Document of F EThe World Bank FLE Copy

FOR OFFICIAL USE ONLY

Report No. 3386-IND

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

STAFF APPRAISAL REPORT

May 8, 1981

East Asia & Pacific Regional Office

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 EQUIVALENTS

Before November 15, 1978US$1.0o = Rp 415Rp 1.00 = US$0.0024Rp 1 million = US$2,410

After November 15, 1978US$1.00 = Rp 625Pp 1.00 = US$0.0016Rp 1 million = US$1,600

ABBREVIATIONS

P.T. ASKRINDO - Indonesian Credit Insurance CorporationBAPINDO - Development Bank of IndonesiaBI - Bank Indonesia

BIPIK Guidance and Development of Small-Scale IndustriesBNI 46 - Bank Negara Indonesia 1946BRI - Bark Rakyat Indonesia

CPMU - Central Project Management UnitDG-SSI (MOI) Directorate General of Small-Scale Industries (Min. of

Industry)DKK - Desk for Small CreditsDPPK - Desk for Small Enterprise DevelopmentKELAYAKAN KREDIT - Feasibility Based Credit ProgramKIB - General Investment CreditKIK - Small Investment CreditKInKP Small Permanent Working Capital CreditLPPI Institution for the Development of Banking in

IndonesiaPUPN - State Committee for Settlement of Credit ClaimsRCP - Rural Credit ProjectRDB Regional Development BankRPMU Regional Project Management UnitSEDP Small Enterprise Development ProjectSKK Section for Small CreditsSPPK Section for Small Enterprise DevelopmentSSE Small-Scale EnterprisesSSI - Cottage and Small IndustriesUNIDO - United Nations Industrial Development OrganizationUPPINDO (IDFC) Indonesian Development Finance Company

FISCAL YEAR

Government April 1 to March 31Ba-'k Indonesia - April 1 to March 31State Banks - January 1 to December 31

FOR OFFICIAL USE ONLY

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Table of Contents

Page No.

1. THE INDUSTRIAL SECTOR

Ovrve . . .1

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . 1Structure of the Manufacturing Sector . . . . . . . . . . . 2E'olicy Issues and Considerations . . . . . . . . . . . . . . 4

2. THE SMALL-SCALE ENTERPRISE SECTOR

Characteriistics of Small-Scale Enterprises . . . . . . . . . 5Constraints on SSE Growth. . . . . . . . . . . . . . . . . . 6Need for SSE Development . . . . . . . . . . . . . . . . . . 6SSE Sector Issues and Policy Considerations . . . . . . . . 6The Bank's Involvement in the SSE Sector . . . . . . . . . 9

3. THE FINANCIAL SECTOR

Financial Institutions . . . . . . . . . . . . . . . . . . . 9Financial Policies and Industry . . . . . . . . . . . . . . 12Bank's Lending Strategy for the Industrial Sector. . . . . . 15

4. THE KIK/KMKP Program

Background . . . . . . . . . . . . . . . . . . . . . . . . . 16Scope and Terms of Lending ... . . . . .... . . . . . . 16Interest Rates and Margins ... . . . . ..... . . . . . 18Organizational Arrangements . . . . . . . . . . . . . . . . 18Lending Procedures .... . . . . . ..... . . . . . . . 19Amount and Distribution of Lending . . . . . . . . . . . . . 21Collection Performance and Arrears . . . . . . . . . . . . . 23Growth Prospects . . . . . . . . . . . . . . . . . . . . . . 24SEDP I and KIK/KMKP Program. . . . . . . . . . . . . . . . . 24

This report was prepared by a Bank mission which visited Indonesia in November1980 consisting of Messrs. R.G. David (mission leader), T.N. Dinh (missionadvisor), H. Lesshafft, J. Levitsky, E. Su and W. Ward. Mr. V. K. Goel, whowas on the preappraisal mission, also contributed in preparing this report.

I 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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Page No.

5. THE PROJECT (SEDP II)

Project Objectives and Scope . . . . . . . . . . . . . . . . 29Project Components . . . . . . . . . . . . . . . . . . . . . 30Studies . . . . . . . . . . . . . . . . . . . . . . . . . . 33Training of Handling Bank's Staff . . . . . . . . . . . . . 33Regional Development Bank's Upgrading . . . . . . . . . . . 35

SSE Support Services . . . . . . . . . . . . . . . . . . . . 36Project Cost and Financing . . . . . . . . . . . . . . . . 37Disbursement . . . . . . . . . . . . ... . . . . . . . . . . 41Procurement . . . . . . . . . . . . . . . . . . . . . . . . 41Accounts and Audit .... . . . . . . . . . . . . . . . . . 41Monitoring and Reporting Requirements . . . . . . . . . . . 41Project Benefits and Risks . . . . . . . . . . . . . . . . . 42

6. AGREEMENTS REACHED DURING NEGOTIATIONS . . . . . . . . . . . . 44

ANNEXES

1. Policy and Strategy for the Development of the KIK/KMKP Program2. Reporting Requirements3. Estimated Schedule of Disbursements4. Estimated Project Execution Schedule5. Medium-term Investment Credits6. Consolidated Balance Sheet of Monetary Authorities, 1976 - May 31, 19807. Functional Balance Sheet of Bank Indonesia, 1976 - May 31, 19808. The KIK/KMKP Program9 The Indonesian Credit Insurance Corporation (P.T. ASKRINDO)10. The Regional Development Bank's Upgrading Program11. Training Component12. Draft Terms of Reference of the Staff Development Expert - LPPI13. Draft Terms of Reference of the BI Staff Development Advisor14. Economic Impact of KIK/KMKP Loans on a Sample of SSE Clients15. Organizational Structure of the Credit Department of BI16. Statements of Expenditures

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CHARTS

1. Bank Indones;ia Credit Departmentlesk for Small Cre.ditsOrganizational Chart

2. Bank Indonesia Credit DepartmentDesk for the Development of Small BusinessOrganizational Chart

3. Bank Indonesia Regional Branch (Central Java)Organizational Chart

4. Bank IndonesiaOrganizational Chart

MAP: Indonesia and RPMU Areas

DATA IN PROJECT FILE

1. Overview of Manufacturing Sector by Scale of Operation, 1974/752. Value-Added (Current Market Prices) in Large and Medium Firms, 1971

and 1974-783. Regional Distribution: Output, Value-Added, Energy Use and Average

Year of Establishment4. Structure of Employment by Ownership Groups, 1974/755. Draft Terms of Reference of the Staff Development Experts BAPINDO

and UPPINDO6. Draft Terms of Reference of the Staff Development Experts - BRI,

BNI 467. Original Terms of Reference of the (BI) Credit Department's Small

Credit Desk8. RDB Upgrading Program Cost Calculations9. Other Technical Assistance Cost Calculations

1. THE INDUSTRIAL SECTOR

Overview

1.01 The rapid increase in oil earnings beginning in the mid-'70s pro-vided Indonesia the resources needed to undertake a high level of developmentexpenditures over the last half decade. The level of gross domesticinvestments rose from less than 20% of GDP in 1974 to 25% in 1979, as real GDPgrew at 6.5% p.a. during the period. The Government invested a good portionof its oil income in large, capital-intensive industries (cement, steel,fertilizer, petrochemaicals), augmenting the inflow of similar investments inthe private sector which had been attracted by the Government's incentivespolicies. Much of the recent economic growth has come from the industrialsector value-added which grew at 8.4% p.a. in real terms and made up for thesluggish growth of the agricultural sector. Agriculture, nevertheless, stillprovides the main source of employment and income for the majority of thepopulation; its share in GDP is 32%. At the end of 1978, the industrialsector (comprising mining, manufacturing, construction, power, water and gas)as a whole contributed about 33% of GDP (in nominal terms), with themanufacturing sector accounting for 9% of GDP, followed by mining at 11%, andconstruction 6%. Manufacturing production grew in excess of 12.4% p.a. inreal terms during 1970-78, however, the rate of growth has been decliningsince 1976. In 1979 the growth of manufacturing was only 9% p.a..

1.02 Indonesia is still behind other neighboring Asian countries in termsof industrialization./l M4uch of recent manufacturing sector expansion tookplace from a small base equivalent to less than 10% of GDP in 1974 and hasbeen confined to the modern large-scale industries. The Government's emphasison import substitution has further influenced the direction of investmentstowards the production of consumer goods for the domestic market, therebyimpeding the growth of manufactured exports. Over 50% of manufacturing outputis produced by food, beverages, tobacco and textile industries; and only 10%of manufactured output is actually exported.

1.03 The small-scale enterprise (SSE) /2 sector which accounts for 99%of manufacturing establish.ments and employs 87% of manufacturing workers has

/1 In 1978, compared to the 9% share in Indonesia the GDP share of manufac-turing in the Philippines was 25%; in Sri Lanka 23%; in Thailand 18%; inIndia 17%; in Malaysia 16%; and in Pakistan 16%.

/2 The Central Bureau of Statistics and the Ministry of Industry use anemployment-based definition of industries: cottage industries (CI) aredefined as units employing 1-4 workers; small-scale industries (SI), 5-19workers; medium-scale industries (MI), 20-99 workers; and large-scaleindustries (LI), 100 or more workers. The banking system, on the otherhand, defines small-scale enterprises on the basis of borrowers' assetsand sectors, i.e., industrial and construction activities with a net worthof up to Rp 100 million ($160,000) and all other productive activitiesincluding services with a net worth of up to Rp 40 million ($64,000).

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until quite recently been relatively neglected. Its rate of growth over theperiod averaged 5% p.a. or less than half that of the modern sector. Sincethe burden of providing employment for a growing labor force is likely tofall more on this traditional, labor-intensive sector rather than on the muchsmaller modern sector, it is important that an appropriate strategy bedeveloped that could fully tap the potentials of this sector in contributingto future growth and employment.

Structure of the Manufacturing Sector

1.04 Size and Sectoral Distribution. The dualistic structure of thissector can be shown by the dominance of a small number of modern enterprisesin terms of output, value-added and wages.

Table 1.1: STRUCTURE OF THE MANUFACTURING SECTORBY SCALE OF OPERATION, 1974

% of Manufacturing SectorTotal Cottage Small Medium Largeabsolute Ind. Ind. Ind. Ind.level (CI) (SI) (MI) (LI)

No. of establishments 1,289,800 95.7 3.7 0.5 0.1- using power 4,649 nil 7.3 68.6 24.1

No. of persons engaged 4,904,800 79.5 7.0 4.2 9.3- unpaid 3,802,800 97.8 2.0 0.2 -- paid 1,102,000 16.1 24.4 18.2 41.3

Gross output (Rp bln.) 1,653 12.2 9.5 12.3 66.0Value-added " 613 13.5 8.6 15.9 62.0Wages & salaries " 120 8.4 13.6 15.9 62.1

Source: Indonesia - Cottage and Small Industry in the National Economy,Report No. 2490-IND, dated November 9, 1979.

As the above figures show, the modern sector comprising less than 1% of thenumber of manufacturing firms, accounts for 78% of value-added and output butonly 13% of employment, whereas the smaller scale traditional sector consist-ing of over a million enterprises, contributes about 22% of output and employsnearly 90% of manufacturing workers. A Bank industrial sector mission /1

/1 The following discussion is based on the draft mission's reportentitled: "Selected Issues of Industrial Development and Strategy,"Report No. 3182-IND, dated December 15, 1980.

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which examined this structure observed other characteristics that distinguishthe modern segment of industry from the more traditional small-scale sectors(SSI). At the extreme, average productivity (value-added per worker) in themodern sector was almost 40 times higher than in the cottage industriessector. While the modern sector has been able to import modern technologyalong with machinery from abroad, SSIs continue to use traditional methods ofproduction, relying principally on manual labor rather than electric power.Large and medium industries consume about 80% of total industrial energy use,to produce goods that are closely similar to but of better quality and oftencheaper than those of SSI. This sometimes results in the displacement of thelatter. Over 40% of the value-added in the modern sector is concentrated infood, beverages and tobacco, followed by chemicals (18%), and textiles (12%).Between 1974 and 1978 there has been some product diversification as the shareof basic metals, nonmetal products, and fabricated metals, all relativenewcomers to Indonesia, has been increasing.

1.05 Employment. The diversification process can also be seen in termsof industrial employment. Employment in the newer segments of industry hasgrown more than twice as fast as growth of overall industrial employmentestimated at 8.6% p.a. during the period 1974-78, while employment in thefood and textile sectors nas grown at a slower rate than this average. As awhole, the manufacturing sector has a very small employment base accountingfor about 11% of the Indonesian labor force, as compared with theagricultural sector of 60% and services sector of 29%.

1.06 Export Orientation. With the growing importance of oil exportsbe!ginning in 1974, the value of manufactured exports which has grown rapidlyin absolute terms remains relatively small at about 2% of total exportsreceipts and about 10% of manufactured output. Significant increases in theexport of cement, fertilizer, cotton fabrics, and wooden products, whichresulted in part frormi the 1978 devaluation of the Rupiah, took place from asmall base. Overall trade policy and the incentive structure are generallybiased towards production for the domestic rmarket. Besides, administrativebottlenecks related to customs procedures, shipping and clearing through theports continue to hinder export growth. Recent efforts to improve the traderegime and stimulate export production in commodities where Indonesia hascomparative advantage are steps in the right direction (para. 1.10).

1.07 Geographic Distribution. Java which contains 65% of populationalso accounts for nearly 82% of industrial output, 85% of value-added, and85% of employment. This is not surprising since this main island also hasrelatively better transport facilities, power supply, and is the seat ofGovernment agencies. Foreign and domestic investment incentives which offeradditional tax holidays and concessions to firms locating in other islandshave yet to make their impact on the geographic distribution of industries.Industrial congestion and environmental pollution seem to be reaching criticalstages particularly in main cities like Jakarta, Semarang and Surabaya.

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Policy Issues and Considerations

1.08 The Government specifies its industrial policy objectives anddevelopment targets in its Five-Year Plan (REPELITA) documents. For theperiod 1979-83, the REPELITA III envisages a growth rate for the manufacturingsector of 11% p.a., which would raise the sector's GDP share from 9.3% to12.6% (in real terms) at the end of the plan period. The plan also envisagesthe creation of 1.1 million new jobs, including 434,000 in the small-scalesector.

1.09 The policy objectives of the REPELITA III include the promotion ofindigenous (pribumi) entrepreneurs,/l the generation of employmentopportunities, and the development of labor-intensive and manufacturedexports. The Bank Industrial Sector mission, which visited Indonesia inFebruary/March 1980, at the request of the Government, identified the majorissues facing the Government in realizing these objectives. These are,inter alia, issues related to the industrial incentives system and traderegime, the regulatory environment, the financing of industrial investmentsand policies towards private foreign investment. The mission-s report isbeing discussed with the Government. This report stresses the need for thecreation of a proper policy environment that is designed to stimulatelabor-intensive industries in the private sector and develop an efficientindustrial base with an appropriate mix of labor- and capital-intensivesectors that capitalize on Indonesia's resources (labor and naturalresources). Its main policy recommendation is to correct the present biasof industrial incentive towards domestic production and to free the privatesector from the grips of a stringent regulatory system.

1.10 Industrial Incentives and Trade Regime. The dualistic nature ofindustry can perhaps be traced directly to the structure of incentivesgoverning the sector. The incentive system is complex and its applicationuneven. While average level of effective protection is moderate (about 30%in 1975) there is a wide variation among various industries ranging from thehighest (over 1,000%) for the tire industry to the lowest (-35%) for thebatik industry. The weighted average rate of effective protection for theimport-competing sector is 61%, while that for the exportable sector is -6.4%.Although adjustments have been introduced from time to time, the system isstill biased heavily towards production for domestic markets and import-substitution. In the long run there is a need to correct this bias andcreate a more open international trade regime that gives approximately equalincentives to manufacturers to produce for the domestic and the foreignmarkets. This would involve the gradual reduction of effective protectionlevels, coupled with measures to help affected industries to adjust to an

/1 An enterprise or business is classified as pribumi if: (a) at least 75%of the capital is owned by indigenous persons, or (b) at least 50% of thecapital is owned by indigenous peTsons avid, the maaority of the directorsare indigenous. The term "indigenous" excludes Indonesian citizens ofEuropean descent, Chinese and other Oriental descent.

increasing competitive environment, and the adoption of more effectiveexport promotion incentives. The Government is taking important steps toaddress these issues, including a major reform of the tariff structure.

1.11 Licensing and Administrative Controls. The expansion of theprivate sector is severely constrained by an extensive system of regulations,licensing requirements and administrative controls. Due to the licensingsystem-s complexity, some private business investments have been retardedand there have been difficulties in applying the various measures in aconsistent fashion. Licenses are required for almost all forms and sizes ofproductive activities, some obtainable only at the central and others at thelocal government levels. Despite attempts to simplify the licensingrequirements, most recently in 1979, more remains to be done, particularlyin respect of manufacturing and services ventures, trade activities,domestic investments, and customs regulations. This involves a majorsimplification, fewer controls, which should result in lower cost of entryto entrepreneurs. This is especially critical to the entry of new smallfirms and the advancement of existing ones (para. 2.05).

2. THE SMALL-SCALE ENTERPRISE (SSE) SECTOR /1

Characteristics of the Small-Scale Enterprises

2.01 The SSI. sector includes all small-scale enterprises engaged inproductive activities including agriculture, industry, transport, trade andservices. However, except for industry, very little data is available on thestructure of these subsectors. Therefore, this section of the report willconcentrate on the characteristics of the cottage and small industries (SSI).About 96% of these firms are very small (unorganized and informal) industrialunits employing, in total, approximately 4 million persons, or about 80% ofall manufacturing workers. Average wages reflecting productivity are alsogenerally low, equivalent to about 40% of the average wage levels of largerfirms. Population/labor force surveys reveal that most family workers engagedin SSI operations work mainly to supplement their incomes from other sources,such as agriculture. Although the 1.3 million SSI firms /2 (including about48,000 SI) are scattered all over the country: roughly 70-77% of them arelocated in Java and another 10% in the three provinces of South Sulawesi,North Sumatra, and South Sumatra. Central Java appears to have a highconcentration of SSIs (42% of the total in terms of both employment andvalue-added). The SSI product range is concentrated in essentially consumergoods destined for domestic markets; exports produced by SSIs are negligible.

/1 This discussion draws on the Bank's recent SSI Sector Report entitled"Indonesia: Cottage and Small Industry in the National Economy," datedNovember 9, 1979, and is supplemented by the findings of the AppraisalMission.

/2 Current informal estimates, however, put this number at 2.5 million.

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Constraints on SSE Growth

2.02 In general, the development of the SSE sector has lagged behindthe rest of the manufacturing sector for a variety of reasons. Establish-ments are extremely small in size; they use mostly traditional technology;their product lines are limited and market demand is often stagnant orsluggish; and they generate very little "surplus" for reinvestment or expan-sion of activities. Consequently, their access to institutional financialassistance is also restricted. Development linkages between SSE and themodern sectors are few. Moreover, the system of Government financial andtechnical support has not really helped the growth of SSEs as the largerfirms generally have better access to these facilities.

Need for SSE Development2.03 Given the limited labor absorption capacity of the Indonesianagriculture, there will be a growing dependence on the nonagriculturalsectors for employment. The existing large base of SSEs, coupled withtheir low capital/labor ratio /1 and low skills requirements, make SSEssuitable for absorbing a significant portion of the new entrants to thelabor force. In addition, SSEs could provide an important element ofindustrial flexibility; produce many specialized and artistic products insmall quantities; provide for local needs and services quickly and cheaply;and have advantages in lower overhead and investment needs. SSE growth wouldalso help nurture entrepreneurship, improve technical skills, and reduceurban/rural income differentials and migration to the large cities.

Sector Issues and Policy Considerations

2.04 Target Groups. Target groups of assistance efforts in the SSEsector are not well defined, and the Government tries to channel thisassistance through various agencies in all parts of the country. As aresult, considerable overlapping exists and the overall assistance policyframework is spread out thinly and is poorly coordinated. Since the SSEsector consists of a large number of small and diverse units that aredifficult to reach, there is a need to focus assistance efforts to make itmore manageable and cost effective. This would require defining, on aregionally specific basis, in what subsectors SSEs enjoy a comparativeadvantage /2 and potential for expansion, and determining the critical

/1 During REPELITA II, the average capital/labor ratio was $250,000 forlarge industries; $15,000 for medium industries; and less than$1,000 for small industries.

/2 The SSI Sector Report mentioned above indicated a number of suchsubsectors: foodstuffs (preserved and processed fish, bakery products,canned goods, etc.), batik clothing and garments, leather footwear andconstruction materials (clay tiles, bricks, nails, etc.).

factors necessary to foster their further development. The studiesenvisaged under this project would aid in defining a more specific targetgroup and strategies for alleviating the growth constraints on SSEdevelopment.

2.05 The Regulatory System. The existing regulatory system tends tohave a more adverse effect on the operation of smaller firms than largerones. In Indonesia, the inability of loan applicants to obtain businesslicenses and operating permits required by banks has been identified as amajor cause of loan rejection for SSEs. Moreover, certain permits such asresidential permits, designed to curb rural/urban migration, may have alsoprevented migrant SSEs and craftsmen from operating in close proximity topotential markets. Under the proposed project attempts will be made throughthe Regional Project Management Units (RPMUs) to identify concrete caseswhich show the impact of the regulations on SSEs access to institutionalbenefits so that efforts could be made to rectify the problems.

2.06 Marketing. SSEs generally serve localized markets and lack directaccess to markets outside their immediate vicinity. Recognizing marketconstraints as a major growth impediment the Government is addressing theproblem on a number of fronts. A Government decree (Keppres No. 14) wasissued in 1979 to reserve a comprehensive list of items for public procure-ment from only SSEs. Both the Ministries of Industry and Trade are promotingexports of SSE products through subcontracting arrangements with tradingcompanies, trade exhibits, overseas sales campaigns, etc. However,marketing assistance efforts are poorly coordinated and lack direction. Thestudies proposed to be undertaken under this project would analyze marketingconstraints of SSEs and find ways of dealing with them.

