 787.7

C_ tC ta caas to eat projected a a *"r-ate itm; working capital Loeas from the Ceba-g (S1R) are also not of c-ab dopaltad in th Cobas (1.(... uhcch. 1 fact . rupreente excess lquidty).metdal Oersids ere epoprlated by SI at the _ of -ea yer.

MDapacb as7?

- 58 -ANNEX 6

INDONESIA

BRI/KUPEDES SMALL CREDIT PROJECT

Cost Su ma ry of USAID Technical Assistance to BRI(U88'000)

Unit Total Total Pln ncingItem Unit cost units cost ¢Ot/BRt USAID

Technical AssistanceTraining/policy advisor san-years 200 8.0 1,600 - 1,600Operations advisor man-years 200 7.5 1,500 - 1,500Rural finance research and audit 1,150 - 1,150Local counterpart support 1,800 1,800 -

Subtotal 6,050 1.800 4,250

Training Operating Costs year 1,000 3 3,000 1,500 1,500

EquipmentCoumunications equipment 2,000 1,000 1,000Computers 3,000 1,500 1,500

Subtotal 5,000 2,500 2,500

Training Center Construction 3,550 1,900 1,650

Project Evaluation 100 - 100

Contingency 300 300 -

Total Project Cost 18.000 8.000 10,000

AEPIDMarch 1987

5-59 -

ANNEX 7Page 1

INDONESIA

BRI/KUPEDES SMALL CREDIT PROJECT

Draft Terms of Reference: Research and Planning Advisor

Background

1. Under the proposed Bank Rakyat Indonesia (BRI)/KUPEDES Small Creditproject, the World Bank intends to finance one long-term advisor to strengthenand enhance BRI's Research and Planning Division. The Research and PlanningDivision consists of 47 staff members, of which 12 are professionals. Theprincipal functions of the division are to undertake special studies asrequested by BRI management and to monitor and evaluate operations. TheResearch and Planning Advisor's major work would be to transfer to BRI staffthe capacity to design, execute and analyze studies useful to BRI manage-ment. The advisor would report directly to the Managing Director responsiblefor the lesearch and Planning Division.

Academic Qualifications

2. At least the equivalent of a masters degree in economics or othersocial science with a strong background in quantitative analytical techniques.

Work Experience

3. Considerable nonacademic work ezperience (five years or more wouldbe desirable) related to the following:

(a) Survey analysis methology

(b) Financial services market research

(c) Management information systems

(d) Office methods analysis

(e) Economic impact studies in rural areas

(f) Basic banking and financial systems

(g) Economic and financial analysis

Candidates with experience in surveys and economic impact analysis, as well asIndonesian work experience, would be preferred.

Language Proficiency

4. English and Indonesian, or English and the willingness to achieveworking-level proficiency in Indonesian within six months after appointment.

- 60 -

AIMX 7Page 2

Term of Appointment

5. Two years with a one-year extension, if mutually agreeable.

Outline of Activities

6. Examples of the studies which the Research and Planning Advisorwould be called upon to help 'ian and to executes

(a) surveys and studies of rural credit (Unit Desa) operations toinclude:

(i) gathering and analysing data of ongoing lending and savingsprograms;

(ii) determining how BR! policies are actually being implemented inthe field;

(iii) comparing actual data collected in the field to the sameinformation reported in the BRI monitoring system to assessits accuracy and timeliness;

(iv) gathering and analysing special data on loan portfoliocomposition, client profiles, etc., which are not part ofBRI's regular monitoring and information system;

(v) surveying. Unit Desa clients to provide market researchinformation in order to improve existing programs, and toassess the socioeconomic composition of clients;

(vi) conducting economic and financial impact studies of samples ofUnit Desa borrowers and savers; and

(vii) special studies to investigate the feasibility of introducingnew financial instruments in rural areas and other subjects;and

(b) surveys and studies of other BRI operations as required.

7. The Research and Planning Advisor would train research section staffin survey methodology techniques, questionnaire design, basic statistics andeconomics, data analysis techniques and using computers to process data.

- 61 -ANNEX 7Page 3

8. Schedule for Acquisition of Planning and Research Advisor

ActivityActivity Completion Date

1. Formulation of TOR October 29, 1986

2. Call for Candidates - November 30, 1986

3. IBRD Sends List of Possible Candidatesfrom Consultant Roster Search November 20,1986

4. Deadline for Receipt of Candidate CVs by BRI Jaunary 31, 1987

5. Preparation of Candidate Shortlist andSubmission by BRI to IBRD for Comments February 15, 1987

6. Draft Consultant Contract Submitted toIBRD for Comments February 15, 1987

7. IBRD Comments Received by BRI March 1, 1987

8. Interviews and Negotiations Completed withSelected Candidate March 31, 1987

9. Contract signed between BRI and Consultant June 1, 1987

10. Tentative Starting Date of Consultaat August 1, 1987

1/ Advise of call for candidates published in newpapers and journals toinclude selected local Indonesian papers and The Economist.