2.07 Financial Assistance. The main financial assistance program forSSEs is the KIK/KMKP scheme /1 which was introduced in 1974. (See Chapter 4for details about the program.) So far, credit to SSEs through this channelby end-1979 constituted only a small fraction (less than 5%) of all institu-tional credit and was extended to about 10% of known SSE establishmentsthroughout the country. However, this credit program has grown very rapidlyand is expected to continue to grow at a fast pace. To facilitate thisrapid expansion, there is a need to strengthen the capacity of participatingbanks to implement SSE lending effectively. The strengthening of thebanking system must: be accompanied by a number of other steps, including,inter alia: (a) development of group loans to clusters of SSEs which aresupported by financial and technical assistance, marketing help and advisoryservices; (b) further simplifying banking institutions appraisal procedures

/1 KIK (Kredit Investasi Kecil) credits finance fixed assets and servicesrequired for expansion or development purposes and KMKP (Kredit ModalKerja Permanen) finance small permanent working capital up to a maximumlimit of Rp 15 million ($24,000) under each type of credit (Annex 8).

and reducing their heavy reliance on collateral requirements; and (c) develop-ing hire-purchase schemes for simple industrial equipment and machinery forSSEs. The proposed project is designed to address most of the above issues(para. 4.36).

2.08 Technical Assistance. The impetus for institutional technicalassistance to SSEs has come mainly from the public sector and publicly fundedagencies. Private sector initiatives have been limited to the provision ofmarketing and procurement assistance, usually for specific groups of SSEs. Inrecent years, as the Government put greater emphasis on the proraotion of smallenterprises, local chambers of commerce, trade associations, and voluntaryorganizations also began to shift their assistance to focus on smallerlabor-intensive enterprises, but their limited financial and manpowerresources have kept these efforts to the minimum. The potential target groupthat needs assistance is large and scattered throughout the country. Itsproblems are also varied and require specialized approaches. Given the numberand diversity of agencies, approaches, and target groups, present official andprivate assistance efforts lack central direction and focus. With theseprevailing conditions, the SSI sector report recommended a selective limitedapproach, where organized technical and financial assistance should beconcentrated on the more dynamic segments of the sector. Many SSEs are sosmall and widely dispersed that the most effective way of helping their growthis through the creation of a suitable policy environnent. While the rationaleof this selective approach is accepted in principle, present assistance isstill directed at broad sectoral groups, with little discrimination as tofirms' sizes and needs.

2.09 Technical assistance to SSEs is carried out by nearly all government-departments at both central and regional levels and target groups are broadlydefined along sectoral lines. The Ministry of Industry (MOI), through theDirectorate General of Small-Scale Industries (DG-SSI), provides industrialextension services to individuals and groups or 'clusters' of SSIs engaged inmanufacturing, but does not provide any assistance to other small enterprisesengaged in retail trade, transport and services industries. In addition,there are over 100 research and development institutes (14 are under theMinistry of Industry) /1 that provide limited technical support to SSEs. Themajority of these institutes lack resources and are still developing theirextension services, and on the whole, have not yet succeeded in developing thetechnology suitable for SSEs. The DG-SSI is relatively new, is short ofextension staff, and lacks experience in industrial extension work. A total

/1 Consisting of seven major industrial research institutes (Batik andHandicrafts, Ceramics, Chemicals, Leather, M4aterials, Pulp and Paper, andTextiles), and six small regional ones mostly chemical research institutesengaged in testing, quality control, and advisory services. In addition,an annually funded project (the Mietal Industries Development Center inBandung) also comes under the control of the Department of Industry.

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of about 400 full- or part-time extension workers are operating in thecountry. At this stage, the DG-SSI does not have an adequate and effectivenetwork of support services to help SSIs.

2.10 In view of the number of agencies involved in providing technicalsupport to SSEs, in addition to the numerous banks that extend creditassistance, the most pressing need is to foster closer coordination ofassistance programs and policies, at the same time as efforts are taken tostrengthen the capacity of individual agencies. As a first step in thislong-term goal, grassroots collaboration on a subsectoral and regionallevel, similar to the arrangements used on the so-called Working Groupprojects being developed jointly by the DG-SSI, BI and the banks, may beexplored further. The need and practicality of creating a central authoritythat could provide policy guidance and coordinate overall assistance to SSEsalso deserve further consideration. Under this project, attempts would bemade to assist the DG-SSI in the early stages of developing an effectivesupport services progra-m (para. 5.24).

The Bank's Involvement in the SSE Sector

2.11 The Bank's involvement in developing this sector consistsessentially of direct financial and technical assistance to the SSE sectorand to government institutions. An IDA Credit of $40 million (Credit785-IND) was approved in FY78 for the first Small Enterprise DevelopmentProject (SEDP I), which was designed to strengthen the Governmaent'sprincipal term lending program (KIK/KKMKP) for SSEs, while laying thegroundwork for and stimulating closer ties between the banking system andother technical agencies. The Rural Credit Project (RCP) of $30 million(Credit 827-IND) supplemented SEDP I by concentrating on small agriculturalproduction lending under KIK/KIKP while focussing its technical assistancecomponent on strengthening the term lending capability of Bank RakyatIndonesia which is the intermediary under this Credit.

3. THE FINANCIAL SECTOR

Financial Institutions

3.01 The Indonesian financial sector consists of a commercial bankingsystem dominated by six state-owned banks (including the state developmentbank BAPINDO), Bank Indonesia, the central bank, 79 private domestic banks,10 foreign banks, three development finance companies, and 26 RegionalDevelopment Banks (RDBs). As of end-1979, there were 144 commercial anddevelopment banks (excluding rural banks) with a total of 1,150 branchoffices. The monetary system consisting of Bank Indonesia and deposit moneybanks accounted for 96% of the total gross assets of financial institutions

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(Annex 6)./l The state banks which accounted for almost 80% of the assetsof all deposit money banks and 85% of outstanding credit were the majorlenders to the industrial sector (Annex 5). The balance of total bankingassets is held by private and foreign banks, 26 RDBs and BAPINDO. Currentlythe assets structure of the financial system is characterized by a dearth oflong-term credits; short-term credits, of less than one year maturity,account for approximately 77% of total manufacturing credits. This lack oflong-term instruments has led to the rollover of short-term credits; between70% and 90% of all short-term credits are rolled over. Since almost 60% ofall long-term credit is allocated to large government-sponsored projects,short-term credits have become an important source of financing investmentsin the private sector. The roles of the major financial institutions aredescribed below.

3.02 Bank Indonesia. In addition to its central banking functionsBank Indonesia (BI) also directs credit to certain priority economic sectorsthrough the banking system. As of May 31, 1980, Bank Indonesia's totaloutstanding credits (excluding advances to the Government and creditsprovided to Pertamina to service its external debt) amounted to Rp 1,785trillion ($2.9 billion), of which 83% represented credits to state banks(Annex 6). These banks have access to BI-s rediscount facilities to financetheir general working capital operations, as well as special investmentcredit programs (KIB, KELAYAKAN and KIK/KMKP) and loans made to developmentprojects undertaken by government agencies or government-owned corporations.BI has also participated, on a joint venture basis, in the establishment ofvarious financial institutions, including two development finance companies(the Indonesian Development Finance Company-IDFC and the Private DevelopmentFinance Company of Indonesia-PDFCI), a credit insurance company (P.T.ASKRINDO) and a venture capital company (P.T. BAHANA).

3.03 BI operates under the supervision of the Monetary Board, aGovernment advisory body comprising representatives of the Minister ofFinance and the Minister for Economic Affairs, BI-s Governor and itsManaging Directors. The Governor of BI and the Managing Directors areappointed by the President for five-year terms. The seven managingdirectors report to the Governor and supervise the work of its 15 departmentseach headed by a general manager. Each managing director holds primaryresponsibility for two departments and secondary responsibility for a third.These assignments are rotated on a regular basis. The Loan Department andthe Credit Supervision Department are, inter alia, primarily responsible forthe KIK/KMKP program, although other departments are also involved invarious aspects of the program (para. 4.07). BI has 37 regional and branchoffices throughout Indonesia; the organizational structure at the regionaloffices closely follows that of the head office (Chart No. 3).

1l Bank Indonesia alone accounted for 59.2% and the state commercial banksfor another 28.6%.

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3.04 State Commercial Banks. The five state commercial banks /1 arethe dominant commercial financial institutions. As of March 31, 1979, theyhad 79% of the assets of all deposit money banks, 76% of all deposits andmade 81% of all loans outstanding. As of the same date, they had a networkof 687 branches throughout the country. The overall level of their lendingboth for working capital and investment funds as well as lending prioritiesare determined by the Government. They are the major channels of officialdevelopment credit programs. Each of the banks is permitted to conductforeign exchange transactions and has been assigned by BI one or twoparticular economic sectors in which to specialize. In practice, however,the individual state commercial banks have not adhered rigidly to theirassigned sectors of specialization.

3.05 Regional Development Banks. There are 26 Regional Development Banks(RDBs) in Indonesia. These banks are owned by the provincial Government inwhich they are based and, while they were originally created to act asdevelopment banks, they have in the past mainly concentrated on providing:(a) commercial banking services; and (b) treasury type functions for thecentral and provincial governments. In the past few years, some of thesebanks have taken an active interest in developing their long-term lendingbusiness, both for small-scale and medium-scale industry. As of end-1979,their share of the gross assets of the financial system was extremely smallonly 1.1% - and their KIK/KMKP lending amounted to about 5% of the total

lending. Their capital base remains narrow and most RDBs suffer from avariety of management problems and lack of experienced and trained staff.Under the proposed project, BI will undertake a program to upgrade theoperations of these banks (para. 5.21).

3.06 BAPINDO. Bank Pembangunan Indonesia (BAPINDO) is the state-owneddevelopment bank. While it accepts deposits and makes some short-termloans, it is principally engaged in granting medium- and long-term creditand equity participation. BAPINDO was established in 1960 and was re-organized in 1970 with the Bank Group assistance with a view to making it thepredominant source of medium- and long-term finance for industry. As ofend-1979, its share of the gross assets of the financial system was 1.4%.

3.07 P.T. ASKRINDO. P.T. ASKRINDO, a credit insurance agency owned bythe Government and BI, was established in 1971 by the Government. P.T.ASKRIND0 insures loans made by Indonesian-owned financial institutions toindigenous small- and medium-sized enterprises against nonrepayment due tonormal commercial factors. Coverage in some cases is automatic when a loanis made or else it is negotiated on a case-by-case basis. As of end-1979,P.T. ASKRINDO insured loans to about one million borrowers with a totalamount covered of Rp 618 billion. All loans granted under the KIK/KMKPprogram are insured by P.T. ASKRINDO (para. 4.12).

/1 Bank Rakyat Indonesia (BRI), Bank Bumi Daya (BBD), Bank Negara Indonesia1946 (BNI 46), Bank Dagang Negara (BDN), and Bank Ekspor-Impor Indonesia(BEII).

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3.08 Other Financial Institutions. There are three nonbank financialinstitutions that are principally engaged in granting medium- and long-termcredit and taking equity participations - the IDFC, PDFCI, and P.T. BAHANA.There are eight investment type institutions which deal mainly in commercia-paper and promissory notes and provide services of a merchant bankingnature. In addition, there are four private savings banks, one state-ownedsavings bank, 3,543 village banks, 2,143 paddy banks and 152 market banks.These secondary banks are distributed throughout Indonesia; their role inthe country's financial sector is quite small due to their limitedresources.

Financial Policies and Industry

3.09 Financial policies in Indonesia have been aimed at promoting over-all economic development. The four major objectives of these policies areto increase the use of financial resources for overall development whilemaintaining price stability; allocate credit to priority sectors includingindustry; promote pribumi entrepreneurs; and create an institutionalenvironment to increase the range of financial services. The majorinstruments used by the Government to regulate monetary expansion have beenthe budget, a mandated interest rate structure, credit ceilings and thereserve requirement. The rapid increase in foreign exchange resources andthe resulting increase in Government spending in 1972-79 has made the budgetthe most important of these instruments. After the oil and commoditiesprice rise of 1974, the Government was able to accelerate its developmentexpenditures, enabling it to undertake important industrial and otherinvestments, but the resultant inflationary impact could not be contained.This prompted the Government in 1974 to impose overall credit ceilings andother monetary policies not only to control the rate of credit expansion,but also to direct it towards officially determined priority sectors andeconomic groups. Consequently, these policies resulted in a largerallocation of credit to the public sector relative to the private sector, ascan be seen by the rapid expansion of large-scale, state-owned industrialprojects and the relative neglect of smaller, private sector projects.

3.10 Credit Policies and Interest Rates. The current interest ratestructure (Annex 8, Table 1) is characterized by an interlinked network ofloan, deposit and rediscount rates that are set by the Government and BI.In addition to the interest rate system, the Government allocates resourcesto priority sectors through the rediscount mechanism, which applies to allstate-owned and private commercial banks. The rediscount instrument is usedby BI to direct resources at certain segments of society, at indigenousfirms of varying sizes and certain priority activities. The generalinvestment credit scheme (Kredit Investasi Biasa, KIB) which caters mainlyto medium- and large-scale industries, the "feasibility-based" credits(Kelayakan Kredit) and the KIK/KMKP credits are examples of schemes designed

to support the "economically weak" or pribumi segments of society; generally,these credits are extended on the basis of project feasibility rather thancollateral.

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3.11 Over the period 1975 to 1979, the level of interest rates hasconsistently lagged behind domestic inflation, leading to negative or lowpositive real interest rates for deposits and loans. In fact, since 1975,real rates for short-term deposits have been negative and only marginallypositive for long-term deposits. The interest rate regulation has notsucceeded in mobilizing private savings as can be seen from the slow growthof savings deposits, 2.4% in 1978 and 0.2% in 1979. Indeed, BI's rediscountfacilities supply roughly 20% of state banks' resources and nearly all oftheir term financing requirements. The fixing of on-lending rates, which isrigidly enforced on state banks, has also tended to discourage issuance ofbonds which, in effect, impedes financial intermediation. In respect of themanufacturing sector the subsidization of lending rates, coupled with theselective access to funds from BI, has had other negative side effects. Themandated interest rate structure for state banks has given rise to interestrate differentials between the state and private commercial banking systemswhich may have caused speculative activities by some borrowers. There is,for instance, evidence that some form of credit arbitrage takes place, inthat loans obtained at below market rates from state banks and deposited inprivate commercial banks, earn between 6 and 9 percentage points above theborrowing rate. The above features of the present interest rate regulationillustrate the need for policy reforms that the Government would have toundertake in order to promote mobilization of resources effectively, developfinancial intermediation and ensure a proper allocation of capital.

3.12 Credit ceilings, coupled with BI's rediscount facilities and otheradministratively-determined policy instruments, are now always based onstrictly economic and financial considerations. In combination with fixedinterest rates, credit ceilings appear to have led to an allocation of creditsbased on preference of the banks for "prime" customers and on officialpreferences for large, capital-intensive industries. Administration of bankceilings has necessitated greater bank supervision both by BI vis-a-vis thebanks and by banks vis-a-vis their clients - which increases banksoperational costs. Difficulties in supervision by BI and the banks of theend-use of funds are well known to clients, some of whom have been known todivert funds from the "high" priority activities to the "low" priority ones.For these various instruments to work effectively would therefore requiresubstantial institutional and policy reform along with an overall strengthen-ing of bank staff capability.

3.13 Financial Policy Reforms. Recognizing these problems, BankIndonesia has, in the last few years, taken major steps to improve theefficiency of state banks and, from time to time, introduces importantfinancial policy changes. BI provides state banks with direct financial andtechnical assistance to strengthen their development banking skills toidentify, promote and supervise viable projects. Under the proposed project,BI would finance the bulk of technical assistance designed to upgrade thecapability of Regional Development Banks and the training of statecommercial banks staff throughout the country.

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3.14 However, in view of the changing development needs of the 1980s,these efforts should be stepped up. In addition, as the size and importanceof the financial sector are expanding, there may also be a need for a broadfinancial policy reform.. Such a reform should focus on, inter alia, the useof appropriate instruments to control domestic inflation, the gradualelimination of credit ceilings, the introduction of a more flexible andmarket oriented interest rate policy, reform of the rediscount mechanism,coupled with financial and nonfinancial assistance to pribumi entrepre-neurs, and institutional-reforms. It should be pointed out, however, thatprogress in implementing these reforms could only be achieved gradually, andin some cases with difficulty; and there may be a need for further analysisof some of the options open to the Government. During the discussion of theIndustrial Sector Report the Bank discussed these policy options and offeredits assistance to speed up their implementation.

3.15 In respect of the weaker economic groups of industry which arepredominantly small indigenous entrepreneurs, the Government has a numberof alternative options that are consistent with the above recommendations.To further the Government-s objectives to promote equity among the differenteconomic segments of society, it is suggested that subsidies be granteddirectly from the budget by earmarking a fixed amount on an annual basisrather than through the rediscount window. Thus, long- and short-termcredit to the economically weak firms should be continued at subsidizedrates; they should, however, be financed by direct subsidies to all banks,not only to state banks. Attractive returns to loans made to economicallyweak investors through this mechanism would encourage state as well asprivate domestic and foreign banks to seek out such enterprises and providethem with expertise and advice regarding financial management and exports.The Government should also continue the present arrangements regarding theKIK/KMKP credits targetted to the small entrepreneurs. Despite certainweaknesses in these schemes, the amounts involved are small, and with time,the benefits can be expected to exceed the costs. But it may be desirableto encourage all banks to provide these credits by assuring them adequatemargins through the budget subsidy. An alternative approach to the budgetsubsidy would be for Bank Indonesia to establish a special development fundfor the weaker economic group and subsidized credit to this group may thenbe financed from this fund. As a distinctly second-best approach, therediscount system may be used to provide subsidies, but this should berestricted only to investment and short-term credit designed to aid theeconomically weak groups of society. The Government may also wish to permitinstitutional equity funds to be treated as surrogate capital with theintention that these shares could be later sold to individual economicallyweak investors.

3.16 The state commercial and development banks can play an effectiverole in this process and should be encouraged and strengthened to do so.More effective support for small enterpreneurs may be provided bytoorcdinating the above credit schemes with other programs such as thedevelopment of mini-industrial estates, cottage industry projects and thedevelopment of industrial extension services throughout the country. The

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possibilities here include assistance to weak entrepreneurs in completingapplication forms and in obtaining licenses, advice on the appropriatechoice of technology, establishment of district industry centers whereassistance from bank officials and extension officers can be provided, andthe creation of provincial committees on which bank extension agencies andlocal government officials would be represented. Under the proposed projectcoordination of credit and technical assistance would be a major emphasis(para. 5.01). To give increased exposure to efficient and modern businesstechniques, the Government may also wish to consider providing taxincentives to private foreign and domestic firms to employ and providetraining to the weaker economic groups. A graduated tax incentive systemcould also be considered in order to encourage private domestic and foreignfirms to increase their share of management and ownership of firms by theeconomically weak groups. Additional policies that may be undertakensimultaneously to promote pribumi enterprises include Government support foron-the-job training, special training facilities and business schools.A major objective of the SSE Support Services component of this project isto strengthen Government support to SSEs in upgrading their technical andmanagerial capability (para. 5.22).

The Bank's Lending Strategy for the Industrial Sector

3.17 The Bank Group's involvement in the industrial sector so far hasbeen aimed at supporting the Government's investment program in keyindustries such as fertilizer, textile and cement, and providing termfinance for investments in the private sector through DFC operations and thesmall enterprise development project. This approach has gone a long waytowards helping the country achieve its development objectives in REPELITAI and II (1969-78) which were focused on the rehabilitation and expansion ofproductive capacity. Execution of Bank projects during the period has beengenerally satisfactory. As the Government is placing more emphasis onemployment and income distribution objectives in its REPELITA III (1979-83),the need for addressing policy issues related to these goals has becomecritical. The Bank is, therefore, attempting to develop a policy-basedstrategy that would address key industrial and financial sector issues, intandem with its involvement in specific project financing. The Bank'sIndustrial Sector Mission identified some of these issues which are beingdiscussed with the Government. These are issues related to the industrialincentive system and trade regime, the regulatory mechanism, financialsupport for industrial investments and policies towards private foreigninvestment. The proposed lending program includes an industrial financingloan for FY83 which would try to address some institutional issues affectingthe Indonesian industrial sector, and an industrial exports loan for FY84,which would address a number of trade-related issues. In addition, the Bankwould continue to support the Government's small- and medium-scaleenterprises programs with increasing emphasis on supporting services andwould also finance a limited number of larger resource-based projects inwhich Indonesia has comparative advantage such as petrochemicals, fertilizerand pulp and paper.

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4. THE KIK/KMKP PROGRAM

Background

4.01 Recognizing the need for medium-term funds, particularly forindigenous small-scale enterprises, the Government introduced in 1969 theGeneral Investment Credit scheme (Kredit Investasi Biasa - KIB). Fundedmainly by BI, through rediscount facilities, this scheme provides term creditsof up to 15 years, at 10.5% to 13.5% rates of interest depending on the sizeof individual loans, but the percentage rediscounted by BI decreases as theloan size increases. The minimum equity share of 25% of project costs andfeasibility reports required of KIB loan applicants, however, proved to be tooonerous for most SSEs. Despite the subsequent relaxation of lending terms andconditions, KIB loans still accrued mostly to medium- and large-scaleenterprises and to enterprises (over 50%) in the public sector. The inabilityof SSEs to qualify for KIB loans prompted the Government to introduce, in1974, two programs of financial assistance specifically directed at SSEs: theSmall Investment Credit (Kredit Investasi Kecil - KIK) for fixed assetsfinancing, and the Small Permanent Working Capital Credit (Kredit Modal KerjaPermanen - KMKP). The KIK/KMKP Policy and Strategy Statement (Annex 1), whichwas approved on April 21, 1981 by BI, specifies that this program is aimed atproviding term-finance for the development of pribumi SSEs in all economicsectors, to create employment opportunities, develop entrepreneurial skills,and promote productive activities in all regions. To ease SSEs' access to theprogram, eligibility requirements as well as terms and conditions of lendingwould be adapted to the needs of small enterprises. For this reason, KIK/KMKPloans could be given not only to creditworthy individuals, but also to group("Massal") projects or groups of entrepreneurs who would otherwise not beeligible for bank credits.

Scope and Terms of Lending

4.02 The KIK/KMKP program was instituted in 1974 primarily to promotethe development of labor-intensive indigenous SSEs who had difficulties ingaining access to term finance in the past. To this end fairly lenientqualifying conditions have been prescribed. The Government, through BI,provides 75-80% of the funding for KIK/KMKP loans made by participatingbanks which finance the balance out of their own funds. BI is responsiblefor the program's central administration, monitoring and policy direction,while its implementation is assigned to the five state commercial banks, anumber of national private banks, and the Regional Development Banks.Together, these handling banks have a network of more than 1,000 bankbranches spread out in all twenty-seven regions of the country. Two statecommercial banks, Bank Rakyat Indonesia (BRI) and Bank Negara Indonesia 1946(BNI 46), account for nearly two-thirds of these branches and 70% of allKIK/KMKP lending.

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4.03 All productive activities in agriculture, industry, trade, trans-port and services are eligible for KIK/KMKP financing, with the exception ofthose ventures that may from time to time be declared by Government as"saturated"./l No equity contribution is required of borrowers, and projectfeasibility rather than collateral is the main criterion of loan approvals.Although collateral guidelines specify that the "project being financed isthe main collateral," additional collateral up to 50% of the loan amount maybe requested, but no customer should be turned down for lack of suchcollateral. Maximum maturity for KIK loans is 10 years, including a graceperiod of four years. KMKP loans have maturities of three years and areusually granted as Lines of credit (which may be drawn at any time) tofinance working capital requirements. Present lending rates are 10.5% p.a.for 'KIK and 12% p.a. for KMKP loans. Borrowers may obtain initially up toRp 10 million ($16,000) under each type of credit and subsequently anotherRp 5 million ($8,000) under each type provided their repayment records havebeen satisfactory. Exceptions to both loan ceilings and maturity limits areoccasionally allowed if they are justified.

4.04 BI periodically reviews lending terms (lending rates, loan amounts,duration) and adjusts them from time to time in response to domestic pricechanges and business conditions. However, the program's lending rates haveonly been adjusted once (in January 1978) when KIK and KMKP lending rates werereduced from 12% to 10.5% p.a. and from 15% to 12% p.a., respectively. Thatchange was made partly in response to the downward trend of the inflation ratefrom 20.1% in 1974/75 to 10.1% in 1977/78, and partly as a further movetowards easing the access of SSEs to the credit facilities. Since then theinflation rate has been rising steadily (reaching 20% in 1979/80) and isrunning at 20% again in 1980/81. Recent KIK/KMKP lending rates, therefore,

-have been negative in real terms. The Government, however, is committed tosubsidizing the interest rates on loans to small enterprises participating inthe program as part of its efforts to foster local indigenous entrepreneurshipand employment. Moreover, the KIK/KMKP interest rates are part of the overallinterest rate structure which is, in turn, determined on the basis of overallfinancial policies and government priorities. As noted in para. 3.17, Bankstaff are currently discussing these issues with the Government in the contextof the Industrial Sector Report, but it is clear that appropriate solutions tothe interest rate issue can only be worked out over the longer-term. Withinthe project context, however, a review of lending terms and conditions by BIis provided for in the KIK/KMKP Policy and Strategy Statement (Annex 1) andthe agreed annual progress reporting system (Annex 2). The KIK/KMKP Policyand Strategy Statement was agreed between BI and the Bank during negotiations(Section 5.01(e) of the draft Loan Agreement).

/1 Qualified indigenous professionals in the fields of law, medicine,dentistry, education and traditional culture may also obtain KIK/KMKPcredits to support or start their practice (BI Circulars No. SE 10/5/UPK,dated June 1, 1977 and March 20, 1978). Since August 1979, KIK/KMKPloans may also be used to refinance high interest loans obtained frommoney lenders (the curb market).

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Interest Rates and Margins

4.05 BI refinances 80% of KIK and 75% of KMKP subloans at 3% p.a. and4% p.a., respectively, requiring handling banks to finance the balance outof their own funds. In addition, the Indonesian Credit InsuranceCorporation (P.T. ASKRINDO) insures handling banks against 75% of the creditrisk, for a one-time premium of 3%, payable half by BI and half by the

handling banks. With interest rates on KIK at 10.5% p.a. and on KMKP at 12%

p.a. and the cost of their own loanable funds at about 8% (according to astudy of Administrative and Financial Costs under SEDP I, para. 4.35),

handling banks earn a gross spread of 5.5% on KIK and 6.3% on KMKP,/l whichare adequate.

4.06 Although these spreads are sufficient to cover administrativecosts (estimated at about 5% of outstanding portfolio) and leave a smallmargin of profit for the handling banks, BI holds the view that additionalincentives are still necessary in order to sustain their interest in theprogram and enable them to administer it effectively. For this purpose, BIgrants state banks an interest moratorium on part of their central bank debtunder rediscount arrangements involving other credit schemes, so that theycould utilize the proceeds to recruit and train a sufficient number of stafffor small lending operations. In addition, 26 RDBs /2 are being providedwith management consultancy services which are financed on a cost-sharingbasis, whereby BI shoulders the bulk (80-85%) of the costs under SEDP II.

Organizational Arrangements

4.07 Bank Indonesia's Loan Department and Credit Planning and Super-

vision Department have been jointly responsible for managing the KIK/KMKPProgram and formulating its policies. Central administration of the Programis carried out by the Small Credit Desk of the Loan Department, which,

inter alia, issues circulars to handling banks on KIK/KMKP procedures andpolicies, examines their applications for rediscounting, monitors KIK/KMKPcredit targets, collects data nationwide, and supervises the sections inBI's branches which screen KIK/KMKP rediscount applications. Program

/1 For KIK, the average cost of funds is 80% x 3% plus 20% x 8% = 4.0%;for KMKP 75% x 4% plus 25% x 8% = 5.0%. The 1.5% flat fee to P.T.

ASKRINDO is equivalent to almost 1% annual charge (0.7%) for KIK loansand a 0.6% annual charge for KMKP loans.

/2 Seventeen of the 26 RDBs indirectly participate in the program throughco-financing arrangements with BAPINDO; nine have direct access to KIK/KMKP rediscount facilities after being accredited by BI. A number ofprivate banks still cofinance KIK/KMKP loans with state commercial banks.

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planning and evaluation are the responsibility of the Credit Planning andSupervision Department, whose Credit Planning Division allocates the annualKIK/KMKP lending targets to the handling banks. Accreditation of financialinstitutions for participation in the KIK/KMKP program is the responsibilityof the Bank Supervision Department which normally evaluates financialinstitutions capabilities, audits their portfolios and monitors theirperformance. These organizational arrangements have worked well inpractice, although there are still occasional problems of coordination andoverlaps within BI. BI proposes to remedy this situation by redefiningand clarifying the functions of units involved in KIK/KMKP and projectactivities (para. 5.10).

4.08 Program Planning and Guidance. As part of the credit allocationmechanism, bankwide ceilings are prescribed by Bank Indonesia on an annualbasis, which are determined by Government priorities considering each bank'sactual lending operations in the preceding year. However, for KIK/KMKPlending the handling banks were assigned lending targets which have beenvery liberal so that practically only a few banks could meet them. To datenone of the handling banks are preparing KIK/KMKP lending programs beyondone year, because of the annual targeting exercise and because theirplanning capacity is either lacking or inadequate. As the program expands,BI and the handling banks have increasingly realized the importance of suchfactors as the potential demand for credit by sectors and regions, theabsorptive capacity of handling banks or future resource growth, in planningtheir operations. In consultation with the Bank, BI is now planning to takethe necessary steps to extend the planning horizon from one to three yearsso that annual targets and forecasts could be set more realistically.During negotiations BI confirmed its intention to implement such amedium-term planning system for the KIK/KMKP program by December 31, 1982(Section 2.06 of the draft Project Agreement).

Lending Procedures

4.09 Appraisal and Supervision. The mechanics of KIK/KMKP lending aredescribed in Annex 8. The small loan size (averaging about Rp 2.7 millionor $4,300 for KIK and Rp 2.1 million or $3,300 for KMKP loans), difficultiesin obtaining accurate information on the operation and performance of largenumbers of clients, and appraisal officers limited experience have causedhandling banks to adopt various appraisal approaches which often lackuniformity. Undue reliance is still placed on the project sponsorscollateral and past performance. What is needed is a simplified appraisalprocedure that consists of a series of simple questions about the project'sviability which could aid in forming appraisal officers judgments quickly.A number of such checklists have been developed on the basis of the standardApplication Form for KIK/KMKP loans, but no systematic procedure has yetemerged on how to introduce and ensure the use of these simplified appraisalmethods by banks. Although a simplified appraisal format has beendeveloped, BI continues its search for an appropriate appraisal procedurefor small loans, but understandably development of new procedures requiresconsiderable experimentation and deliberate efforts given the uneven

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appraisal skills of bank staff. Therefore, the mission has suggested thatthe Small Enterprise Development Committee /1 should be used as a forumwhere needed changes in procedures and policies affecting the lendingprogram could be dealt with. Other ways of introducing procedural changesthrough circulars, directives, etc. from BI would also be used for thispurpose. An understanding of BI's plans to simplify appraisal proceduresand introduce them to the handling banks was reached at negotiations.

4.10 Regular supervision of individual KIK/KMKP clients by handlingbanks is still not possible, nor perhaps realistic to expect given the largenumber of small projects involved and the limited staff capacity. What isneeded is a more systematic supervision approach, based at least onup-to-date monitoring of loans so that those projects which experiencedifficulties would be more readily identified. Supervision work is expectednonetheless to improve in parallel with the banks' training efforts proposedunder the project (para. 5.16) and their success in recruiting talented andmotivated professionals. As in SEDP I, supervision practices of handlingbanks would be closely monitored by BI.

4.11 Improved Monitoring System. A consultant study undertaken underSEDP I to improve the information on KIK/KMKP lending operations, recommendedthe establishment of an improved monitoring and reporting system that couldprovide better support to BI and the banks. Under this system, data onsubloan approvals and disbursements, data on the subprojects' economic andfinancial profiles, as well as loan repayments data and arrears would bereported by the banks to BI which would then computerize them. BI wouldanalyze the data and, on the basis of its analysis, formulate directives toimprove lending operations performance. The details of the monitoring system,its timing and review process, however, had not been decided at the time ofthe Appraisal Mission. Agreement was reached during negotiations that animproved monitoring system for all KIK/KMKP lending operations be implementedat the latest by December 31, 1982 (Section 2.07 of the draft Project Agree-ment).

4.12 Credit Insurance (P.T. ASKRINDO). The Indonesian Credit InsuranceCorporation, Ltd. (P.T. ASKRINDO), established by the Government and BankIndonesia in 1971, has been operating as the only credit insurance companyin Indonesia. Its primary objective is to assist the implementation of theGovernment's credit policies by insuring bank credits to small- and medium-size indigenous enterprises, particularly those with insufficient collateralwho normally would have limited access to institutional credit. P.T. ASKRINDOinsures all KIK/KMKP loans against 75% of losses. Insurance coverage is

/L This is a committee of senior handling banks officials who meetregularly at BI head office to discuss policies, problems, and issuesaffecting KIK/KMKP lending. It is chaired by a senior BI official.

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automatic for individual KIK/KMKP loans; for other types of credits such as"massal" loans, P.T. ASKRINDO evaluates each praogram before agreeing toinsure. A flat premium fee of 3%, payable half by BI and half by thehandling bank is charged for insuring individual KIK loans for five yearsand KMKP loans for three years.

4.13 Annex 9 details P.T. ASKRINDO's financial position and activitieswith respect to the KIK/KMKP Program. Over the last three years, creditinsurance coverage approved by the company has increased sharply from about81,000 loans amounting to Rp 60 billion in 1977 to 211,000 loans amountingto Rp 151 billion in 1979. As of June 30, 1980, total credit insuranceapproved by the company amounted to about Rp 761 billion ($1.2 billion), ofwhich Rp 508 billion ($813 million), or 67%, represented KIK/KMKP creditinsurance. Payments on claims by banks also rose sharply during the period,although P.T. ASKRINDO's present procedures do not permit a speedy repaymenton such claims. To strengthen its role in mitigating risks under theKIK/KMKP program, these procedures need to be streamlined.

4.14 Recognizing this need, a consultant was hired to study itsorganization, policies and procedures. The consultant's report, which wascompleted in January 1980, recommended a number of measures to strengthen theexisting organizational structure and management, speed up claims proceduresof P.T. ASKRINDO, and rationalize, the premium rate structure. Since the con-sultant report was completed, the Government, BI, P.T. ASKRINDO and thehandling banks have been reviewing its findings and recommendations and someaction has already been taken to improve tne procedures. Ilowever, in orderto assure that the credit insurance system will operate more effectively tosupport the expanding program, it is recommended that the Bank ask theGovernment and BI to present a statement on how they propose to improve theclaims procedures on credit insurance for KIK/KMKP loans by P.T. ASKRITNDOduring SEDP II. Assurances were obtained during negotiations that theseproposals would be presented to and reviewed by the Bank no later thanJune 30, 1982 (Section 3.03 of the draft Loan Agreement).

Amount and Distribution of Lending

4.15 Since program inception (1974), KIK/KMKP lending operations havebeen growing rapidly, particularly in the last two years (Annex 8, Tables 10and 11). KIK loan approvals which started from a small base of Rp 15.3 bil-lion ($37 million) in 1974 increased at the rate of over 30% p.a. in nominalterms through 1979, reaching a cumulative total of Rp 214 billion ($342 mil-lion) by June 1980. KMKP loans for working capital, which require minimumevaluation by handling banks, expanded even faster at the rate of over 50%p.a. to a cumulative amount of Rp 312 billion ($499 million) over the period.The rapid expansion of the program further accelerated during 1979 andthrough the first half of 1980, resulting in nominal growth rates of over 80%for KIK and 100% for KMKP loan approvals. However, amounts outstanding as ofJune 1980 of Rp 142 billion ($227 million) and Rp 229 billion ($366 million)for KIK and KMKP lending, respectively, including delinquent loans account

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for less than 5% of the handling banks' outstanding loan portfolios. Sinceabout 77,000 borrowers have obtained KIK financing and about 450,000 /1received KMKP credits during this period, or roughly 10% of the estimatednumber of SSEs throughout the country, there is still some scope for furtherexpansion. Sustained overall economic growth over the period, accompaniedby promotional efforts which were intensified beginning in mid-1979, appearsto be the underlying cause of the rapid expansion of the program in 1979 and1980. Successive measures in 1978 and 1979 to further relax lending termssuch as reduction of lending rates, increase of maximum loan amounts andexpansion of maturities, have acted as catalyst in recent program expansion.

4.16 Sectoral Distribution. KIK lending for investments in the indus-trial sector has been declining steadily in favor of the services sectors(transport, trade, others) from about 23% in 1974 to 15% in 1979, and to 14%as of June 1980. Although this is not surprising given the structure of theSSE sector in Indonesia, the time may be ripe for stimulating more lending toSSEs engaged in the industrial sector. BI's evaluation of KIK/KMKP lending inthe three regions of Central Java, East Java and West Sumatra (para. 4.28)suggests that lending to the services sector results in fewer job opportuni-ties than that to the manufacturing and agro-industrial sectors. The 35,000KIK/KMKP recipients engaged in manufacturing industries to date represent lessthan 3% of the estimated 1.3 million small manufacturing firms in the country.Bank Indonesia recognizes the importance of achieving the employmentobjectives of the program and is considering a number of measures to achievethem. The mission recommended that the studies to be conducted by RPMUs putemphasis on identifying potential for further expansion of lending to themanufacturing subsectors. During negotiations, the Bank and BI discussedfurther other measures of promoting KIK/KMKP lending to the industrial andagro-industrial sectors, including more active promotional measures,strengthening of technical support services and strengthening of handlingbanks.

4.17 Distribution by Size, Maturity and Purpose. The characteristicsof KIK/KMKP loan approvals, shown in Annex 8, Table 13, indicate that themajority of loans are concentrated at the lower end of the size spectrum.Around 49% of the number of KIK loans are for less than the average size KIKloan of Rp 2.7 million ($4,300) and about 70% of KMKP loans are for lessthan the average size of Rp 2.1 million ($3,300). This is not surprising asthe maximum loan limit has been increased only recently. The average KIKloan size based on cumulative data has grown at a nominal annual rate ofaround 10% (12% for KMKP) from Rp 1.9 million to Rp 2.4 million during the1976 to June 1980 period./2

/1 Over 300,000 of these loans were granted under the KIK/KMKP "Massal"scheme which is administered jointly by BI and the technical ministriesconcerned.

/2 For loans made during the first half of 1980, the average loan sizefor KIK was Rp 4.1 million ($6,500) and for KMKP Rp 2.6 million ($4,000).

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4.18 Similarly, the bulk (58%) of KIK loan approvals in both numbersand amounts has been for maturities of less than 4 years, resulting in anaverage duration of 3.4 years. This may not have reflected exactly theprojected earnings of the projects financed with those loans and may haveunduly burdened borrowers' cash flows in the past. HIowever, BI has recentlyresponded to this issue by extending the maximum loan duration from 5 to 10years.

4.19 Most KIK/KMKP lending has gone to established entrepreneurs forrehabilitation or expansion of their operations. This may be explained bythe handling banks' reluctance to deal with new entrepreneurs who have notrack records yet. Investment in equipment and machinery has absorbedaround 82% of total KIK lending while around 18% was used for buildings.

4.20 Distribution by Handling Banks. Bank Rakyat Indonesia with itslarge network of branches accounts for 46% and 64% of cumulative KIK and KMKPapprovals (Annex 8, Table 10). Bank Negara Indonesia 1946, a very activeparticipant with particular focus on the manufacturing sector, ranks secondwith 15% of KIK and 12% of KMKP lending. The RDBs, partly under cofinancingarrangements with BAPINDO, and the private banks together account for 8% oftotal KIK lending and 5% of KMKP lending; the share of the former group, inparticular, is expected to increase over the next few years.

4.21 The sectoral specialization of state commercial banks has not been aconstraint on KIK lending as this is not observed rigidly in practice. Due toits sheer size, BRI accounts for the major share (over 81%) of KIK lending toagriculture according to its principal assignment, but also leads in lendingto other economic sectors. The other handling banks show a greater degree ofspecialization and BNI 46½s KIK/KMKP lending is concentrated in industry (over36%), while transportation accounts for Bank Bumi Daya's major KIK/KI4KP lend-ing activity. The question of developing specialized financial institutionssuch as the Regional Development Banks to provide credit assistance to SSEshas been debated extensively in local banking circles in the past and therenow seems to be a consensus of opinion in favor of such additional channels.BI, in addition to supporting the existing channels, is consequently preparingto expand RDBs' participation in the program. To accomplish this objective,26 RDBs are being upgraded under SEDP II (para. 5.20).

Collection Performance and Arrears

4.22 While the KIK/KIfKP program has expanded rapidly, this does notappear to have led to a growing collection problem. Arrears on KIKprincipal amounts outstanding appear to have been declining from around 25%in 1977 to 24% in 1978, 19% in 1979 and 19% through June 1980. Althoughthese arrears are high in absolute terms, they are not unusually so forsmall-scale industry lending programs at similar stages of development.

4.23 The proper management and control of arrears is a major objectiveof the project. Steps are being taken to lay the basis for arrears control

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by improving the arrears monitoring and the procedures for handling baddebts. Arrears recording by banks on KIK/KMKP lending activities is stilldeficient, since it does not show interest payments in arrears, rescheduledamounts and amounts written-off, nor does it classify arrears by age. Thisshould, however, be corrected if the improved management information system,mentioned in para. 4.11, is implemented as planned. More detailed data onarrears and collection performance by the banks should also pave the way fora follow-up analysis of the causes of arrears so that appropriate remedialmeasures could be taken. The Annual Progress reports to be submitted by BTto the Bank for SEDP II would include a review of handling banks collectionperformance and arrears on KIK/KMKP loans (Annex 2).

Growth Prospects

4.24 The rapid expansion of the program in both number and value termsnoted in para. 4.15 continues unabated through 1980. During the period1981-84, nominal growth rates may decelerate somewhat from the 1974-80 growthof over 30% p.a. for KIK and 50% p.a. for KMKP lending (about 12% p.a. and 32%p.a. in real terms) as the program is increasingly directed towards the morecomplex nonservices sectors, but the upward trend is likely to be sustained.There is still a large segment of SSEs that are not yet reached by the programwhich could, with improving technical assistance, qualify for KIK/KMKP loansin the next few years. The Government puts high priority on these programs,and resources would most likely be available for financing the program atleast during the period of REPELITA III which ends in 1983/84. Taking thesevarious factors into account, BI estimates that KIK loan approvals would growat an annual rate of 16% p.a. in real terms during 1980-84, reaching anincremental lending volume of Rp 574 billion ($918 million) over the period.

SEDP I and the KIK/KMKP Program

4.25 Background. As the program expanded, a number of institutional andoperational problems which threatened its effectiveness had begun to emerge.Interest spreads on KIK/KMKP, although adequate, had not been perceived byhandling banks to be as attractive as spreads on their other lendingoperations, largely because of the high administrative costs of small lendingactivities and the bank staff inexperience in and physical difficulties ofadministering small loans. Handling banks, moreover, had found theiroperational procedures to be unsuitable to the needs of small borrowers whooften keep no records of their operations. There had been a need for newoperating guidelines, a need for additional staff who are trained for smalllending operations, and a need for effective support services (which banksstaff could not provide) in order to make the lending program effective.Furthermore, the information on the characteristics of SSEs had been inade-quate for operational purposes. Recognizing these problems, BI approachedthe Bank for assistance in 1975. Subsequent discussions with BI and theGovernment led to the first Small Enterprise Development Project, for whicha $40 million IDA credit (Credit 785-IND) was approved in March 1978.

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4.26 Project Objectives and Components. The objectives and componentsof the first project, detailed in the SEDP I Staff Appraisal Report,/1 aimedat improving both the volume and quality of KIK/KMKP lending in the regionsof Central Java, East Java and West Sumatra by: (a) strengthening programmanagement and supervision at BI's head office and its regional branches;(b) improving loan administration by handling banks through the provision oftraining; and (c) supplementing BI's rediscount resources with the proceedsof the IDA credit. The project components consisted of a $71.0 millioncredit component, of which the IDA Credit proceeds financed $33.8 millionand a $9.0 million technical assistance component,/2 of which the IDA Creditfinanced $6.2 million. Project implementation was scheduled for two and ahalf years for the credit component, and for most of the technicalassistance, three years. The Credit became effective on August 17, 1978.

4.27 SEDP 1 Credit Component. KIK loan approvals in the three projectregions amounted to Rp 9.7 billion ($15 million) at the end of 1978, when theproject started, then rose sharply by 84% in 1979 to Rp 17.9 billion ($29million), reaching a cumulative total of Rp 67.7 billion ($108 million) byJune 1980 or roughly 32% of the nationwide figure. KMKP lending for workingcapital (not covered under the IDA Credit) expanded much faster reaching Rp129 billion ($206 million) in the same period. No significant lags wereobserved between loan approvals and disbursements. As of June 31, 1980,around 28,000 KIK loans were approved in the project areas, or 36% of thetotal recipients of KIK nationwide.