- 62 -

ANNEX 8Page 1

INDONESIA

BRI/KUPEDES SMALL CREDIT PROJECT

Formula for Calculation of Relending Rate from GOI to BRI

1. The interest rate payable by BRI to GOI on funds out of the Bankloan will be a -ariable rate per annum equal to the average weighted interestcost of BRI loanable funds arising out of its customer deposits (i.e.,excluding free funds from government and parastatal agencies). This rate willbe determined accoarding to the following formula:

rT (T ) + rS (S ) + rD (MD )x =

t (T + S + D (RT + R D + RD

Definitions

t = the last day of the most recent month or quarter prior to anInterest Period for which BI has consolidated data on the depositbase of BRI

rD = interest payable on BRI demand deposits, at time tTrT = interest payable on BRI time deposits, at time t

Srt = interest payable on BRI savings deposits, at time tt

Dt the amount of BRI demand deposits, at time tTt the amount of BRI time deposits, at time t

St = the amount of BRI savings deposits, at time t

MDt = minimum average balance of demand deposits outstanding duringquarter immediately preceeding time t

RT reserves on time deposits of BRI at tt

Rs = reserves on savings deposits of BRI at tt

RD reserves on demand deposits of BRI at tt

Xt = interest rate applicable on subsidiary loan (from GOI to BRI) foreach interest period

2. Notwithstanding the above cost-of-funds formula, the relending ratewill not be less than the interest rate on the Bank loan plus a margin of1.75%.

- 63 -

ANNEX 8Page 2

3. The interest rate Xt shall be calculated for each interest period,except that if, during an interest period, changes in the underlying para-meters indicate a change of at least 1.5 in the rate, then t.e Governmentmay, after consultation with the Bank, adopt for the rest of that interestperiod the rate calculated on the basis of the most recently available data.

- 64 -

ANNEX 9Page 1

INDONESIA

BRI/KUPEDES SMALL CREDIT PROJECT

Rationale for Disbursement Formula Adoptedfor BRI/KUPEDES Small Credit Project

1. Among the objectives of Bank support for the KUPEDES program are:

(a) To support a growing credit program;

(b) To encourage resource (savings) mobilization by the Unit Desas; and

(c) To replace additional BI liquidity credit.

Under the existing agreement with BI regarding the provision of liquiditycredit to BRI for the KUPEDES program, BRI is comitted to funding one thirdof the increment in KUPEDES lending operations on the basis of the outstandingKUPEDES loan portfolio. For every Rp 50.0 billion in liquidity creditprovided by BI, BRI must provide Rp 25.0 billion, either through additionalUnit Desas' TABENAS/SIMPEDES savings deposits and/or other BRI funds. Inother words, no growth in the KUPEDES program, no additional BI liquiditycredit; furthermore, no less than 33.3% of the incremental must be funded byBRI (preferably, through savings mobilized by the Unit Desss).

2. In arriving at a formula for disbursing the proposed Bank loan insupport of the KUPEDES loan program, the appraisal mission was concerned withretaining the objectives/advantages inherent in the existing formula forproviding additional BI liquidity credits (which will no longer be availableonce the Bank loan becomes effective). These objectives/advantages are:

(a) funds can only be disbursed against an expanding KUPEDES loanprogram - it does not maake any sense to provide additional funds toBRI if total KUPEDES loan outstanding are stagnant or shrinking,particularly since existing BI liquidity credits constitute a basepool of stable long-term resources;

(b) BRI must provide a minimum and increasing percentage of theincremental funds required for KUPEDES loans - this encourages BRIto continue, and increase, resource mobilization efforts; and

(c) BRI would not be penalized if it raises more resources than neededby a growing loan program - additional funds could be lent by UnitDesas to the branches and successful savings mobilization effortsare to be encouraged.

The mission was also concerned that the proposed formula should (i) not resultin the Bank financing more than 25% of KUPEDES loan disbursements during anycalendar year (in order to stay within indirect import/local cost guidelinesfor Indonesia); yet (ii) still allow the Bank to finance a substantial portion

- 65 -

ANNEX 9Page 2

(at least 50%) of the increase in total loan outstanding if that increaseresulted in substantial part from an increase in the average length ofmaturity of new KUPEDES loans.