4.28 Quality of Lending in SEDP I. The quality of KIK/KMKP subloans inthe project regions has been generally satisfactory. Initial findings ofthe BI evaluation of KIK/KMIKP lending in the SEDP I regions, which accountfor 36% of KIK and 41% of KMKP clients, concluded that without exception,KIK/KMKP loans have accrued to enterprises classified as "small" under thebanks' definition (para. 1.03) and, based on a sample of subloans, most (82%of the sample) of these loans were used for the stated purposes./3 Theremaining 18% of the loan proceeds appears to have been used for sidelineprojects of the clients or for consumptive purposes. Over 64% of the

/1 Indonesia: Appraisal of a Small Enterprise Development Project,Report No. 1614a-IND, dated March 6, 1978.

/2 Includes training, consultants'services, and studies of the developmen-tal impact of KIK/KMKP lending, the handling banks' administrativecosts, credit insurance, lending procedures and management informationsystems.

/3 The evaluation studies were divided into two parts, one to examine thesocio-economic impact of KIK/KMKP lending which was carried out by localuniversities and the other, conducted by BI staff, to examine thefinancial impact of the program.

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borrowers sampled repaid their loans on time, 2% repaid in advance, and 34%were late in their installment payments. The study also noted that theprimary cause of delinquency was business failure due to poor internalmanagement, marketing and production problems. As of June 1980, arrears as apercentage of KIK principal amounts outstanding in the SEDP I project areaswere estimated at about 19% and there appears to be an increasing trend inthe collection rate of handling banks in those areas. The study disclosedfurther that nearly 60% of loan recipients hired additional workers,averaging 1 - 5 persons. per firm, and about 70% have more than doubled theiroutput as a result of expanded production and/or increased capacityutilization facilitated by the KIK/KMKP credits. The observed incidence ofdeviation of credit funds and the risk associated with such practices suggestthat there is a continuing need for better project evaluation and intensifiedsupervision efforts accompanied by adequate technical support after loanapproval.

4.29 Preliminary findings of the socio-economic study, carried out bythree local universities,/1 seem to confirm the general findings of the BIstudy. To illustrate the employment and output impact of KIK/KMKP, arepresentative sample of 64 clients, with the most complete information, wasselected (Annex 14). An Economic Rate of Return (ERR) analysis was furtherattempted (with great difficulty for lack of consistent data) on 20 of thesevery small firms. The analysis yielded mixed results partly due to dataproblems and partly because this method of analysis does not lend itselfwell to an analysis of small-scale enterprises, which for the most part donot keep adequate records. The analysis showed that the median ERR of thesample was 13%; the investment cost per job was Rp 2.1 million ($3,300)compared to the national average of Rp 9.4 million ($15,000) for mediumindustries and Rp 156 million ($250,000) for large-scale industries; thatoutput increased by an average of 62% as a result of the credits obtained;and that the incremental labor creation was 2 workers per firm. The zero ornegative ERRs of some firms resulted from one or more of the followingfactors: diversion of loan proceeds to unproductive uses, overinvestment inrelation to expected cash flow, incomplete data supplied by customers, andmethodological problems.

4.30 Technical Assistance Component. Technical assistance under SEDP Iwhich focussed on the institutional strengthening of KIK/KMKP programmanagement and administration proved to be much more difficult to implementthan had been anticipated at appraisal. Clearly, there is a need to continueand improve this institution-building process, a need for experimentation ofvarious approaches and evaluation of progress both under the KIK/KMKP programand the project.

/1 University of Indonesia and the University of Andalas for West Sumatra,Gadjah Mada University for Central Java, and the Brawijaya University forEast Java.

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4.31 Strengthening Project Management. SEDP I is managed by a separteunit at BI-s Head Office, the Central Project Management Unit (CPMU),/l whose

manager and staff are a part of the Loan Department. At the regional level,the Regional Project Management Units (RPMU) which are attached to BI1sregional branches in Central Java, East Java and West Sumatra, carried themain burden of project field work and served as the main contacts for projectadministration between BI and the CPMU, on the one hand, and the branches ofhandling banks and other local government agencies on the other. The CPMU andRPMUs are supported by consultants./2

4.32 The CPMU has carried the main burden of central project management,which included the monitoring of KIK lending and RPMU project activities inthe three project regions; while another unit, the Desk for Small Credits(Desk Kredit Kecil - DKK) monitors and supervises rediscount facilities forKIK/KMKP lending activities for all regions. These administrativearrangements have at times resulted in some degree of overlap and internalcoordination problems at the Head Office which, in turn, tended to disruptcommunication flows between the CPMU and the RPMUs. In view of the expandedcoverage and scope of the proposed project, BI has been evaluating projectmanagement and has been considering various plans to strengthen it. Detailsof these plans which include redefining and clarifying functionalresponsibilities, additional staffing and strengthening of coordinationbetween field and central project units, have been discussed with theAppraisal Mission (para. 5.10).

4.33 The RPMUs in the three project regions, after some initial difficul-ties in establishing their operations and rapport with branches of handlingbanks and local government agencies, have generally succeeded in carrying outtheir assigned tasks of training local BI and handling bank staff in actualsmall lending operations, identifying feasible lending programs for the banks(which took up nearly 70% of their time in 1979 and 1980), and otherwiseassisting handling banks administer the KIK/KMKP program. They have produceda number of subsector reports (42 in Central Java, 35 in East Java and 38 inWest Sumatra) many of which have resulted in actual KIK/KMKP loans.Consultants attached to RPMUs have also begun to influence the local branches

/1 In BI's Organizational Chart (Chart No. 4) the CPMU is referred to as theDesk for Small Enterprise Development (Desk Pengembangan Pengusaha Kecilor DPPK) under the Loan Department; while the RPMU is referred to as theSection for Small Enterprise Development (Seksi Pengembangan PengusahaKecil or SPPK) in the Branch Offices of BI.

/2 The CPMU is assisted by a Project Advisor, a Small Business Advisor, anAgricultural Advisor and a number of professional BI staff; while theRPMUs are assisted by five-man (four-man in West Sumatra) consultantteams who are experts in development banking, SSE development, agricul-ture, marketing and development economics.

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of handling banks in developing better loan processing and supervisionprocedures. To measure RPMUs' impact on the volume and quality of KIK/KMKPlending, however, a systematic evaluation of their achievements, alreadybegun, is required. The revised Terms of Reference of RPMUs, presentedat negotiations, incorporate such a monitoring and evaluation process.

4.34 Training of Handling Bank Staff. The classroom training underSEDP I has encountered problems affecting the principal training units (BI'sInstitute for the Development of Banking - LPPI - and the handling banks'training units). There were problems in recruiting suitable trainers at LPPIand developing training materials for the handling banks' training units.Coordination between LPPI and these training units was lacking. Consequently,during 1978-80 only 122 loan officers and 152 RPMU counterparts had beentrained as compared with the target of 500 loan officers, 200 creditdepartment supervisors, and 200 branch managers, and 50-70 Regional/HeadOffice staff./l To reach a larger number of handling bank staff, the trainingcomponent under SEDP II would stress more active involvement of handlingbanks' training institutes, development of self-directed training materialsand better coordination of training by both the CPMU and the LPPI.

4.35 Studies. To improve the data base on SSEs' operational character-stics with a view to formulating sound credit policies for KIK/KMKP, studies

(para. 4.26) were conducted under SEDP I by BI staff, local universities andconsultants. These studies had a twofold purpose of determining creditimpact, the banks' operational costs and profitability of KIK/KMKP lending,and improving lending procedures, management information systems and thecredit insurance operation of P.T. ASKRINDO. Except for the credit impactstudy on East Java, all studies have been completed and evaluated. Thestudies yielded a wealth of information (paras. 4.28-4.29) on the developmentimpact of KIK/KMKP loans and characteristics of SSEs in the project areas.Some of the recommendations are being implemented by BI. Improvements in thedesign of the proposed project are based in part on the findings of thesestudies. On the whole, the findings of the studies have been useful to BI andthe Bank in initiating improvements in KIK/KMKP program and projectadministration.

4.36 The studies undertaken under SEDP I and Bank staff review of projectimplementation also identified a number of problems that impeded the KIK/KMKPprogram's effectiveness. Although BI's management of the credit program andthe project has been satisfactory, this could be reinforced further byclarifying lines of responsibility among the various BI administrative unitsthat are involved with the program and the project. Some degree ofdecentralization of control would also be helpful. To facilitate a betterevaluation of the development impact of the program, lending and projectactivities, including policy and other constraints inhibiting the growth ofSSEs, should be monitored more closely. The studies and improved management

/1 One week orientation seminars, however, were given to 575 branch managers.

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information system proposed under SEDP II, supported by BI s regular creditand bank supervision reports, could supplement this important monitoringprocess. With respect to the handling banks, there is a need for a betterfocussed training of a practical nature to enhance their skills in termlending to SSEs and increase their appreciation of SSEs- financial andnonfinancial needs. This implies a need to work closely with technicalsupport services agencies and the strengthening of those agencies. Finally,there is a need to improve, through better project identification andpreparation, the quality (so as to maximize economic benefits and reducearrears) of KIK/KMKP lending. To achieve the Bank's objectives in supportingthe Government's and BI-s efforts to develop the SSE sector, closer workingrelations with BI, the executing agency, and the various projects units,through more frequent exchanges of views on project progress and problems andregular end-use review missions, would be necessary. The proposed projectis designed to address the problems mentioned above.

5. THE PROJECT (SEDP II)

Project Objectives and Scope

5.01 The build-up in resources resulting from rising oil revenues has ledto substantial liquidity in the banking system and permitted the rapidincrease in credit programs such as the KIK/KMKP program described above. Thestrategy of the Government is to expand these programs as quickly as practi-cally possible to direct resources to support productive investment by smallerentrepreneurs throughout the country. Government and BI officials clearlyrecognize that the success of this strategy is critically dependent on build-ing up the capacity of the banking system to administer a program of this kindand, in the longer term, improving the supporting services for small-scaleenterprises. Recognizing this long-term need, and the need to address prob-lems currently faced by the program, the Government has asked the Bank toprovide finance in support of an SEDP II project with major emphasis on insti-tutional support. The institution building program proposed under SEDP IIwhich is a time-slice of the Government's program to develop the SSE sector,consists of the following elements: (a) strengthening program management inBI both at the head office and regional branches; (b) expanding training ofhandling banks staff and decentralizing training functions to bank traininginstitutes; (c) strengthening the planning mechanism and implementation of theprogram both in BI and handling banks; (d) increasing the participation ofRegional Development Banks in KIK/KMKP lending by upgrading their operationalcapability; and (e) improving the functional coordination of financial andnonfinancial assistance to SSEs.

5.02 Project Area. From the three regions covered under SEDP I, theproposed project would be expanded to cover all 27 regions of Indonesia wherethe KIK/KMKP program has been under implementation. To support this national

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credit program, a nationwide training program would be implemented involving,more actively than under SEDP I, the handling banks training units as primarytrainers with BI's own training institute (LPPI) supplying course materialsand training guidelines.. All the 1,000 some bank branches participating inthe program, including RDBs and a selected number of private banks arequalified to send staff assigned to administer KIK/KMKP loans to thesetraining courses. Since on average each branch has 1 to 5 staff membershandling KIK/KMKP lending, this would not pose any serious replacement problemwhile staff are undergoing training. Among the trainees completing theprescribed courses a selected number would further receive a year of on-the-job training under the guidance of RPMU consultants before returning to theirparent institutions. BI and the handling banks have gained sufficient projectexperience over the last five years, particularly under SEDP I, to be able tocope with this nationwide program. Proposals to further strengthen theprogram-s management and organizational structure (para. 5.10) and itstraining component appear reasonable and should enable BI to manage theproject adequately.

Project Components

5.03 The main project components are:

(a) credit to finance the KIK lending program for two-and-a-half yearsin 27 regions (equivalent to $558.4 million);

(b) an SSE technical support services component ($8.3 million); and

(c) technical assistance to the banking system designed to:

(i) strengthen the KIK/KMKP program management and project super-vision at BI-s head office ($2.0 million) assisted by a numberof consultant advisors;

(ii) support the operations of 10 Regional Project ManagementUnits (RPMUs) each assisted by a team of 4-5 consultants (2-3Indonesians and 2 expatriates) at BI's Regional Branches($16.3 million);

(iii) develop and implement a training program for KIK/KMKP loanofficers and supervisors in LPPI and in the training insti-tutes of three of the participating banks /1 ($14.0 million);

(iv) upgrade 26 RDBs and train selected RDB staff ($5.2 million)and;

/1 Bank Rakyat Indonesia, Bank Negara Indonesia 1946, and the IndonesianDevelopment Finance Company (UPPINDO).

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(v) conduct studies on the operational aspects andeconomic/financial impact of the project ($1.2 million).

5.04 Credit Component. The project would finance KIK lending by thefive state-owned commercial banks (excluding subprojects eligible forfinancing under Rural Credit Projects in BRI), selected national private banksand RDBs in all regions for two-and-a-half years beginning in about July1981. As in SEDP I, KMKP loans for working capital would not be covered bythe Bank loan. It is estimated that about 70,000 KIK loans with average sizeof about Rp 5 million ($8,000) would be made by some 1,000 bank branchesinvolved. Indigenous SSEs in agricultural, manufacturing, trade and otherservice production would be the beneficiaries of these loans.

5.05 Technical Assistance. In 1980, more than 1,000 branches ofprivate and state banks and more than 5,000 staff were directly involved inKIK/KMKP lending operations. The relative strengths and weaknesses of thesehandling banks vary and few of their staff had any training or experience interm lending to small enterprises. The dimensions of technical assistancerequirements are enormous and the time required to meet them fully would farexceed the life span of the proposed SEDP II. As mentioned in para. 5.01above, the technical assistance in this project should be seen as part of alonger-term effort to upgrade handling banks capability in small lendingoperations and strengthen industrial extension services to support SSEdevelopment.

5.06 The technical assistance component of the project would addressthe most critical of these needs as outlined in para. 4.36. It wouldemphasize the establishment and strengthening of assistance delivery modesinvolving the banking system and industrial extension services agencies underthe Ministry of Industry (MOI). It is envisaged that this approach couldbenefit directly about 1,500 to 2,500 loan officers, or the majority of thenumber of loan officers needing training, and an indeterminate number of SSEswho would benefit from the proposed improvement of technical support servicesincluded under the project.

5.07 Consultancy Requirements. To support the technical assistanceprogram, 63 long-term consultants, including 36 Indonesians would be engagedunder the project in various advisory capacities./l Altogether 276 man-yearsof long-term (3 years duration each) and 29 man-years of short-term (3-6months duration) consultancy are provided under the project. Consultancyservices would consist of 18 man-years of long-term consultancy for BI s headoffice, 144 man-years for the RPMUs, 30 man-years for the training institutes,

/1 In addition to 20 of the staff of BAPINDO and UPPINDO who would beengaged to provide advisory services for the RDB Upgrading program(para. 5.21), consultants on development banking, SSE development,training, marketing and industrial extension services would be requiredunder the project.

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74 man-years for the RDB uprgrading program, 10 man-years for MOI and about 29man-years of short-term consultancy for the baseline surveys and other studie-mentioned in para. 5.13. While this consultancy requirement is high, itshould be seen in the context of the size, geographic spread and needs of theprogram. Of the total number of consultants required, 44 have been hired andare in the field, 4 are in advanced stage of recruitment and 15 would stillneed to be recruited. Average cost of expatriate consultancy per man-year,in end-1980 prices, is estimated at about $100,000.

5.08 Given the large number of consultants required for the project,consultant recruitment and administration (which consumed a substantialportion of the CPMU's time under SEDP I) would need to be systematized toensure smooth project implementation. For this purpose, an improvedconsultant performance evaluation system will be implemented by BI under theproposed project. An understanding was reached at negotiations on the detailsof this evaluation system and its implementation under SEDP II.

5.09 Duration of Project. The commitment period for the credit compo-nent will be two-and-a-half years, and for the technical assistance threeyears commencing around July 1981. This is considered long enough for theproject to have a significant, measurable impact.

5.10 Project Management. In view of the rapid growth of KIK/KMKP lendingin recent years and the expanded coverage and scope of the proposed project,BI has decided to implement adjustments with respect to the functions of theCPMU or the Desk for Small Enterprise Development and the Desk for SmallCredits under the Loan Department at the Head Office. Likewise BI is takingsimilar measures at its Regional Branches with respect to the RPMUs and theunits /1 that are in charge of managing the KIK/KMKP program and projectactivities. As a result, BI has recently issued circular letters whichredefine the main functions of the central and regional project managementunits and clarify their operational relationships. Official English versionsof the above circulars were presented to the Bank (Section 2.08 of the draftProject Agreement).

5.11 Ten RPMUs are now established in various parts of the country, andoperating on the same Terms of Reference that were approved by the Bank for

/1 These are the sections on Small Enterprise -development (SIVYK) and on SmallCredits (Seksi Kredit Kecil or SKK) that are an integral part of theregional branches' organizational structure (Chart No. 3)

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SEDP I. It is expected that all ten RPMUs would be operative when the projectstarts around mid-1981./1

Studies

5.12 Information on the operational characteristics of SSEs has beenimproving but is still generally poor and does not provide an adequate basisfor formulating longer-term assistance programs. The latest census of Small-Sc:ale Industries was taken in 1974/75 and the next one is not scheduleduntil 1984. Therefore one of the objectives of SEDP I was to build up thedata base with a number of operational and evaluation studies concerningspecific aspects of the KIK/KMKP lending program, viz., administrative costsof handling banks, lending procedures, credit insurance, and managementinformation systems.

5. 13 Under SEDP II, the process of building up the information based onSSEs and KIK/KMKP lending would continue. Baseline surveys of key projectregions would be conducted. Each RPMU would, as mentioned above, also spenda good portion of- its time in conducting sectoral and subsectoral studies tohelp handling banks identify viable projects and the demand for KIK/KMKPcredits in their vicinity. In addition, a follow-up study on handling banks'administrative costs would be conducted. Evaluation of the KIK/KMKP economicimpact would be continued under the proposed project.

5.14 As in the first project, studies under SEDP II would be contractedout to suitable local universities and consultants and supervised by BIwhich would also provide staff to undertake some of the studies and surveysrequired. It is envisaged that the CPMU Advisors would provide assistanceona the formulation of Terms of Reference for the studies which would besubmitted to the Bank for review. A total of 216 man-months (including 33man-months of short-term expatriate consultancy) is required to undertakethe studies. Draft Terms of Reference for a few of these studies have beenpresented to the Bank for review and approval.

Training of Handling Bank's Staff

5.15 Through 1980, the shortage of suitably trained and qualified staffto carry out the KIK/KMKP lending program had adversely affected lending.

/1 In addition to the three RPMUs established under SEDP I in Central Java,East Java and West Sumatra, BI has established in 1979/80 seven new RPMUsin Bali, South Sulawesi, South Kalimantan, West Java, Yogyakarta, Jakarta andNorth Sumatra. The 10 RPMUs under SEDP II would cover the 12 majorregions accounting for about 80% of KIK/KMKP lending; while BI's RegionalBranches, assisted by the CPMU from time to time, would handle specialproblems related to KIK/KMKP in the other regions whose volume oflending is too small to justify the establishment of RPMUs.

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Under SEDP I, training of handling bank staff was delegated primarily to LPPI,and the project provided for two expatriates to assist LPPI in carrying outthe task. As mentioned in para. 4.34, training achievements fell short ofexpectations. Recognizing that the task of training handling banks staff wastoo large for LPPI to handle alone, LPPI in 1980 started to decentralize itstraining function to those handling banks which had in-house trainingcapability. In consultation with the Appraisal Mission, an expanded trainingprogram was formulated and agreed upon (Annex 11). With the more activeparticipation of handling banks' training institutes, it is envisaged that theproposed program would be able to reach a larger target group commensuratewith expected program expansion.

5.16 Under this program, training would be expanded and decentralized to:(a) the RPMUs for selected staff; (b) the training units of Bank RakyatIndonesia, Bank Negara Indonesia 1946, and UPPINDO who would provide in-houseand on-job training of approximately two-thirds of the staff to be trainedunder the project; and (c) line managers and trained cohorts would be involvedin identifying training needs and staff development. Formal classroom train-ing would be expanded and its emphasis reoriented towards: (a) activeinvolvement of line managers in identifying needs and staff in need oftraining; (b) training of trainers at LPPI to carry out in-house training ofhandling bank staff; and (c) development of skills required specifically forimproving KIK/KMKP lending performance will be continued. To assist in theimplementation and to provide for closer coordination of training in thedecentralized system, a Training Coordinator would be posted in the CPMU atBIrs Head Office. He would be assisted by an internationally recruited StaffDevelopment Advisor. At the regional level training would be coordinated bythe CPMU working in consultation with LPPI, the RPMUs and the regionalmanagers of handling banks.

5.17 Training Targets and Staff Requirements. Training targets cannot beestimated precisely (and will be reviewed annually), since the multipliereffects of the various elements of the proposed strategy are not known. Itis, however, envisaged that the proposed training/staff development strategywould be able to train directly the majority of the 5,000 bank officersinvolved in KIK/KMKP lending over the three-year period of SEDP II. Theprincipal objective of this approach is to lay the basis for a viable trainingprogram that could later on be carried out by banks themselves with minimumoutside help.

5.18 The training units of the handling banks and the LPPI would bestrengthened by providing 7 training consultants in addition to the 2 assignedto LPPI under SEDP I (BNI, UPPINDO and CPMU, one consultant each and LPPI, 4consultants). Included among these consultants would be two Staff Developmentexperts to be posted at LPPI and the CPMU to advise the Training Coordinator.It is expected that three of the above experts would be expatriates. Costs ofthe training component are shown in Annex 11, Table 22. Of the total trainingcost of $14.0 million, the Bank would finance the foreign costs of trainingamounting to $2.8 million. The remainder would be financed by BI, thehandling banks and by bilateral aid donors. At negotiations the Bank obtained

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a financing and execution plan for this component and confirmed theappointment of the Staff Development Advisors at LPPI and BI as well as theother key advisors mentioned above.

Regional Development Banks' Upgrading

5.19 The RDB system consists of 26 banks with head offices located inthe capitals of 26 of the regions of Indonesia, and with a network of 129branches and seven cash offices. Established in the 1950s to serve as themain channel for development financing in the regions, RDBs have an authorizedcapital of Rp 34.9 billion ($56 million) of which Rp 20.4 billion ($33million) is paid-in. Regional Governments own 100% of RDBs capital which isderived mainly from the regional development budget and specifically from theregional development tax revenues (IPEDA), 10% of which is earmarked to bedeposited with RDBs. Low collections on the tax in recent years have,however, prevented the growth of their capital base resulting in severelyrestricted term lending activities (equivalent to 2% of total bank lending)and equity participation for most of these banks. As of December 31, 1980,the RDBs' share in KIK/KMKP lending amounted to just over 5% of the totalKIK/KMKP loan approvals throughout the country. The bulk of their lendingoperations is short-term. Historically, they function primarily as fiscalagents for the regional governments.

5.20 BI, however, recognizes their potential for increased participationin term lending operations such as the KIK/KMKP program, in view of theirregional government ties. Over the last several years, BI has beenassisting a selected number of RDBs by way of rediscount facilities onpriority investments and staff training. These assistance efforts, however,tended to benefit only the stronger RDBs, leaving the majority unaffected onaccount of their limited absorptive capacity. Therefore, BI is proposing tosystematize and expand its assistance to RDBs both to enable them to live upto their developmental functions and to increase their participation in theKIK/KMKP lending program.

5.21 A survey conducted by BI, in cooperation with BAPINDO and UPPINDO,found that apart from the constraints of a narrow capital base, RDBs have invarying degrees weak management and organizational structures, lack uniformoperational guidelines, and are short of qualified staff. It, therefore,recommended an upgrading program for 20 RDBs as a first start that is aimed ataddressing some of these problems. It is expected that by 1982 all 26 RDBswould be included in the upgrading program. A total of 480 RDB staff andmanagers have been identified as needing training on various aspects oflending operations. Consultancy for this program had been contracted out toBAPINDO and UPPINDO who would conduct on-the-spot training in the regions,introduce the application of operational manuals and provide classroomtraining to RDBs staff (Annex 10). The proposed RDB upgrading included underthe project would cover three years beginning in October 1980, at the end ofwhich, additional technical assistance required by RDBs would be determined.Consultancy services costs of the component are estimated at around $5.2 mil-lion. Supervision of the upgrading program would be handled by BI's Bank

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Supervision Department. The CPMU would be kept informed of the RDB upgradingprogress which would be reported to the Bank as part of the reporting require-ments (Annex 2). This understanding was reconfirmed during negotiations.

SSE Support Services

5.22 The need for improved support services to assist the SSE sectorin business management, marketing and technical problems has been recognizedfor some time by both the Bank and by local banking and official circles.SEDP I concentrated on providing technical assistance to BI and the handlingbanks to improve the administration and management of the KIK/KMKP loanprogram. Help to the individual SSE has been left mainly to the programs oftechnical ministries, principally the Ministry of Industry, which wasreceiving technical assistance from UNIDO/UNDP. Studies under SEDP I havefurther reconfirmed the vital need to strengthen technical support services toSSEs in order to support an expanding KIK/KMKP lending program.

5.23 The Government has allocated the equivalent of $300,000 out of theFifth Technical Assistance Project (Credit No. 898-IND) to finance consul-tancy services to help the Directorate General of SSI (at MOI) in strengthen-ing its industrial extension services and to determine the feasibility of alarge-scale program to support SSEs. The UNIDO/UNDP is currently implementinga larger, follow-up technical assistance project as part of its ongoing aidprogram to the DG of SSI. The Bank would collaborate with UNIDO/UNDP in theselection and supervision of some of the consultancy requirements and thereview of overall progress in the implementation of this component.

5.24 To complement the above efforts and to strengthen nonfinancialassistance to SSEs being provided by MOI, the Appraisal Mission proposed anSSE support services component at a total cost of about $8.3 million to beincluded in SEDP II. This component would involve IBRD funding of $6.0million which the Government would pass on to the Ministry of Industry in theform of a budgetary allocation. The Government would provide local counter-part funding of about $2.3 million equivalent. Reconfirmation of the modeof financing this component through the budget and its implementation andassurances that adequate local counterpart funds are available were obtainedat negotiations (Section 3.02 of the draft Loan Agreement).

5.25 Funding for the foreign currency cost of this component would beprovided from the proceeds of the proposed Bank loan. About $5.0 millionequivalent would be used for the purchase of imported equipment needed tosupport MOI's industrial extension services SEDP II. About $1.0 million wouldbe used for technical assistance to MOI to strengthen its advisory services toSSEs on management, marketing and technological problems during SEDP II. Theproposed allocation of these funds for the hardware components MOI is asfollows:

(a) $4.0 million for Common Service Centers (location to be decidedby MOI and agreed with the Bank) - to purchase machinery andequipment needed for training and demonstration purposes;

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(b) $0.8 million for Technological (R&D) Institutes under the MOI - topurchase laboratory, testing and other scientific equipment,related journals and reference materials and training of staff; and

(c) $0.2 million for Industrial Extension Services and Training - topurchase training equipment/materials (e.g. audio-visualequipment, copying machines, mobile workshop, office equipment).

The design and detailed program for implementing each component, accompaniedlists of items to be procured, would be subject to Bank approval prior todisbursement (Schedule I, para. 4 of the draft Loan Agreement).

Project Cost and Financing

5.26 Total project cost is estimated at $605.3 million (Rp 378 bil-lion), of which foreign exchange costs would be $242.2 million, or 40% ofthe total. Project costs are estimated as follows:

ESTIMATED PROJECT COST

Local Foreign Total…------- ($ million) --------

(a) KIK Subloans (current prices) /a 335.0 223.4 558.4(Equivalent in Rp. billion) (209.4) (139.6) (349.0)

(b) Technical Assistance (current prices)CPMU consultants 0.77 1.21 1.98RPMU consultants 7.83 8.43 16.26Training 11.17 2.78 13.95RDB upgrading 5.17 - 5.17Economic surveys 0.76 - 0.76Studies 0.13 0.36 0.49Industrial extension services 0.80 1.00 1.80

Subtotal 26.63 13.78 40.41

(c) SSE Support Services (end-1980 prices) 1.00 4.00 5.00Contingencies /b 0.50 1.00 1.50

Subtotal (c)(current prices) 1.50 5.00 6.50

Total (current prices) 363.13 242.18 605.31

/a Based on BI's projections for KIK lending for July 1981-December 1983.

/b Based on domestic price increases of 15% p.a. and foreign cost increasesof about 10% p.a.

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The credit component is the projected KIK lending in 26 regions over two-and-a-half years (July 1, 1981 - December 31, 1983), based on BI's projec-tion of KIK lending (para. 4.24) during the period. The projected rate ofgrowth appears realistic, as no shortage of loan demand is anticipated.Lending operations over the period would be further enhanced by the work ofRPMUs and other promotional measures by BI and the Government. The technicalassistance cost of the project, including the SSE Support Services componentis $46.9 million, or 7.7% of total project cost.

5.27 Relending Terms. A Bank loan of $106.0 million to the Republic ofIndonesia is proposed. The loan would be made to the Government which wouldpass on $100.0 million of the loan proceeds to BI for the credit componentunder a Subsidiary Loan Agreement acceptable to the Bank. The signing of thesaid agreement would be a condition of effectiveness of the proposed loan(Section 6.01 of the draft Loan Agreement). The balance of the loan proceedsof $6.0 million would be passed on to the Ministry of Industry in the form ofa budgetary allocation for support services to SSE.

5.28 Under SEDP I, the IDA Credit (No. 785-IND) proceeds were pooled withBI's own resources and were used to rediscount 80% of KIK subloans extended byhandling banks in the three project regions. Since IDA funding on conces-sional terms is not available for SEDP II, the Government agreed to use Bankfunds and relend the proceeds of the proposed loan to handling banks on thesame terms as the Bank loan. However, BI proposes to modify financingarrangements for KIK loans under SEDP II by rediscounting 80% of KIK lendingfrom its own resources at the going rate of 3% p.a. and use the Bank loanproceeds to finance the remaining 20% on Bank terms. Assuming the Bank loanat 10% p.a. interest rate, the combined cost of BI funding to handling bankswould then be about 4.4% after deducting a fee of around 1% p.a. /1 for creditinsurance by P.T. ASKRINDO. After resource and insurance cost, the handlingbanks would be provided with a satisfactory spread of 5.1% which is notsignificantly different from what they now earn (para. 4.05). KMKP financingarrangements will be maintained as at present and will not be covered by theBank loan. Preliminary agreement was reached at negotiations on the relendingterms of the proposed loan proceeds, to be finalized as soon as the interestrate for the Bank loan is determined.

5.29 As in previous DFC operations in Indonesia, the Government wouldbear the foreign exchange risk of the proposed loan. It is proposed that thisloan be repaid according to a fixed schedule, on country terms, i.e., 20 yearsmaturity including five years of grace period. Since the average maturity ofKIK subloans during the project period would be about five years, this wouldmean that a significant amount of funds would be repaid to BI before the Bankloan is due to be repaid. As in SEDP I, BI would relend ("roll over") thesefunds to provide further support for the KIK program.

/1 The flat fee to P.T. ASKRINDO of 1.5% is equivalent to almost 1% p.a.(0.7%) on KIX loatns on the basis of their present average duration pattern(para. 4.05).

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5.30 BI would finance the bulk (82%) of the credit component while thebalance would be funded from the proceeds of the proposed loan ($100 million).For the financing of technical assistance costs, the Government has decided touse only "soft" funds. Hence, BI has arranged funds from bilateral sourcesand, on its request, the Association has agreed to reallocate and rephase theuse of the undisbursed balance of Credit 785-IND, amounting to about $9.5million, during the period of SEDP II. During negotiations agreement wasreached to amend the SEDP I (Credit 785-IND) legal documents to enable BI touse the remaining balance of the Credit for financing technical assistanceinitiated under SEDP I and continuing through SEDP II. Both projects aretime-slices of the Government's long-term assistance to the small-scalesector. BI presented the following project financing plan which issatisfactory to the Bank.

PROJECT FINANCING PLAN

Local Foreign Total Share----------- ($ million) --------- (%)

CreditBI 335.00 123.40 458.40 82IBRD - 100.00 100.00 18

Subtotal 335.00 223.40 558.40 100

SSE Support Services 1.50 5.00 6.50 100TBRD 5.00 5.00 77GOI 1.50 - 1.50 23

Technical AssistanceBI 14.62 1.32 15.94 39GOI 0.80 - 0.80 2IDA (SEDP I) /a 3.62 5.85 9.47 24IBRD - 1.00 1.00 3Handling banks 4.62 - 4.62 11Other aid donors 2.97 5.61 8.58 21

Subtotal 26.63 13.78 40.41 100

Total Project CostBI 349.62 124.72 474.34 78GOI 2.30 - 2.30 -IBRD/IDA 3.62 111.85 115.47 19Handling banks 4.62 - 4.62 1Other aid donors 2.97 5.61 8.58 2

Total 363.13 242.18 605.31 100

la Undisbursed balance of Credit 785-IND to be utilized during SEDP 1I.

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Disbursement

5.31 Withdrawal applications would be submitted by the CPMU for theproposed loan's share ($100 million) of the credit component and for thetechnical assistance costs covered by Credit 785-IND (SEDP I). For the SSESupport Services component which is financed by a portion ($6.0 million) ofthe proposed loan, the Directorate General of SSI (MOI) would be responsiblefor submitting withdrawal applications to the Bank, and disbursements wouldbe made on 100% of the total expenditures of consultants to MOI; 100% of theforeign cost of directly imported items; 95% of the ex-factory cost oflocally produced items, and 65% of foreign produced off-the-shelf items.For the portion of the IBRD loan to be channelled through BI for the creditcomponent, disbursements would be made by the Bank covering 20% of amountsdisbursed by BI to handling banks for eligible KIK lending under the project.As in SEDP I, withdrawal applications would be supported by statements ofexpenditures, prepared by BI, certifying that equivalent amounts had beendisbursed to subborrowers. The loan-by-loan documentation for the statementsof expenditure would be retained by the handling banks for review by theBank (Annex 16). Disbursement of the reallocated portion of SEDP I funds(Credit 785-IND) for consultants to BI and its affiliates would be made inaccordance with the following procedures, i.e., (a) 100% of total expendi-tures for all project consultants; (b) 100% of foreign expenditures forstaff training, both evidenced by official invoices, receipts, or otherpayments documents. The estimated schedule of disbursements (Annex 3) isbased on the experience under SEDP I which is in line with Bank experienceon DFC loans to Indonesia.

Procurement

5.32 Given the small size, great variety and wide geographic spread ofKIK/KMKP loans, bulking for the purposes of carrying out competitive biddingwould not be feasible. However, to ensure that goods and services financedunder such loans are procured at competitive prices, BI's regulationsstipulate that for any large purchases, borrowers should obtain and submitto the handling bank three price quotations from suppliers/contractors.These procedures are acceptable to the Bank. BI monitors handling bankprocurement practices, taking into consideration cost, quality and services,so as to be able to ensure that goods and services financed under KIK/KMKPloans are procured at competitive prices. Consultants to be financed byBank funds would be recruited in accordance with normal Bank Group proce-dures. Terms of Reference of these consultants would be subject to Bankapproval.

5.33 A total of $5.0 million worth of machinery, equipment and materi-als needed for industrial extension services would be procured by MOI on thebasis of a list of items subject to approval by the Bank. Normal governmentprocurement procedures acceptable to the Bank would be applied, sinceitems to 'be procurea unaer this component ate many, smaAl in valne and cf

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great variety which cannot be grouped in sufficiently large quantities toattract international bidders./l

Accounts and Audit

5.34 Under SEDP I, two types of audit reports were required, namely, ageneral audit of handling banks' accounts and financial statements and aspecific audit of their KIK lending operations in the three project provinces.BI has met some difficulties in fulfilling these requirements mainly becausethe reporting system on KIK lending was in the process of being developed anddata from handling banks branches and those recorded at BI are difficult toreconcile. The audit reports of the State Accountancy Directorate, which arein the Indonesian language, are usually delayed; BI has also not been able tocomply with this reporting requirement on time.

.5.35 For SEDP II, therefore, the reporting requirement should be revisedso that the Bank can realistically expect to receive information regularlyfrom the borrower concerning the utilization of Bank funds as well as theoverall operations under the KIK/KMKP Program. Accordingly, BI and thehandling banks would have their accounts and financial statements for eachfiscal year audited by independent auditors acceptable to the Bank (the StateAccountancy Directorate in the case of BI, state-owned and regional develop-ment banks). B:[ would send certified copies in English of its auditedstatements and the auditors' report no later than nine months after the end ofthe fiscal year. In addition, BI would furnish information concerning itsaccounts and financial statements, including its KIK liquidity credit accounts(unaudited) which would be sent to the Bank every quarter (Section 3.02 of thedraft Project Agreement). Handling banks would submit audited accounts andfinancial statements with supporting information no later than 12 months aftereach fiscal year (Section 4.02 of the draft Loan Agreement).

Monitoring and Reporting Requirements

5.36 The revised project monitoring and reporting requirements areshown in Annex 2. BI would submit to the Bank quarterly and annual progressreports in English; the latter would form the basis of joint annual reviewsof the project by BI and the Bank in the course of project supervision. Inaddition, each handling bank branch would maintain up-to-date files, maps,and statistics of its project subloans which would be available for reviewby the Bank. Similarly the Directorate General of SSI would submit annualprogress reports in English as provided in Annex 2.

/1 In 1980, the new Government procurement procedures were implemented whichinclude various provisions to strengthen small local firms operating inproject areas. These procedures should ensure efficient procurement atreasonable prices.

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Project Benefits and Risks

5.37 The project would provide needed technical and financial assistanceto make KIK/KMKP program a more effective and efficient system for channellingdevelopment finance to small enterprises. Project lending nationwide on KIKloans for fixed investments is expected to create additional employment forsome 140,000 workers at an investment cost per job of about $4,000 in thesmall-scale enterprise sector (compared to $15,000 and $250,000 for mediumandlarge-scale industry). Through the promotional efforts and sectoral studiesprovided under the project, it is expected that the proportion of KIK loansgoing to the labor-intensive, agro-industrial and manufacturing sectors(presently 15% of total) will increase significantly./l As illustrated inAnnex 14 most of these beneficiaries would be small producers ofagro-industrial products, consumer goods, small traders, transport operatorsand other services entrepreneurs. More than 50% of these SSEs would be insmall towns and rural areas.

5.38 The extensive technical assistance envisaged under the project isdesigned to improve overall banking capability to plan and carry out termlending operations nationwide. The training component is expected to improvedevelopment banking skills of the handling banks and increase their awarenessof the financial and nonfinancial problems of small borrowers. In addition,by providing financial and technical assistance to MOI to strengthen itsindustrial support services, the project lays the groundwork for a practicalcoordination and development of nonfinancial support in the long-run.

5.39 The success of the KIK/KMKP lending program depends on its costeffectiveness and the timely delivery of adequate support services to SSEclients. The project addresses only the most crucial of these factors duringits three-year life span and provides a framework for dealing with othersthat require a longer time frame. The major risk to the project is the levelof arrears which if uncontrolled could defeat the program's effectiveness andits developmental impact. The project takes specific steps to reduce thelevel of arrears by: (a) implementing an improved monitoring and evaluationsystem; (b) strengthening project appraisal and supervision capability ofhandling banks staff; and (c) by keeping the costs and benefits of theprogram as well as its developmental impact under review.

5.40 A crucial factor to project success is the effectiveness of BI smanagement of the nationwide program. BI proposes to address this risk bystrengthening the program's management structure at its head office andregional branches and by implementing an expanded training program that isaimed at all participating banks. A related risk is the ability of the creditinsurance company (P.T. ASKRINDO) to mitigate the risks normally associated

/1 Present data do not permit the setting or projection of sectoral targetsfor KIK/KMKP. However, the improved monitoring system provided under theproject (para. 4.11) should correct this problem during SEDP II.

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with small lending operations. As mentioned above the Government and BIwould take measures to speed up claims procedures under P.T. ASKRINDO. Theoperation of the various project units, including P.T. ASKRINDO, would beclosely monitored during project implementation.

6. AGREEMENTS REACHED AND RECOMMENDATIONS

6.01 During negotiations, agreements (reflected in the loan and projectdocuments) were reached on the following:

(a) With Bank Indonesia, on:

(i) adoption by BI's Board of Directors of the policy and strategystatement (Annex 1) (para. 4.04);

(ii) the implementation and timing of a medium-term planningsystem for KIK/KMKP lending (para. 4.08);

(iii) the implementation of the improved monitoring system(para. 4.11);

(iv) presentation to the Bank of management circulars issued byBI to improve project management (para. 5.10);

(v) signing of the Subsidiary Loan Agreement between theGovernment and BI, as a condition of loan effectiveness(para. 5.27);

(vi) the details of audit requirements (para. 5.35);

(b) With MOF, on:

(i) the implementation of measures to improve the claimsprocedures of P.T. ASKRINDO, the state credit insurancecompany (para. 4.14);

(ii) the Government's commitment to provide the necessarycounterpart Rupiah funds for the SSE Support Servicescomponent of the proposed project (para. 5.24); and

(c) With MOI: Bank approval of the design and detailed program for themajor elements of the SSE Support Services program as a condition ofloan disbursement (para. 5.25).

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6.02 An understanding was reached with BI on the following:

(a) BI's proposals for simplifying banking procedures and introducingprocedural reforms to handling banks (para. 4.09);

(b) implementation of the proposed consultant evaluation system(para. 5.08);

(c) BI's supervision and review of the RDB upgrading program andsubmission of progress reports to the Bank (para. 5.21); and

(d) confirmation of the financing plan for the technical assistancecomponent (para. 5.30).

Recommendation

6.03 On the basis of agreement/understanding with the Government, BI andMOI on the points listed above, a Bank loan of $106 million, on countryterms, is recommended.

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Page 1 of 3

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMIENT PROJECT

Bank Indonesia

Policy and Strategy for the Development of the KIK/KMKP Program _1

1. This statement specifies the main objectives of the KIK/KMKPProgram (hereinafter the Program) and the directions to which the Governmentand Bank Indonesia (BI) expect it to develop. The primary emphasis of theProgram is on the expansion of lending volumes and the improvement of thequality of loan portfolios. Both volume and quality of subprojects financedunder the Program will be monitored, evaluated and any necessary actions tobe taken will be decided upon from time to time. For that purpose, advicewill be sought from all organizations and operating units involved in theProgram based on their experience.

General Objective and Strategy

2. The main objective of the Program is to finance the development ofsmall-scale enterprises (SSE) in virtually all economic sectors. Specificprogram objectives are the creation and sustenance of employment, geographicdispersion of productive investment, development of entrepreneurial opportu-nities and technical skills, provision of markets for local SSE products andraw materials, and in general, the promotion of productive economic activityin all regions. To achieve this objective, it is recognized that a compre-hensive development strategy, involving both financial and nonfinancialassistance agencies, would need to be developed in the long run. BI and thehandling banks (HB) will continue to explore practical ways of facilitatingcredit as well as the required technical assistance to SSE clients.

3. It is intended that an SSE development strategy based on experienceunder SEDP I would be pursued under SEDP II. It would consist of, interalia, the following elements:

(a) improvement of lending operations by HB staff through classroomand on-the-job training on the various aspects of project identi-fication, appraisal, loan processing and supervision;

(b) strengthening of the planning machinery and staff capabilitieswithin BI and HBs to support their longer-term development andpromotion of KIK/KMKP loans to SSEs;

(c) providing adequate incentives to HBs and encouraging their continuedparticipation in the program; and

(d) continuing assistance and operational guidelines to HIBs in prepar-ing sound lending programs with emphasis on:

ANNEX 1Page 2 of 3

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(i) sectoral and subsectoral, labor-intensive projects in thevarious regions;

(ii) lending for specific village industries in accordance withexisting village development schemes;

(iii) projects related to hire-purchase and subcontracting arrange-ments; and

(iv) "Special Projects" involving grassroots collaboration betweenbanks and nonbank technical assistance agencies.

4. It is expected that the RPMUs would take initiatives and assist HBsin identifying potential clients for KIK/KMKP loans and means of developingprogram lending based on program feasibility. Cost-effectiveness in develpingproject- and program-type loans will be a major consideration.