3. The proposed formula meets all these concerns. Thus, the Bankwould finance either

(a) 10% of new KUPEDES loan approvals for a given quarter with a ceilingof 65% of the total increase in KUPEDES loan outstandings during thefirst year of the project (BRI would finance the rest out ofmobilized savings). This ceiling would be reduced to 601 after thefirst year of the project in order to encourage further the resourcemobilization efforts of the Unit Desas; or

(b) 50% of the total increase in KUPEDES loans outstandings (net ofprovision for doubtful debt) if this is greater than the amountcalculated under (i) above. This option is designed to enable theBank to prcvide a higher level of assistance (in terms of absoluteRps.) to BRI in case of a rapid, large increase in total loansoutstanding resulting frt a substantial lengthening of averageKUPEDES loan maturities." Even in this case, however, it isunlikely that Bank financing as a percentage of KUPEDES approvalswould exceed 20%.

Sensitivity tests indicate that option (i) will always be applicable duringthe disbursement period of the proposed loan provided that the averagematurity of new KLPEDES loans does not increase substantially. Below are 3examples to show hiw the formula works.

4. Attachment I shows a simplified presentation of projected lendingoperations with assumptions as outlined in the appraisal. The KUPEDES programis growing with BRI committed to meeting a minimum level (i.e., 35% and 40%)of annual KUPEDES funding requirements. Over a two-year period, total KUPEDESdisbursements would amount to Rp 1,564 billion with outstanding portfolioincreasing by R 195 billion (from Rp 400 billion to Rp 595 million). Of theadditional resources required to finance the growing portfolio, IBRD wouldprovide Rp 121.9 billion (or 62.5%) with BRI/Unit Desas providing the otherRp 73.1 billion.

5. Attachment 2 shows only a marginal increase in projected quarterlydisbursements over the two-year period (no change in assumed loan maturi-ties). Total disbursements amount to Rp 1,287 billion; outstanding portfolio,however, would increase by only Rp 65 billion (from Rp 400 billion to Rp 465billion). Of the additional funding resources required (i.e., Rp 65 billion),IBRD would finance Rp 40.8 billion (or 62.8%) with BRI/Unit Desas providingthe remaining Rp 24.2 billion.

1/ At the same time, this formula minimizes the amount of effectiverefinancing undertaken by the Bank in the event that the KUPEDESportfolio rapidly expands due to increasing arrears, since such arrearswould be provided for in the provision for doubtful debt.

- 66 -

ANNEX 9Page 3

6. Attachment 3 shows the same level of disbursements as assumed in theappraisal, but assumes a doubling of average loan maturity. Thus, while totaldisbursements would still amount to Rp 1,564 billion (as in the case ofAnnex 1), KUPEDES loans outstanding would increase by Rp 598 billion (from Rp400 billion to Rp 978 billion) due to the lower level of repayments attributedto the longer repayment periods. In this instance, IBRD would finance 50% ofthe additional funding resources required, i.e., Rp 289 billion. Using the10% of disbursements and minimum BRI contribution formula applied in the Annex1 and 2 examples, IBRD would be able to provide only Rp 156.4 billion (or27.1%) of the additional resources required to fund KUPEDES lending activitiesover the two-year period. Under the alternative formula, IBRD is able toprovide a substantially greater amount of absolute Rp resource requirementswhile BRI would also increase its level of participation (i.e., from 40% to50%); at the same time, Bank disbursements as a percentage of total KUPEDESloans would be slightly less than 19%.

Attacbment 1

Projected IWPEDes Laendlg Operatlons: AssuLmplons As OutliTned In SAR

Year 1 Year 2

0 1 II II IV I II III IV

Outstrdling at Begiming of Quarter 400 424 449 473 498 521 546 570

P1iUs Dlsburuints 161 171 181 191 200 210 220 230

Less: Repayments 137 146 157 166 177 185 196 205

Outstanding at End of Quarter 4D00 424 449 473 498 521 546 570 595 CS

Year 1 Year 2

Total Disbursements 704 860x 10% 70.4 86.0

As percentage of dlBbuzuet

Aoutstantxlg 98.0 97.0x 65Z 63.7 9.05x 60C 58.2 6.78

_ QzEDLm

Attachment 2

Projected IaPE2ES L!Ir,g Operatlons: Assujptions as oiutlhid In SAR,xcept only mrglnal increase In quarterly dIsburseients

Year 1 Year 2

Quarter 0 I I: III IV I II III IV

Outstariirig at Beglnming of Qumrter 400 415 425 431 437 444 451 458

Plus: DMsbureaonts 152 154 156 160 162 165 168 170

Less: BeTnyments 137 144 150 154 155 158 161 163

Outstamdng at Erd of Qmrter 415 425 431 437 444 451 458 465 100

Year 1 Year 2

Total nDisburseenets 622 665x 10% 62.2 66.5

As perceltage of dIsbura.ets

A Outstanding 37.0 28.0x 65% 24.0 3.86x 60% 16.8 2.53

vi

Attachment 3

Projected KUPFDES Lerdlng Operations: Assu.iptlons as ottllned In SAR,except average maturlty of new loans doubled