5. In preparing development lending programs, active collaboration,to the extent possible, with other Government assistance agencies/programssuch as the industrial and agricultural extension services, technologicalinstitutes, BAPPEDAs, local universities and training institutes would bepromoted.

Lending Procedures

6. KIK/KMKP procedures will be improved from time to time in responseto changing circumstances. Project viability rather than collateral willcontinue to be stressed in loan processing by HBs. BI will see to it thatHB staff comply with accepted development banking techniques in loan adminis-tration and, whenever necessary and feasible, assist clients in gainingaccess to technical and other nonfinancial assistance.

Terms and Conditions of Lending

7. For the present, KIK/KMKP loans wil be made to subborrowers at10.5% p.a. and 12% p.a. interest rates, respectively, for a maximum maturityperiod for KIK loans of 10 years (including four years' grace period) and of3 years for KMKP loans. Maximum ceilings under each loan will be maintainedat Rp 10 million in general, and for borrowers who have demonstrated a goodrepayment performance this ceiling may be raised, at HBs' discretion, toRp 15 million. Further exceptions to both size and maturity limits will bemade on project consideration provided that these exceptions do not lead toa redirection of the program in favor of larger enterprises. Lending rateswill be reviewed and adjusted as needed.

Strengthening the Handling Banks' KIK/KMKP Capability

8. Training of bank staff will be extended to loan officers, projectcounterparts, the middle management, branch managers and regional office man-agers. To reach a greater portion of the officials handling and processing

ANNEX 1-47- Page 3 of 3

the loans, the scope and the number of courses will be increased. To achievethis, the training will be decentralized from LPPI to those handling bankswhich have or can develop in-house training capabilities. Trainers will betrained by LPPI for this task. In addition to this, a self-directed train-ing program will be initiated to reach more loan officers than is possiblethrough classroom training and to involve their supervisors in training res-ponsibility. To handle the variety of training programs and to reach greaterefficiency, strong effort in the coordination of all training activitieswill be made. Simultaneously the concept of staff development will beintroduced into the training and personnel management of the handling banksto improve their training capacity and efficiency in a permanent and self-sufficient way.

Collections Performance of and Incentives to HBs

9. Terms and conditions of KIK/KMKP are set so as to provide HBs withadequate interest spreads. Additional incentives designed to stimulatecontinued participation in the Program include technical and financialassistance to HBs by BI for staff recruitment, training and development.This assistance should enable HBs to build up their capability to superviseprojects adequately, achieve satisfactory collection rates, and keep arrearswithin manageable limits.

Data Collection and Evaluation

10. Under SEDP II an improved monitoring and reporting system will beimplemented, allowing BI and HBs to obtain timely and accurate informationfor management use, particularly on loan approvals, disbursements and repay-ments. HB reporting requirements on KIK/KMKP will be standardized and sim-plified. A Credit Data System Analyst attached to DPPK would assist BI and,if requested, the HBs in implementing this system.

11. The evaluation of the KIK/KMKP program, to determine its financialand socioeconomic impact, will continue under SEDP II.

/1 Adopted by the BI Board of Directors on April 21, 1981.

AEP Projects DepartmentMarch 26, 1981

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ANNEX 2Page 1 of 2

INDONESIA

SMALL ENTERPRISE DEVELOPMENT PROJECT

Reporting Requirements

(a) For Bank Indonesia

1. Consolidated Quarterly Progress Reports. Bank Indonesia will sendto IBRD after each quarter a progress report in English containing a summaryof the most recent basic operational data on the progress of KIK/KMKP lendingand a summary of activities related to major components of the SEDP projectincluding:

(i) official translations of circulating letters (Surat Edaran),decision letters (Surat Keputusan) and major telexes involvingsignificant changes in KIK/KMKP regulations or procedures;

(ii) a list of RPMU papers, surveys and proposals relating tolending projects or pilot programs;

(iii) the courses taught, number of people trained, trainingmaterials developed, and training costs under the trainingcomponent of the project;

(iv) terms of reference, executing agencies and costs of specialstudies and surveys, and the summary and conclusions of suchreports when completed;

(v) any support services to KIK/KMKP clients which may take placewithin the project; and

(vi) summary of withdrawals (disbursements) of IBRD funding.

2. Annual Review. After the end of each project year BI will send toIBRD an Annual Review evaluating the accomplishments of the project duringthe preceding 12 months. This Review will include:

(i) analysis of any specific problems and constraints impedingthe smooth progress of the various project components, alongwith a statement of actions or plans to deal with suchimpediments;

- 49 - ANNEX 2Page 2 of 2

(ii) a statement of progress in coordinating the project activitieswith nonbank agencies such as BIPIK and other technicalagencies, both in the field and at the BI head office;

(iii) report on KIK collections performance per HB and province,indicating age and type of arrears as well as the affectedoutstanding portfolio;

(iv) the distribution of project lending by province, bank, sector,maturity and size, with comments;

(v) a report on RPMU observations of public policies that directlyor indirectly affect the development of small-scale enter-prises; an analysis of the adequacy of KIK/KMKP lending termsand conditions; and

(vi) the work program of consultants participating in the RDBupgrading program, and progress on implementation of the RDBupgrading program.

3. Financial Reports. Bank Indonesia will provide to the IBRD copiesof Annual Reports and Audit Reports of the KIK/KMKP handling banks. (Thesection of the Audit Reports and any commentary and tables dealing with theKIK/KHKP lending operations and portfolio will be translated into English byBI and sent to IBRD along with copies of the full Audit Reports.)

(b) For the Directorate General of SSI

4. An annual report on project progress would be submitted by theDG-SSI, highlighting project implementation of the various components coveredunder the project. This report to be submitted in English should be brief,analytical and factual, touching upon progress as well as problems encounteredin implementing the SSE Support Services component. Supporting statisticaldata on procurement, utilization of machinery, equipment, number and types ofend-users, and other economic benefits would be provided.

AEP Projects DepartmentMarch 26, 1981

ANNEX 3-50 -

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Estimated Schedule of Disbursements

IBRD SEDP I IBRDIBRD fiscal year Credit Tech.asst. SSE support Cumulativeand quarters component component component disbursement

----------------- ($ million) ------------------------

FY1982I (Jul-Sep 81) 8.8 0.8 - 9.6

II (Oct-Dec 81) 9.1 0.8 0.1 19.6III (Jan-Mar 82) 9.4 0.9 0.2 30.1IV (Apr-Jun 82) 9.6 0.8 0.4 40.9

Subtotal 36.9 3.3 0.7

FY1983I (Jul-Sep 82) 9.9 0.9 0.5 52.2II (Oct-Dec 82) 10.1 0.9 0.6 63.8III (Jan-Mar 83) 10.4 0.9 0.7 75.8IV (Apr-Jun 83) 10.6 0.9 0.7 88.0

Subtotal 41.0 3.6 2.5

FY1984I (Jul-Sep 83) 11.1 0.7 0.7 100.5II (Oct-Dec 83) 11.0 0.7 0.7 112.9III (Jan-Mar 84) - 0.6 0.7 114.2IV (Apr-Jun 84) - 0.6 0.7 115.5

Subtotal 22.1 2.6 2.8

Total 100.0 9.5 6.0 115.5

AEP Projects DepartmentMarch 26, 1981

- 51 - ANNEX 4

INDONESIA

SECOND SAULL ENTERPRISE DEVELOPMENT PROJECT

Estimated Project Execution Schedule

Calendar year 1980 1981 1982 19P3 1984quarter 1 2 3 4 1 2 34 1 2 34 1 2 3 4 1 2 34

! I1 II 11 -IProject Activities I I I I I I II

I I I I I II11 KIK sublending I I x II I II

I I I I ! I 1 1 Consultancy to BI Head Office! I I I I I I II

Project Advisor I I I x I I I I IISSE Dev. Advisor I I I X I ! II I I_IStaff Dev./Training Adv. I I -I I I IDevelopment Banking Adv. - -I II IAgricultural Advisor I _ _ __ I I … I I …iManagement Infor. Expert x _ I I i I | | | I

Consultancy to RPMlUs I _ I I x I I I I II II =1 1 1 1 1 1 11

Training consultancyLPPI I II XBRI and BNI 46 I IBapindo and Uppindo | t I __Il _

I I I -1 1----I F … I 1…RDB upgrading X _X I x I I I I _

I… … … …I -IIIBaseline surveys I I I v

I I 1 1 1 1 I 111Evaluation studies I I I x I I I I II !

I I I I I 1 - 1 SSE support services I I I I I I I II

procurement I I - I … I III I I - I 1--- 1I----… …-I

= Solid lines represent ongoing activities carried over from SEDP I.= Broken lines represent activities introduced in SEDP II.

X = Starting point of SEDP II activity.

AEP Projects DepartmentFebruary 2, 1981

ANNEX 5

-52 -

INDONESIA

SECOND SMALL ENTERPRISES DEVELOPMENT PROJECT

Medium-term Investment Credits

March 31 Jun. 30 Sep. 30 Dec. 31 Mar. 311975 1976 1977 1978 1978 1978 1978 1979

Credit Outstanding 126,098 168,829 221,550 224,897 229,955 228,084 257,283 264,426

1. By economic sectors- Agriculture 9,545 16,338 18,966 21,303 23,744 20,187 20,605 19,990- Mining 147 5,143 4,273 3,277 3,276 3,276 3,276 3,276- Manufacturing 61,404 67,740 79,254 83,505 85,524 85,933 86,191 90,954- Service industry 46,672 70,346 110,608 106,545 103,112 104,242 132,574 135,420- Others 8,330 9,262 8,444 10,267 14,299 14,446 14,637 14,786

2. By source of funds- Bank Indonesia 61,454 81,368 92,337 105,281 102,399 99,425 115,161 118,711- State banks 60,696 83,628 126,065 118,759 126,699 127,202 141,266 144,859- Government Budget/b 3,948 3,833 3,148 857 857 857 856 856

Approved by Banks 177,071 224,825 290,829 284,993 303,008 309,548 345,226 356,078

1. By economic sectors- Agriculture 12,139 17,955 20,421 28,160 31,134 28,258 29,290 26,208- Mining 221 5,154 5,296 5,296 5,296 5,296 5,296 5,296- Manufacturing 86,837 84,430 114,081 108,898 120,637 127,197 134,054 145,114- Service industry 65,916 103,741 137,156 126,969 127,597 129,722 156,752 158,841- Others 11,958 13,545 13,875 15,670 18,344 19,075 19,834 20,619

2. By source of funds- Bank Indonesia 111,827 138,416 184,848 183,623 196,224 200,259 224,600 231,778- State banks 59,485 81,305 101,804 98,948 104,642 107,147 118,484 122,158- Government Budget/b 5,759 5,104 5,177 2,422 2,142 2,142 2,142 2,142

/a Based on Announcement of the Board of Directors of Bank Indonesia No. Peng I/DIR/1969,March 7, 1969.Excludes foreign exchange component and rupiah financing of project aid.

/b Since 1971 the Government Budget no longer provides rupiah financing for investment credits.

Source: Bank Indonesia "Annual Report for the Financial year, 1978/79."

AEP Projects DepartmentFebruary 2, 1981

- 53- ANNEX 6

INDONESIA

SECOND SMALL ENTERPRISES DEVELOPMENT PROJECT

Consolidated Balance Sheet of Monetary Authorities, 1976-May 31, 1980(Rp billion)

May 31,1976 1977 1978 /a 1979 1980

AssetsForeign assets 628.1 1,056.8 1,651.7 2,625.6 3,670.4Claims on public sectorCentral government 239.0 312.3 509.2 579.8 559.4Claims on official entities andpublic enterprises 1,208.8 1,225.1 1,925.0 2,142.7 2,063.8

Claims on private enterprises andindividualsLoans 2.8 4.2 9.9 20.4 20.3Other claims 13.9 16.6 22.6 24.4 27.1

Claims on deposit money banks 640.4 681.5 846.4 1,129.3 1,484.6Other assets 68.6 4.1 37.3 113.4 125.9

Total Assets 2,801.6 3,300.6 5,002.1 6,635.6 7,951.5

LiabilitiesReserve money 1,332.9 1,670.0 1,847.1 2,421.5 3,041.3Currency outside banks and government 781.0 979.1 1,239.9 1,545.4 2,187.8Currency held by banks 79.9 94.5 112.8 146.8 163.8Bankers' deposits 442.7 528.0 438.7 632.8 647.1Private sector demand deposits 29.3 68.4 55.7 96.5 42.6

Foreign currency and other deposits /b 3.1 1 4 3.2 27.0 106.2Bankers' restricted and FX deposits 48.7 49.8 38.2 56.2 73.8Import deposits 50.9 102.4 105.1 125.9 103.7Foreign liabilities 227.9 112.2 189.9 27.6 30.9Government depositsCurrent account 421.6 677.2 1,094.1 1,762.2 2,359.7Blocked account 466.4 399.1 476.0 391.2 391.2Aid counterpart funds 62.1 78.0 76.4 208.2 206.9

Capital accounts 182.3 190.1 1,133.3 1,393.0 1,049.0Other liabilities 5.7 20.4 38.8 222.8 588.8

Total Liabilities 2,801.6 3,300.6 5,002.1 6,635.6 7,951.5.

/a Includes changes resulting from exchange rate adjustment on November 15, 1978 fromRp 415 to Rp 625 per US dollar, amounting to Rp 561.2 billion in foreign assets,Rp 62.0 billion in claims on government, Rp 481.1 billion in claims on officialentities and public enterprises, Rp 1.5 billion in other assets, Rp 0.6 billion inforeign currency and other deposits, Rp 24.8 billion in bankers restricted and FXdeposits, Rp 23.1 billion in imports deposits, Rp 15.3 billion in foreign liabili-ties, Rp 15.8 billion in current account, Rp 164,1 billion in blocked account,Rp 809.7 billion in capital accounts and Rp 52.4 billion in other liabilities, res-pectively.

/b Includes revaluation of foreign exchange deposits amounting to Rp 16.7 billion.

AEP Projects DepartmentFebruary 2, 1981

-54- ANNEX 7

INDONESIA

SECOND SMALL ENTERPRISES DEVELOPMENT PROJECT

Functional Balance Sheet of Bank Indonesia, 1976-May 31, 1980(Rp billion)

May 31,1976 1977 1978 /a 1979 1980

AssetsForeign assetsGold and foreign exchange 619.9 1,049.2 1,647.6 2,622.1 3,491.8Other foreign assets 34.9 3.3 7.8 14.0 178.5

Claims on public sector and centralgovernmentAdvance to government 60.0 60.0 60.0 60.0 60.0DICS promissory notes 27.8 0.1 0.5 1.8 2.3Other claims 224.8 327.9 555.1 674.4 649.1

Claims on official entities andpublic enterprisesOfficial entities 167.1 175.7 238.4 247.9 253.3Public enterprises 1,072.5 1,051.5 1,698.8 1,894.8 1,810.5

Claims on private enterprises andindividualsLoans 2.8 4.2 9.9 20.4 20.4Other claims 13.9 15.6 22.6 24.5 27.1

Claims on deposit money banks 640.4 681.5 846.4 1,129.3 1,484.6Other assets 139.0 167.6 281.5 361.1 259.3

Total Assets 3,003.1 3,537.6 5,368.6 7,050.3 8,236.9

LiabilitiesMonetary liabilities

Currency in circulation 876.5 1,095.6' 1,386.2 1,743.2 2,091.0Bankers' deposits 442.7 528.0 438.7 632.8 647.1Private sector demand deposits 29.3 68.4 55.7 96.5 42.6

Foreign currency and other deposits /b 34.0 3.5 15.5 27.0 106.2Bankers' restricted and FX deposits -48.7 49.8 38.2 56.2 73.8Import deposits

Government 45.1 74.1 99.2 94.2 102.1BULOG 50.9 102.4 105.1 125.9 103.7

Foreign liabilitiesForeign exchange liabilities 111.3 29.2 45.4 1.4 2.7Other foreign liabilities 34.9 3.3 7.8 14.0 28.2

Government depositsCurrent account 374.7 597.8 919.6 1,642.2 2,518.2Blocked account 466.4 399.1 476.0 391.2 391.2Counterpart funds 121.9 136.9 224.7 339.5 358.9- Proceeds of Gov't bond issues (-) (-) (63.7) (100.4) (96.2)- Foreign aid (121.9) (136.9) (161.0) (239.1) (262.7)

Capital and reserve 65.5 76.6 103.2 124.3 248.9Other liabilities 301.2 372.9 1,453.3 1,761.9 1,522.3

Total Liabilities 3,003.I 3,537.6 5,368.6 7 ,050.3 8,236.9

/a Includes changes resulting from exchange rate adjustment on November 15, 1978 from

Rp 415 to Rp 625 per US dollar.

/b Includes foreign exchange deposits of public enterprises (Pertamina).

AEP Projects Department -

February 2, 1981

ANNEX 8- 55 - Page 1 of 14

The KIK/KMKP PROGRAM

Background

1. Small-scale enterprises (SSEs) are a relatively unsophisticatedtarget group compared to their larger counterparts and generally face seriousdifficulties in obtaining institutional credit due to problems in complyingwith bank requirements. The Indonesian Government had started responding tothese constraints as early as 1969 by introducing the "Kredit InvestasiBiasa" (KIB) or medium-term investment credit scheme, administered by BankIndonesia (BI) and operated by all State commercial banks, BAPINDO andselected development banks. Although this program was intended to provideterm loans for fixed assets and working capital purposes at varying interestrates to virtually all sectors of the economy, most lending went to largerprojects in urban areas and the SSE coverage was disappointing. Although theprogram was subsequently refocussed to increase the participation of smallindigenous enterprises it failed to reach this objective for the followingreasons:

(a) Participating Banks. They preferred larger projects and werereluctant to accept the greater risk and higher cost of SSElending; furthermore lending procedures were not suited to SSElending and SSEs could also not provide the data required forproject appraisal.

(b) Program Features. Most SSEs were not able to comply with theminimum equity requirements of 25%; furthermore credit insurancewas not incorporated in the program features and the program termsfavored large loans.

(c) Borrowers. On the whole SSEs needed working capital financingeven more urgently than investment loans and could not engage inany investment project without concurrent working capitalfinancing and without the necessary technical support.

Main Features of the KIK/KMKP Program

2. Given the constraints of the KIB program and its limited SSEcoverage, GOI has introduced a new program, specifically designed for thefinancial assistance of SSEs. It comprises the Kredit Investasi Kecil(KIK), financing of fixed assets and services to rehabilitate, modernize,expand projects as well as to establish new businesses and Kredit ModalKerja Permanen (KMKP) for permanent working capital. Better access oflabor-intensive indigenous SSEs with limited access to institutional term

ANNEX 8- 56 - Page 2 of 4

financing has been the principal objective of the new program./l All produc-tive activities /2 in industry, trade, services and agriculture are eligiblefor financing, except certain industries that may from time to time be declar-ed saturated. The KIK/KMKP program incorporates the lessons learned from theKIB program, modifying its features and eliminating previous constraints. Tocompensate banks for some of the high cost and difficulties associated withSSE lending, BI has introduced highly subsidized rediscount facilities for thehandling banks (HBs) and permitted the use of simplified credit procedures.The greater risk of SSE financing has been partly offset by P.T. ASKRINDO'sautomatic credit insurance, which coveres 75% of the loan amount. Fairlylenient qualifying conditions have also been introduced. Finally minimumequity requirements have been abolished at least for the first tranche ofRp 10 million.

3. Eligibility Criteria. Original size eligibility criteria /3 hadbeen rather restrictive, limiting KIK lending to enterprises at the lower endof the SSE spectrum. To accommodate also larger and frequently more progres-sive SSEs and to offset the effects of inflation on asset values, BI hasraised the ceilings on eligibility criteria. They now require that theborrowers' net worth /4 does not exceed Rp 100 million (US$160,000) andRp 40 million (US$64,000) for industrial activities including construction,and all other activities such as trade and transportation, respectively.

4. Loan Limits. BI has adjusted individual loan ceilings of KIK andKMKP loans from the original Rp 10 /5 to RP 15 million each and thus respondedto the inflationary development during the past few years and to the devalua-tion of the Rupiah, which resulted in substantially higher prices for most ofthe investment items. The new loan limits appear to be more realistic and

/1 Since August 1979, SSEs can also obtain KIK/KMKP financing to repayhigh interest loans from the "curb" market; however, only successfuloperations qualify.

/2 Indigenous professionals, originally excluded, have also becomeeligible according to BIs circulars No. SE10/5/UPK dated June 1, 1977and March 20, 1978 (KIK/KMKP Profesi).

/3 Original eligibility criteria were as follows: The net worth was not toexceed Rp 20 milion and net current assets Rp 10 million.

/4 Defined as total assets minus total liabilities irrespective of size,excluding private homes and land, however.

/5 Comprising two tranches of 5 million.

ANNEX 8- 57 - Page 3 of 14

should also encourge the HBs to consider the financing of SSEs with morecomprehensive investment requirements. Now, the KIK/KMKP program providesloans for fixed assets and working capital purposes up to a maximum amount ofRp 15 million (US$24,000) under each type of credit. This maximum amount,however, can be obtained only by borrowers who have a good repayment record onprevious loans./l To qualify, borrowers also have to contribute at least 10%from their own resources. Given these ceilings, SSEs can obtain a maximum ofRp 30 million or $48,000./2

5. Program Responsibility. While BI has been responsible for policyand program development, administration and monitoring, the five state com-mercial banks, 30 private commercial banks and 26 regional development banks(RDBs) with a countrywide network of around 1,000 branches have been assignedresponsibility for the implementation of the program. Some of the privatebanks and RDBs have not yet reached the stage where they can implement theprogram independently and consequently participate under cofinancing arrange-ments with the state commercial banks and BAPINDO respectively. Nine RDBshave already "graduated" from the cofinancing arrangement and have startedextending KIK/KMKP loans directly. Bank Rakyat Indonesia (BRI) is the singlelargest handling bank accounting for around one third of all branches andproviding some 50% of total KIK/KMKP lending. The aggregate share of allprivate and regional development banks on the other hand, has so far beenlimited to not more than around 7% of total KIK/KMKP approvals but theirinvolvement is expected to increase over the next few years. A program,/3specifically designed to upgrade the RDB group (Annex 37), is expected toresult in this group's intensified involvement in SSE term financing. BI hasallocated sectoral responsibilities to the various HBs for KIK/KMKP lendingoperations according to their priority assignments to make best use of eachhandling bank's specific expertise. However, this specialization appears notto be very rigid, as all state commercial banks cater for more than one sectorand exceptions from the rule of sector assignment and financing responsibilityare foreseen for existing long-time (over one year) clients who want toventure into other than the assigned sector of a particular bank, or for newclients if the responsible blank explicitly approves the exception in writing.

/1 Indicated by a satisfactory loan repayment performance for at least36 months (24 months for KMKP loans) after loan agreement.

/2 These limits are also applicable if borrowers obtain several KIK loansfor more than one business activity.

/3 To be implemented by BAPINDO and UPPINDO but steered and monitored by BI.

ANNEX 8-58 - Page 4 of 14

Lending Term and Conditions

6. Loan Maturity. Currently applicable terms and conditions forKIK/KMKP borrowers are shown in Annex 8, Table 2. The maximum KIK loanduration of originally 5 years was not adequate for financing investment itemswith long life spans such as buildings and machinery. As a consequence, theHBs would either compress repayment periods, overburdening the borrower's cashflow, or reject such cases which inevitably leads to a discrimination againstcertain sectors, such as industries. BI has responded to this issue andlengthened the maximum duration for KIK loans to 10 years and the grace periodfrom 2 to 4 years./l The maximum duration of 3 years /2 for KMKP loans forworking capital purposes, has remained unchanged. Such loans are operated asoverdraft facilities and do not require any grace period.

7. Lending Rates. KIK and KMKP carry mandated lending rates of 10.5%and 12% p.a., which have remained unchanged since January 1978./3 Since thenthe inflation rate has been rising steadily, reaching 20% in 1979/80 and isrunning at 20% again in 1980/81. KIK/KMKP lending rates, therefore, have beennegative in real terms and have been so in all years except in 1977/78. Sincethe program to date accounts for less than 5% of total bank credits, and theproportion of KIK/KMKP credits going to the small-scale industrial sector iseven smaller (about 2% of total industrial lending), whatever misallocation ofresources has taken place due to the negative lending rates has probably beenmarginal. Besides, being a high priority credit program, KIK/KMKP lending isclosely monitored as to its end-use and clientele. For this reason, thepresent level of interest rates could be accepted, especially when taken aspart of a package of incentives designed to ease SSE access to term finance.The required capital contribution and collateral on other medium term creditschemes are still beyond the reach of most SSEs.

8. The mission, nevertheless, noted the possibility of a more seriousmisallocation of resources if lending rates are kept at a negative level forany length of time particularly in view of the expansion of the programand recommends an adjustment. BI considers it politically inexpedient, how-ever, to change the KIK/KMKP lending in the context of SEDP II. The Govern-ment views the present level of interest rates as still consistent with itspolicy to subsidize credit for small indigenous entrepreneurs which also aimsat social objectives in addition to economic and financial ones. Moreover,it was pointed out that the KIK/KMKP interest rates are linked with the over-all interest rate structure which is, in turn, determined on the basis of

/1 The grace period, which normally applies to principal repayments, may alsobe extended to interest repayment obligations.

/2 KIMKP loans can be "rolled over" for up to three years each time if theborrower's business develops satisfactorily.

/3 At that time they were reduced from 12% and 15% to 10.5 and 12% for KIKand KMKP respectively.

ANNEX 8- 59 - Page 5 of 14

overall financial policies and government priorities. Therefore, it would beinappropriate to deal with these rates in isolation. While this may be thecase, the mission recommends that BI subjects also the KIK/KMKP lending ratesto its periodic reviews in order to keep them in line with longer term pricemovements.

9. Refinancing Terms and Arrangements. Under SEDP I, the Creditproceeds were pooled with BI-s own resources to rediscount 80% of KIK loanamounts at an interest rate of 3% p.a. /1, while the HBs financed the balanceof 20% from their own resources. Under the proposed loan, BI intends tocontinue to rediscount 80% of KIK lending from its own resources at 3% p.a.but relend the proceeds of the proposed IBRD loan to the HBs for the remaining20% on the same terms as the Bank loan. Thus, BI would refinance 100% of KIKlending at a weighted average rediscount rate of about 4.3% p.a.,/2 therebyrelieving the HBs of their 20% financial share.

10. One possible drawback of the proposed formula is that the HBs wouldbe required to make no financial contribution to KIK lending under SEDP II.While this might reduce the HBs' incentives to implement the KIK/KMKP programsomewhat, it would not affect their obligation to enforce repayment ofsubloans, since they would continue to administer the loans and would still beaccountable to BI for full repayment. As in SEDP I, BI will continue tosupervise all HBs closely. The mission believes, however, that the HBs shouldbe encouraged in the long run to mobilize as much of their own resources forterm financing (such as the KIK/KMKP program) as possible, to reduce theirdependence on BI funding, but does not consider this a critical issue at thistime.

I1. Given the present lending rate of 10.5%, the proposed refinancingarrangement will provide HBs with a 6.1% interest spread which should beadequate although it constitutes a slight reduction when compared to theSEDP I /3 arrangement. BAPINDO and the RDBs have worked out separate incomeand cost sharing arrangements which are shown in Annex 8, Table 2.

/1 BI rediscounts 75% of KIKP lending at 4%.

/2 Assuming an IBRD lending rate of 9.6% p.a.

/3 The spread for KIK lending under SEDP I has been between 6.1-6.5%,depending on the assumption of the resource base and its cost,from which HBs finance their 20% share (savings, time and demanddeposits, or a deposit mix). Average resource costs of 8% as identifiedby a study of Administrative and Finance Cost, would result in a 6.5%gross spread under the current arrangement.

ANNEX 8- 60 - Page 6 of 4

12. Collateral Requirements and Credit Insurance. Rigid collateralrequirements originally called for a 100% coverage of all KIK loans and haveconstituted a significant impediment for faster growth during the initialyears of the program and have been identified as a major reason for the rejec-tion of loan applications. Moreover, lenders appeared to be preoccupied withcollateral considerations owing to their loan officers' lack of appraisalexperience. Recently lenders have started realizing that their attempts tofully secure SSE loans by collateral are not successful, particularly in viewof the difficulties of liquidating it and the cultural stigma associated withforeclosure procedures./1 In the light of this new perspective, BI hasresponded to the collateral issue and advised HBs to focus on the viability ofprojects rather than collateral and not to reject viable cases simply becauseof insufficient collateral. Normally, the loan-financed assets figure as theprincipal collateral and, if their values prove insufficient, the borrower canbe requested to pledge additional collateral (except his private home andland) but only up to the maximum of 50% of the loan amount. Since this isonly a guideline, and owing to the absence of standardized valuation proce-dures, the HBs have still some scope to manipulate collateral requirements.

.The mission observed in its discussions with the HBs that the relaxation ofthe collateral requirements was welcome by most of the HBs, and that colla-teral considerations ha e started losing their significance in constrainingKIK lending. /

13. Over and above, HBs are required to secure a credit guarantee fromP.T. ASKRINDO (para. 2) covering 75% of KIK lending /2 against a 3% one-timefee, of which 1.5% is borne by BI and 1.5% by the HBs. For loans with aduration of more than five years P.T. ASKRINDO charges a 5% fee, to be absorb-ed by BI and the HBs in the proportion of 2:1. Liquidated collateral in thecase of nonpayment by the borrower is shared in the proportion of 3:1 betweenP.T. ASKRINDO and the HBs.

Lending Approach

14. Individual vs. Program Lending. General ("umum") lending consistsof KIK/KMKP loans given on a case-by-case basis while special ("khusus") ormass ("massal") lending operates on the basis of specially designed creditprograms for several borrowers with similar production needs and capitalrequirements. Such programs, developed by type of activity or subsector,

/1 The HBs do not directly foreclose delinquent loans but transfer them toPUPN, the Government's quasi-judicial collection agency. In compliancewith the recommendations of the Government, PUPN tries to work out alenient settlement compromise and considers foreclosure as a measure oflast resort. As a result, the HBs are often faced with a protractedsettlement period which constitutes a disincentive for their intensifiedinvolvement.

/2 Individual losses are granted automatic cover, while program loans toa group of borrowers require P.T. ASKRINDO's prior evaluation.

ANNEX 8- 61 - Page 7 of 14

require at least 50 borrowers with financing requirements not exceedingRp 200 million. Financing is either extended to each individual in such agroup or to the group as a whole (e.g., cooperative), but the creditworthinessof individual borrowers is appraised notwithtanding the collective nature ofmassal arrangements. Specific lending programs under the massal approach areidentified and prepared jointly by the Government, HBs and technical agenciesin accordance witn official priorities. After program identification andformulation by the Department of Agriculture, for instance, BRI reviews theproposal, suggests appropriate financing arrangements within the standardKIK/KMKP terms, and forwards the package to BI for final review and approval.The "massal" approach, while most suitable for agricultural lending, requiresextensive subsectoral analysis (to determine markets, input supplies, choiceof technology) prior to lending and permits extension services to be providedmore efficiently. It also reduces the HBs' administrative costs. A list ofall current KIK/KMKP massal programs is shown in Table 3.

15. Allocation of Credit Ceilings. The overall ceiling for the expan-sion of all bank credits and fixed assets is determined on the basis of anoverall assessment of the economy which takes into account factors such as themoney demand and supply situation, inflation expectations, and budget andbalance of payment considerations. Individual bank ceilings, on the otherhand, set by BI for the fiscal year from April to March, are allocated on thebasis of the individual institution's growth record and performance withparticular regard to its plans for financing priority. In the light ofthe importance GOI and BI attaches to this program, KIK/KMKP allocationsfunction as targets rather than ceilings and are consequently set high enoughso as not to constrain the handling banks in their lending activities. BIdisaggregates KIK/KMKP ceilings for state commercial banks and allocates themby regional (BRI, BNI 46) or even branch office levels. Interregional branchoffice transfers of unused allocations of a particular HB require BI's permis-sion, while intraregional transfers do not.

16. Program Guidance. BI uses circulars to instruct and guide partici-pating HBs on matters such as procedural changes and program innovations.Over the years the number of guidelines has increased, however, and some HBsface difficulties in keeping track of them; they may consequently apply someoutdated procedures which are out of line with BI's latest recommendations.Thus, BI may want to furnish the HBs with a complete set of its currentlyapplicable circulars and improve the updating system to ensure that this setbe kept current.

Appraisal and Supervision

17. The small loan size, difficulties in obtaining accurate informationon the operation and performance of clients, and their appraisal officers'limited experience have caused HBs to adopt a sometimes too practicalappraisal approach. This has resulted in undue reliance on the projectsponsors' collateral and past performance, thus nurturing reluctance inappraisal officers to deal with newly established ventures. In cooperation

ANNEX 8-62 - Page 8 of 14

with the HBs, BI has recently introduced a standardized appraisal format,which draws its vital information from a standardized application form,supplemented by data from the appraisal officer's interviews and field visits.However, the new appraisal approach, which is expected to yield a speedier andmore uniform appraisal work, is only a first step towards a more efficient andconducive instrument for SSE appraisal. The mission has thus encouraged BI tosearch for such a more efficient SSE appraisal method together with thehandling banks, which can fall back on their intensive KIK/KMKP appraisalexperience.

19. Decentralization of functions related to KIK/KMKP operation andincreased delegation of approval authority to the regional and branch officelevels have resulted in speedier loan processing and approval. However, thisdevelopment was not supported by a more regular supervision exercise owing tothe rapid increase in the number of borrowers. Cognizant of these shortcom-ings, the HBs tried at least to single out those projects for regular super-vision which would otherwise collapse or default with their repayment obliga-tions. Generally, the HBs accept their supervision responsiblility and haverecognized its importance for the success of the program. They expect thatintensified supervision efforts would eventually result in better loancollection, lower default rates and also provide their loan officers withfirst-hand experience of problems commonly faced in SSE term lending.However, a quick solution is not imminent and the HBs should refine theirselective supervision approach and back it up with an up-to-date monitoringsystem. Supervision work is, nonetheless, expected to improve in parallelwith the HBs' training efforts and their success in recruiting talented andmotivated young professionals.

20. Procurement and Disbursement Procedures. Basically, a credit canonly be considered for the purchase of new capital goods. Exceptions arepossible, however, for the purchase of secondhand capital goods, if it canbe proved that the prices of those goods are reasonable, that they are stillin good condition, and their technical condition and economic life will lastlonger than the duration of the loan.

21. According to BI's directive the choice of suppliers should bedetermined jointly by the HBs and borrowers, who are requested to submitthree price quotations whenever possible, to assist borrowers in theselection process, taking into consideration cost, quality and services;these regulations are generally adhered to.

22. Diversion of loan funds has been grossly reduced by BI's disburse-ment regulations on KIK/KMKP loans which require that payments are directlymade to suppliers/contractors whenever possible; they are principallyadhered to. For such cases as construction of buildings or boats, the HBsare advised to release the loan in tranches after project inspection toensure that the loan proceeds are utilized in accordance with the agreedproject purpose and plan.

ANNEX 8- 63 - Page 9 of 14

23. Rediscount Procedures. In response to complaints in the past, BIhas devised very expedient rediscounting procedures which allow immediatewithdrawal of the funds upon application by virtue of giro transfer formsattached to the application form. So obtained funds will immediately bedebited again if the application later turns out not to conform with theexisting regulations. Subborrowers have to withdraw their subloans within agiven period if HBs are to escape BI-s additional 4% p.a. interest charge./lBI allows for an alternative procedure, if the HBs prefer to apply first forthe liquidity credit and await its approval, eventually drawing it down inparallel with the subborrower requirements. The HBs face cancellation ofthe liquidity credit in such instances unless it is withdrawn within a timeperiod of six months.

24. The HBs' rediscount requests are reviewed at BI's branch officelevel to detect subborrowers blacklisted for uncovered checks and transfernotes. In a second step, BI ensures that borrowers qualify under itsdefinition of "small" indigenous enterpreneurs. Beyond these checks, BI doesnot get involved, however, nor does it review the HBs' appraisal work.

Lending Scale

25. The pace of growth since inception of the program (1974) has beenimpressive and overall KIK approvals have increased at a nominal rate of 30%p.a. to a cumulative total of about Rp 223.9 billion ($358.2 million) as ofJune 30, 1980. Almost 77,000 borrowers have received KIK financing duringthis period. KMKP approvals have grown at an even faster rate (at some50%), supplying almost 143,000 individual and more than 300,000 massalborrowers with KMKP loans (the latter mainly within the context of agricul-tural program lending), amounting to Rp 415.4 billion ($664.6 million) asof June 30, 1980. The rapid growth of KIK loan approvals has acceleratedduring 1979 and the first six months of 1980, quarter by quarter fromRp 9.0 billion (I. Quarter 1979) to Rp 26.5 billion (II. Quarter 1980),resulting in rates of over 80%. During the same period, the rate ofrejected applications was reduced from 27% to 17% (by amount). In the threeproject regions, partly financed from the IDA credit, KIK lending expandedaccordingly to a cumulative total of around Rp 68 billion ($109million), reaching some 28,000 small borrowers, or around 36% of all KIKrecipients. The program's outstanding performance in terms of growth isalso reflected in the rapid increase in the aggregate KIK and KMKPportfolios of all HBs, amounting to Rp 142.3 and Rp 228.5 as of June 30,1980. Sustained overall economic growth, accompanied by promotional effortswhich were intensified in mid-1979, appear to be the underlying causes ofthis performance. The further relaxation of lending terms in early 1978 andagain in July 1979 may have been an added catalyst in recent programexpansion.

/1 They can also redeposit the liquidity credit amount instead.

ANNEX 8- 64 - Page 10 of 14

Lending Characteristics

26. Sectoral and Regional Distribution. Out of overall KIK approvals ofRp 213.8 billion,/l 30.3% has been lent for transportation, 28.4% for tradeand services, 16.9% for agriculture, 14.0% for manufacturing and 10.4% forother purposes. As of June 30, 1980, transportation accounted for the largestshare of total cumulative KIK loan approvals while the trade sector was secondwith 28.4% but with continuously increasing annual shares (from around 24% in1974/75). The annual shar>) of agricultural KIK lending, on the other hand,has declined, but its total approvals still account for 17% of total KIKlending. Industrial KIK lending, however, has developed disappointingly,declining steadily from virtually 23% in 1974/75 to around 14% during the1976-78 period and eventually to 12% in 1979. The declining trend has beeneven more pronounced for working capital lending (KMKP) to manufacturingindustries, which has slipped from originally 34% to 13.4%. Recent approvallevels do not indicate any reversal of this development and suggest that theshare of industrial KIK/KMKP lending is likely, at best, to be sustained,unless some promotional efforts are undertaken (para. 2). Total industrialKIK/KMKP loan approvals accounted for less than 5% of outstanding credit tothis sector, despite the importance of small and cottage industries inIndonesia,/l which provides an estimated 87% of all manufacturing employmentin the country. Hence, this sector's financing requirements have notadequately been covered yet by KIK/KMKP lending, probably affecting employmentcreation efforts. BI intends to stress labor-intensive sectors by intensifiedpromotional efforts through HBs assisted by RPMUs. These units undertake ahost of studies to identify potential growth industries and to solicit HBsinto financing them. The intended strengthening of MOI's extension servicesystem is also expected to increase the share of industrial KIK lending.Overall, only about 77,000 borrowers have obtained KIK financing and about470,000 /2 received KMKP loans, or roughly 10% of the estimated number of SSEsthroughout the country, there is still scope for further expansion.

27. Data in Annex 8, Tables 6 and 7 indicate that the objective of dis-persing investment away from Java and from the major urban centers has beenachieved. Jakarta, for instance, accounted for only 7.2% and 4.2% of totalKIK and KMKP approvals, while KIK lending to projects in the outer islandsaccounted for about 46% (42% for KMKP lending) and thus exceeded the propor-tion of populace in these islands (about 36%). By and large, distribution ofKIK/KMKP lending in the various islands and even at provincial levels corre-sponds fairly well with the population distribution pattern in these areas.

/1 Based on approval form ("Form A").

/2 Report No. 2490-IND "Cottage and Small Industrial in the NationalEconomy" dated November 9, 1979.

/3 Almost 330,000 of these loans were granted under the KIK/KMKP "massal"scheme.

ANNEX 8- 65 - Page 11 of 14

28. Distribution by Size, Maturity and Purpose. The characteristics ofKIK/KMKP loan approvals, shown in Annex 8, Tables 9 and 13 indicate that themajority of both KIK and KMKP loans are at the lower end of the size spectrum.Around 49% and 68% of all KIK and KMKP loans (by number) are for Rp 2 millionand less, while on:Ly a small portion of around 8% (5.2% for KMKP) has beenextended to borrowers in the Rp 5-10 million bracket. This is not surprisingas the maximum loan limit has been increased only recently. The average KIKloan size has grown at an annual rate of around 10% from Rp 1.9 million to Rp2.8 million during the 1976 to June 1980 period, indicating a slight declinein real terms.

31. Around 49,300 or 65% of total loans amounting to Rp 123 billion,accounting for 58% of total KIK lending, have been approved with maturities ofless than 4 years resulting in an average duration of 3.4 years when weightedby number of loans (Annex 8, Table 9). This may not exactly have reflectedthe life span of the assets financed with those loans and may have undulyburdened borrowers cash flows in the past. However, BI has eventuallyresponded to this issue and extended the maximum loan duration from 5 to 10years, but the adjustment was too recent to have a substantial impact on theduration distribution pattern. Consequently, only around 3.5% of total KIKloans has been extended with maturities between 5 and 10 years. BI's proce-dures also provide for loan rescheduling if necessary and recommended by HBsfor successful project implementation. BI has not yet collected data on theextent of such reschedulings except for the 3 project provinces, whererescheduling remained marginal.

29. Most KIK/KMKP lending has gone to established entrepreneurs forrehabilitation or expansion of their operations (Annex 8, Table 9), and newproject development accounts for only 11.4 and 3.5 of all KIK and KMKP loans.Investment in equipment has absorbed around 67% of total KIK lending whilearound 18.4% was used for factory buildings.

30. Distribution by Handling Bank. BRI plays a dominant role in SSEfinancing, accounting for 45.9% and 64.4% of total cumulative KIK and KMKPapprovals (Annex 8, Tables 4 and 5). It also accounts for around one third ofall bank branches so far involved in the lending program. Bank Negara Indo-nesia 1946, a very active participant with particular focus on the manufac-turing sector, ranks second with around 15.3% and 12.3% of KIK and KMKP lend-ing although it has recently been overtaken by Bank Bumi Daya in KIK lending(16.7%). The RDBs', partly in cooperation with Bapindo, and the private bankstogether account for 8.1% of total KIK lending (4.5% of KMKP lending); theshare of the former group, in particular, is expected to increase over thenext few years (Annex 37).

31. Sectorial specialization of the HBs has not been a constraint on KIKlending as indicated by Annex 8, Table 10. BRI accounts for the major share(81.4%) of KIK lending to agriculture according to its principal assignment,but also leads in lending to (agrobased) industries (37.4%), trade (36.5%) and

ANNEX 8- 66 - Page 12 of 14

transportation (43.7%) due to its sheer size. The other HBs show a greater

degree of specialization and BNI 46's KIK/KMKP lending is concentrated inindustry (36.1%), while transportation accounts for Bank Bumi Daya's majorlending activity.

Demand Prospects and Forecast

32. Since inception of the program in 1974 through 1979, overall KIK

lending has grown at an annual rate of 30%, amounting to about Rp 224 billion($358 million) to almost 76,500 borrowers. The pace of growth has beenparticularly fast in 1979 and preliminary data for 1980 do not indicate anyreversal of this development. For its projections BI has relied on a multipleregression model based on the following assumptions:

(i) annual real growth rate of GDP of 6.5% according to REPELITA IIIprojections; and

(ii) average inflation rate for 1980-84 period of 9.2%.

33. Under these assumptions, BI's projections show KIK loan approvalsgrowing at an annual real rate of 16% during the 1980-84 period and reaching atotal incremental lending volume of about Rp 673 billion (over $1 billion).These targets appear achievable in the light of the high priority Governmentplaces on the KIK/KMKP program, the present economic environment and theconservative assumptions used for the projection model.