Year 1 Year 2

Quarter 0 I II III IV I II III IV

Outstanding at Beginning of Quarter 400 424 469 535 624 736 833 915

Plus: Dlsbursements 161 171 181 191 200 210 220 230

Less: Repayments 137 126 115 102 88 113 138 167

Outstandlng at End of Quarter 424 469 535 624 736 833 915 978 1

Outstandlng Net of Provisionfor Bad Debts 386 408 450 513 594 698 787 865 924

Year I Year 2

Total Disbursements 704 860x 10% 70.4 86.0

As percentage of disburseents

A Outstandnlg 224 354x 65% 145.6 20.68 ":.x 60% 212.4 24.70 lb

5Net Outstandilng 208 330 a%x 507% 104 165 14.77 19.19

- 70 -

ANNEX 10

INDONESIA

BRI/KUPEDES SMALL CREDIT PROJECT

Estimated Cumulative Disbursements of the Proposed Loan(US$ million)

Estimated cumula- Standard disburse-Bank Estimated tive disbursement: Total estimated ment profile forfiscal cumulative technical cumulative IDF East Asia andyear disbursement: technical assist- disbursements Pacific Regionsemester credit component ance component /a Amount Percent (Percent)

FY88

First 7.0 0.1 7.1 7.2 1.0Secornd 15.0 0.3 15.3 15.1 7.0

FY89

First 25.0 0.6 25.6 25.2 20.0Second 40.0 1.0 41.0 40.4 38.0

FY90

First 60.0 1.3 61.3 60.4 56.0Second 75.0 1.5 76.5 75.4 71.0

FY91

First 87.0 1.5 88.5 87.2 83.0Second 93.0 1.5 94.5 93.1 91.0

FY92

First 97.0 1.5 98.5 97.0 96.0Second 100.0 1.5 101.5 100.0 100.0

/a Estimated disbursements reflect the anticipated implementation timetable of thetechnical assistance component.

'AEPIDMarch 1987

(her I1

INDONESIABRIIKUPEDES SMALL CREDIT PROJECT

Orgoniztiomi Structure of BRI Heodquarters

[-3~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~A .3

01.00 01000 -- 100 10101

0.0.1.,r 0,0 0,ooo.0 0.., 01 l1.000 00110 lo,Oo

< ~~~~~~~~~~100 0,10 01.0 0.00 {< {03 000 {o1 (.1 00.0 *000 -m. .oso t {o..o{aoo {o

910*{ 9 10*1 1101 000, { 3*0 S100 {1* 301 *000 SO0, 0111 0101 {:100 SIl { 3

0.00,10 00000 0.0,0.0 0.0100 11000l 010010 000000 0601,00 000,000 000010 .0,000, 000010 01000 0.000

H~~~~~~00 010 110 040 0000 EX{<

10,01 0000& 0010101 W 100 CIIl U001101 { 3o~ *o,o 1110 100S0.

1010010 { E, ,0. OIOI000.010000~0 0 00..00,0110 00.o.

E g H3 E H~~~~~~~~~~~~~~~01. 00101 100 1010001 < [k A

~~~~~~~~~~~~~~~~~~~~~~~~loo0 1001

010010 000 ~ ~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 10.0 1100 U00 0ANR R.0AI W01010101.1 01010,1lO Co., 10011 10.. 0 70.0 110101 01. 010010100 0100 101001001, Il1

185R 11038R5I

0' ~ '-~ YTHAILAND liW P lis 1 liO' l0

0>~ t-*'*' N PHILIPPINES I N D O N E S I AEBRUNEI I r"' /

b .MALAYS A rCi ) 115 g ~ ~ ~_ L _ \ Cities Or Towns

i Koolo *Y-IEE' ~ \\ / i = = Province Boundories

MALAYSIA ) /

@ g <-> SINGAPORE 7. y

O* tn-s~/ b"io, 5 .'0HA _ALMAHERA

A-, T..w. 11-- ~ ~ ~ ~ AA MAIT

4 5 26 E

Cb ' T- -- S...d /

J - ^ ~ o (\KA 255> ) oook.30o..es N / t ?- \\ le \ owo I

PROVMtJCES 5 80 J 24 5U 'A2WES/" "K":A-AIN S,.A a - :

2A *_T- LTA.1N 0/\9 I RI AN' )AYA4

2540055> 405 .. 0 -7 o °0

no A'o '-E

ICoo semenss 9EAA

8I JOW 0500 IO o0oS0 *' ' \

430. A.0500 -A.

7 503 * I'

10 1AA . .AAT 9

Tt13w TlW °MADUkAo

15 O0050005 505 *_ 10 I I _

1714 cOYOE NA118 FLLKQ t \S { tg #~0500 -o_e

14 IC0000 5 °

27 sOIIIANe. 0A 030 ,* _ I/ 'qO0ES

32 AA IIY4

24 soLeoe 55L027

260 s'P 50 '390'4~