34. The econometric model used to determine future KIK lending incorpo-rates also some demand factors such as the real growth prospects of the econo-my (GDP) on a regional level as well as price expectations, both significantdeterminants /1 of the lending volume. Results should be compared withempirical observations of the individual handling banks, which have directfield experience with KIK/KMKP lending at the regional/branch office level.However, such a integrated planning mechanism exists only in a very rudimen-tary form and with one year time horizon in some of the handling banks. Whenintroduced, a medium-term planning mechanism is expected to yield not only thedesired information on KIK demand (as well as total finance requirementsperhaps at a later stage), but also to serve as a suitable management tool.As a consequence, the mission recommended and BI and some of the HBs concurredthat such an integrated mechanism be introduced. An understanding to thisaffect should be reached between the Bank and BI during negotiations.

/1 The model indicated that a 1% increase in the economic growthperformance or inflation would result in the growth of KIK lending of0.64% and 2.04% respectively.

ANNEX 8- 67 - Page 13 of 14

Collection Performance and Arrearage

35. Loan collection and arrears cannot be determined with accuracy underthe present reporting system. Cognizant of these constraints, BI had commis-sioned a study (SGV) on the Management Information and Reporting System forKIK lending, whose findings and recommendations are currently discussed andunder consideration for implementation. This and other BI reports are expect-ed to provide a satisfactory basis for the monitoring of arrears. Nonethe-less, assurance should be obtained during negotiations that regular informa-tion will be collected on the following:/l (a) principal and interest inarrears by bank; (b) principal and interest in arrears by age; (c) reschedu-lings by bank; (d) claims to P.T. ASKRINDO by bank and settlements; (e) pro-visions for doubtful accounts by bank; and (f) write-offs by bank.

36. Currently applicable arrears criteria for KIK lending are based onjudgemental aspects and would best be complemented with a more neutral record-ing system which records arrears by types and age. It is expected to yield aclearer picture on categories and extent of arrears as well as to signal moreconspicously optional managerial steps such as: which loans to write-off(without relaxing collection efforts), whether to enforce repayment morevigorously /2 and whether or not to resort to loan rescheduling. In thiscontext, BI may also want to guide HBs more comprehensively on all aspects ofloan rescheduling and write-offs through the issue of its usual circulars forthe benefit of a more consistent and uniform approach. However, whetherprocedural adjustments, additional efforts in providing supervision and exten-sion services, more rigid collection efforts or other appropriate actions arerequired, can eventually only be determined by comprehensive and systematicanalysis of the causes of arrears.

37. Overall KIK arrears, excluding interest in arrears in the absenceof sufficient information, are high but not alarmingly so. Partial datashow (Annex 8, Table 15) that principal in arrears has been declining from25.1% in 1977 of total KIK portfolio outstanding to 23.5% and 18.5% in 1978and 1979, but has slightly increased during the first six months of 1980(19.0%). BI supplied the mission with more comprehensive information on theportfolio quality in the three project provinces; however, this information isneither fully consistent nor necessarily representative for the country as awhole and should consequently be used with caution. On the basis of thissurvey, principal and interest in arrears, reschedulings and write-offsaccounted for 26% of the total aggregate portfolio in these provinces. Around81% and 61% of the arrears have been overdue for more than 6 months and 12months respectively, affecting some 41% of the HBs total portfolio.

/1 Perhaps to be implemented in stages within a reasonable time frame.

/2 A penalty interest rate of 3% is levied on all interest and principalinstallments in default for more than 90 days.

ANNEX 8- 68 - Page 14 of i4

38. KIK loan collection data confirm the trend of declining arrears asindicated by the aggregate collection rate of the 5 state commercial bankswhich has improved from 44.4% in 1977 to 53.5% and 54.1 in 1978 and 1979(Annex 8, Table 15). This indicator incorporates also accumulated arrears andis somewhat limited in its present form, particularly as a management tool formonitoring collection efforts. It should be complemented by a simple annualcollection ratio, relating collected to due amounts, which could comfortablybe used to set annual collection targets for the individual HBs on the basisof their past performance but incorporating gradual improvements.

Growth Prospects and Constraints

39. The rapid expansion of the program in both number and value termscontinues unabated through 1980 but may decelerate somewhat from its currentlevel of over 30% p.a. for KIK and 50% p.a. for KMKP lending. Despite itsimpressive growth performance to date, there is still a large segment of SSEsnot yet reached by the program particularly in the industrial sector, whoseshare has been declining in relative terms. However, improved project prep-aration facilities in banks as well as more effective technical assistance nowbeing developed under REPELITA III could enable many new clients to qualifyfor KIK/KMKP loans in the next few years. Since the Government puts highpriority on the KIK/KMKP program, resources would at least be made availablefor the period of REPELIA III which ends in 1984. BI has also responded withspeed and efficiency to previous program constraints by the recent adjustmentmeasures such as increasing loan ceilings, lengthening loan duration andde-emphasizing collateral requirements. Moreover, the SSE credit demand ismost reponsive to the overall economic conditions (GDP) which are not antici-pated to deteriorate in view of expectedly sustainable oil revenues andinvestment demand. On the basis of these considerations, BI projects that KIKloan approvals would grow at an annual rate of 11% during 1981-84. Althoughthis forecast appears conservative, judging from the current momentum of theprogram, there are, nevertheless, some uncertainties about potential supplyconstraints which may slow down program expansion.

AEP Projects DepartmentApril 24, 1981

- 69 -ANNEX 8Table 1

INDONESIA Page 1 of 3

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Rediscount, Lending and Deposit Terms of BI and State Banks(In %)

BI's BI'srediscount rediscount Lending

share rate rates

I. LoansA. Short-Term

Group I1. Working capital for BUUD/KUD for

procurement and distribution ofrice and maize 100 3 9

Group II1. BIMAS/INMAS rice and secondary

crops 100 3 122. BUUD/KUD/P.N. Garam for collection

and distribution of salt andworking capital for P.N. Garam 75 4 12

3. Working capital for flour mills 75 4 124. Export and exporting producers 75 4 125. Production, import and distribu-

tion of fertilizers 75 4 126. Import and distribution of nonfood

items under foreign aid 75 4 127. Working capital for BUUD/KUD and

cooperatives for collection anddistribution of agriculturalproducts, livestock and fish 75 4 12

8. Working capital for smallholderagriculture and cottage handi-crafts 75 4 12

9. Working capital for livestock,poultry and fisheries 75 4 12

Group III1. Working capital for rice mills/

hullers, sugar, coconut oil,textiles, agricultural equip-ment, paper, cement, publictransportation, printing andpublishing and tourism 70 6 13.5

2. Working capital for other produc-tion 70 6 13.5

- 70- AN4NEX o

Table 1Page 2 of 3

BI's BI'srediscount rediscount Lending

share rate rates

3. Import and distribution of con-trolled goods 70 6 13.5

4. Sugar stock financing 70 6 13-55. Domestic (inc. interinsular trade) 70 6 13.56. W4orking capital for contractors

for DIP/INPRES projects financedout of regional governments'budgets and for low-cost housing 70 6 13.5

Group IV1. Working capital for contractors

for projects other than thosespecified in III.6 60 6 15

Group V. Import and distribution of

imported goods not covered inII.5, II.6 and III.3 40 6 18

Group VI1. All other short-term credits 25 6 21

B. Medium/Long-TermFixed assets financing:Up to Rp 75 million 80 3 10.5Rp 75 - 200 million 75 4 12Rp 200 - 500 million 70 4 13.5Above Rp 500 million 65 4 13.5

Working capital financing:Up to Rp 300 million 70 4-6 12-18/aAbove Rp 300 million 65 4-6 12-187a

C. Loans to Small EnterprisesFixed asset financing (KIK) 80 3 10.5Permanent working capital financing

(KMKP) 75 4 12

D. Foreign Aid Project FinancingForeign currency requirements 100 4-6 12-15/bDomestic currency requirements 90-100 4-6 12-157

- 71 -ANNEX 8Table 1Page 3 of 3

Interest rateDeposit subsidy on

rate deposits

II. DepositsTime Deposits24 months for the first Rp 2.5 million 15 4.5On balance exceeding Rp 2.5 million 12 1.512 months 96 months 6

Demand DepositsUp to Rp 1 million to banks Determined

by banks(3.0-9.0)

More than Rp 1 million to Rp 50 million 3.0On balance exceeding Rp 50 million 6.0

Call Money 9.0-15.5

Tabanas (National Development Saving SchemeFor the first Rp 200,000 deposited 15On balance exceeding Rp 200,000 6

Certificate of Deposit1 month 3.0-14.753 months 4.0-15.256 months 6.0-15.259 months 7.012 months 8.0-14.75

/a Depending on the economic sector concerned.

/b 12% up to Rp 100 million; 15% above Rp 100 million.

Source: Bank Indonesia.

AEP Projects DepartmentFebruary 2, 1981

- 72 -ANNEX 8Table 2

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Current Terms of KIK/KMKP Lending

KIK KMKP

Direct LoansFor BorrowerMaximum loan amount Rp 10 million Rp 10 millionMaximum amount includingsupplementary loan Rp 15 million Rp 15 million

Interest rate 10.5% p.a. 12% p.a.Maximum duration 10 years 3 yearsMaximum grace period 4 years /aCollateral requirements Assets financed by loan and, if required,

additional collateral up to 50% of loanamount

Borrower's financial contri-bution ----------------- None /b ------------------

For Handling BankRediscount rate 3% p.a. 4% p.a.Rediscount share 80% 75%Credit insurance fee (front-end charge)Up to 5-year duration 3% /c 3% /cOver 5-year duration 5% -

Risk exposure 25% 25%

Co-Financing ArrangementsCo-Financing ShareRDBs 10% 10%BAPINDO 10% 15%BI 80% 75%

Interest Income ShareRDBs 50% 33-1/3%BAPINDO 27% 33-1/3%BI 23% 33-1/3%

Risk ExposureRDBs 10% x 30% = 3% of the loan amountBAPINDO 90% x 30% = 27% of the loan amount

/a Loan is normally extended as an overdraft facility./b Supplementary KIK credit above Rp 10 million requires 10% self-financing.7- To be absorbed by BI and HBs in equal shares.

AEP Projects Department

February 2, 1981

-73 - ANNEX 8Table 3

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Program ("Massal") Lending by Handling Bank

KIK KMKP

Bank Rakyat Indonesia Pepper Cattle fatteningPoultry SugarcaneCoffee pruning PoultryCooperatives/transmigration ClovesStorage space & drying Pepperfloors Fish pond development

Fisheries Coffee pruningWater pumping systems Fishing boat motorizationMarketing CooperativesCattle insemination FisheriesRice field development TrausmigrationFishing boat motorizationDairy farming

Bank Bumi Daya Marketing MarketingTransportation TobaccoTobaccoMarket stalls

Bank Dagang Negara MarketingTransportationShopping center units

Bank Ekspor Impor TobaccoIndonesia

Bank Negara Marketing MarketingIndonesia 1946

BAPINDO MarketingCity transportation

Regional development Marketing Tobaccobanks Taxi

AEP Projects DepartmentFebruary 2, 1981

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

KIK Lending by Bank, 1974-80 (June 30)

(Rp million)

1980 (as of

1974 1975 1976 1977 1978 1979 June 30) Cumulative total

Amount X Amount X Amount X Amount X Amount X Amount % Amount % Amount X

ApprovalsBRI 7,249 47.5 8,111 63.2 12,255 57.0 12,619 51.3 13,978 44.2 23,925 41.7 24,646 40.5 102,783 45.9

BBD 2,505 16.4 1,459 11.4 3,280 15.2 3,372 13.7 4,851 15.3 10,140 17.7 11,750 19.3 37,357 16.7

BDN 2,182 14.3 587 4.6 1,189 5.5 832 3.4 2,361 7.5 6,511 11.4 9,091 15.0 22,753 10.1

BETI 1,198 7.8 288 2.2 817 3.8 870 3.5 986 3.1 2,125 3.7 2,388 3.9 8,672 3.9

BNI 1946 1,676 11.0 1,126 8.8 2,304 10.7 4,255 17.3 6,137 19.4 10,387 18.1 8,373 13.8 34,258 15.3

BAPINDO 443 3.0 1,267 9.8 1,666 7.8 2,635 10.8 2,468 7.9 1,309 2.3 998 1.6 10,786 4.8

RDBs - - - - - - - - 835 2.6 2,867 5.0 2,920 4.8 6,622 3.0

Private banks - - - - - - - - 45 0.1 640 1.1 685 0.3

Total 15,253 100.0 12,838 100.0 21,511 100.0 24,583 100.0 31,616 100.0 57,309 100.0 60,806 100.0 223,916 100.0

OutstandingBRI 6,032 46.3 12,057 55.7 20,703 57.4 28,158 55.8 33,745 52.1 48,188 48.5 65,833 46.3

BBD 2,178 16.7 2,929 13.5 5,320 14.7 6,849 13.6 9,007 13.9 15,430 15.5 23,903 16.8

BDN 1,981 15.2 1,930 8.9 2,227 6.2 2,762 5.5 4,098 6.3 8,761 8.8 15,816 11.1

BEII 1,029 7.9 1,164 5.4 1,664 4.6 2,202 4.4 2,640 4.1 3,762 3.8 5,542 3.9

BNI 1946 1,452 11.1 2,142 9.9 3,468 9.6 6,136 12.1 9,107 14.1 15,488 15.6 21,276 14.9

BAPINDO 367 2.8 1,423 6.6 2,704 7.5 4,356 8.6 5,456 8.5 4,599 4.6 4,419 3.1

RDBEs - - - - - - - 659 1.0 2,996 3.0 4,963 3.5

Private banks - - - - - - - - - 155 0.2 582 0.4

Total ~~sta~13,039 100.0 21,645 100.0 36,086 100.0 50,463 100.0 64,712 100.0 99,379 100.0 142,334 100.0

Note: KIK approval (Telex) data comprise individual and mass#l lending as well as loans fully financed from handling banks' own resources and do not

tally with those in other tables (based on approval form "A--).

Source: Bank Indonesia.

AEP ProJects Department

February 19, 1981

J-. 0a

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

KMKP Lending by Bank, 1974-80 (June 30)(Rp million)

1980 (as of1974 1975 1976 1977 1978 1979 June 30) Cumulative total

Amount Z Amount Amount x Amount X Amount t Amount X Amount 1 Amount x

ApprovalsBRI 7,425 47.9 6,893 52.3 27,766 72.3 34,773 72.6 38,286 61.5 85,123 67.7 67,118 59.7 267,384 64.4BBD 1,731 11.2 1,046 7.9 1,988 5.2 2,623 5.5 5,730 9.2 10,552 8.4 9,931 8.8 33,601 8.1BDN 1,829 11.8 957 7.3 1,537 4.0 2,052 4.3 3,495 5.6 8,732 6.9 10,903 9.7 29,505 7.1BEII 1,768 11.4 861 6.5 1,439 3.7 1,947 4.1 1,971 3.2 3,831 3.1 3,177 2.8 14,994 3.6BNI 1946 2,329 15.0 2,186 16.6 4,021 10.5 4,487 9.4 9,787 15.7 13,712 10.9 14,565 13.0 51,087 12.3BAPINDO 420 2.7 1,244 .9.4 1,641 4.3 1,936 4.0 1,475 2.4 1,153 0.9 1,036 0.9 8,905 2.1RDO8 - - - - - - 93 0.2 1,503 2.4 2,601 2.1 2.377 2.1 6,574 1.6Private banks - - - - - - - - - - - - 3,348 3.0 3,348 0.8

Total Approva]s 15,502 100.0 13,187 100.0 38,392 100.0 47,911 100.0 62,247 100.0 105,704 lO0.0 112,455 100.0 415,398 100.0OOtatandingBRI 5,776 46.1 9,646 50.2 25,681 62.0 39,824 64.4 50,591 60.4 94,330 61.1 138,899 60.8 1BBD 1,408 11.3 1,857 9.6 3,130 7.6 4,322 7.0 7,371 8.8 13,991 9.1 21,118 9.2 -4BDR 1,428 11.4 1,497 7.8 2,128 5.1 2,829 4.6 4,231 5.0 11,187 7.3 17,661 7.7 tnBElI 1,581 12.6 1,881 9.8 2,716 6.5 3,727 6.0 4,829 5.8 6,615 4.3 9,303 4.1BNI 1946 1,988 15.9 3,016 15.7 5,591 13.5 7,941 12.9 12,246 14.6 21,009 13.6 30,918 13.5BAPINDO 332 2.7 1,336 6.9 2,200 5.3 3,111 5.0 3,165 3.8 2,910 1.9 2,994 1.3RDOB - - - - _ 84 0.1 1,315 1.6 3,149 2.0 5,158 2.3Private banks - - - - - - - - - 1,125 0.7 2,492 1.1

Total Outstanding 12,513 100.0 19,233 100.0 41,446 100.0 61,838 100.0 83,748 100.0 154,316 100.0 228,543 100.0

Note. KIK approval (Telex) data comprise individual and massal lending -as well as loans fully financed from handling banks own resources and do nottally with those in other tables (based on approval form 'A").

Sourte. Bank Indonesia.

AEP Projects DepartmentFebrWary 24, 1981

LAo

- 76 - ANNEX 8Table 6

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Cumulative KIK/KMKP Lending by Province as of June 30, 1980(Rp million)

Provincialpopulation

as Z of national KIK loan approvals KMKP loan approvalsProvinces population No. Amount % No. Amount %

SumatraAceh 1.7 2,127 7,511 3.5 4,576 10,238 3.3North Sumatra 5.6 4,118 13,376 6.3 8,219 21,205 6.8West Sumatra 2.4 1,559 5,625 2.6 2,512 8,507 2.7Riau 1.4 1,095 4,736 2.2 1,514 5,524 1.7Jambi 1.0 532 1,930 0.9 1,200 3,427 1.1South Sumatra 2.9 1,651 6,031 2.8 3,705 11,472 3.7Bengkulu 0.4 693 1,322 0.6 873 2,575 0.8Lampung 2.3 951 3,476 1.7 1,490 4,964 1.6

Subtotal 17.7 12,726 44,007 20.6 24,089 67,912 21.7

JavaWest Java 18.3 11,059 33,369 15.6 13,892 37,134 11.9Jakarta 3.8 4,781 15,461 7.2 3,303 13,030 4.2Central Java 18.5 9,581 24,441 11.4 27,936 56,468 18.1Yogyakarta 2.1 2,539 5,373 2.5 4,810 9,127 2.9East Java 21.5 16,738 37,607 17.7 42,534 64,004 20.5

Subtotal 64.2 44,698 116,251 54.4 92,475 179,763 57.6

KalimantanWest Kalimantan 1.7 1,141 3,876 1.8 1,567 3,499 1.1South Kalimantan 1.4 1,122 3,996 1.9 1,660 4,680 1.5Central Kalimantan 0.6 355 1,166 0.5 651 1,724 0.6East Kalimantan 0.6 975 3,204 1.5 943 3,459 1.1

Subtotal 4.3 3,593 12,242 5.7 4,821 13,362 4.3

SulawesiNorth Sulawesi 1.5 1,507 4,672 2.2 2,551 6,863 2.2Central Sulawesi 0.7 1,392 3,731 1.7 1,996 5,104 1.7South Sulawesi 4.4 5,108 15,062 7.1 5,905 15,605 5.0Southeast Sulawesi 0.6 635 1,738 0.8 1,075 2,603 0.8

Subtotal 7.2 8,642 25,203 11.8 11,527 30,175 9.7

Other ProvincesMaluku 0.9 556 1,332 0.6 596 1,174 0.4Irian Jaya 0.1 453 1,490 0.7 580 2,170 0.7West Nusa Tenggara 1.9 602 1,281 0.6 1,093 1,524 0.5East Nusa Tenggara 1.9 1,894 4,743 2.2 2,602 4,533 1.5Bali 1.8 3,148 7,177 3.4 4,965 11,382 3.6East Timor - 12 80 - 13 64 -

Subtotal 6.6 6,665 16,103 7.5 9,849 20,847 6.7

Total Approvals 100.0 76,324 213,806 100.0 142,761 312,059 100.0

Source: Bank Indonesia

AEP Projects DepartmentFebruary 24, 1981

- 77 -

ANNEX 8Table 7Page 1 of 4

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Cumulative KIK/KMKP Lending by Sector and Province as of June 30, 1980(Rp million)

KIK loan approvals KMKP loan approvalsNo. Amount % No. Amount %

Three Project Provinces(RPMU-covered)West SumatraAgriculture 157 547 9.7 62 125 1.5Industry 340 1,115 19.8 316 944 11.1Trade 506 1,543 27.5 1,998 6,832 80.3Transportation 422 1,869 33.2 25 104 1.2Other 134 552 9.8 111 503 5.9

Subtotal 1,559 5,626 100.0 2,512 8,508 100.0

Central JavaAgriculture 3,433 4,788 19.6 3,217 4,528 8.0Industry 1,585 4,448 18.2 5,814 12,337 21.8Trade 2,108 7,404 30.3 18,032 37,022 65.6Transportation 1,942 5,987 24.5 107 269 0.5Other 513 1,815 7.4 766 2,311 4.1

Subtotal 9,581 24,442 100.0 27,936 56,467 100.0

East JavaAgriculture 5,398 7,560 20.1 11,588 9,333 14.6Industry 2,204 6,029 16.0 6,857 11,610 18.2Trade 6,168 13,442 35.8 22,676 38,681 60.4Transportation 2,073 7,155 19.0 332 845 1.3Other 895 3,422 9.1 1,081 3,535 5.5

Subtotal 16,738 37,608 100.0 42,534 64,004 100.0

Total Three ProvincesAgriculture 8,988 12,895 19.1 14,867 13,986 10.9Industry 4,129 11,592 17.1 12,987 24,891 19.3Trade 8,782 22,389 33.1 42,706 82,535 64.0Transportation 4,437 15,011 22.2 464 1,218 0.9Other 1,542 5,789 8.5 1,958 6,349 4.9

Total 27,878 67,676 100.0 72,982 128,979 100.0

- 78 -

ANNEX 8Table 7Page 2 of 4

KIK loans KMKP loansNo. Amount % No. Amount %

Additional Nine Provinces (AlsoRPMU-covered)JakartaAgriculture 276 1,297 8.4 85 343 2.6Industry 423 1,827 11.8 577 2,323 17.8Trade 2,994 6,612 42.8 1,852 7,825 60.1Transportation 471 2,250 14.5 65 304 2.3Other 617 3,475 22.5 724 2,236 17.2

Subtotal 4,781 15,461 100.0 3,303 13,031 100.0

West JavaAgriculture 2,518 4,969 14.9 1,528 2,515 6.8Industry 1,316 4,612 13.8 3,415 8,366 22.5Trade 3,928 10,839 32.5 8,232 23,156 62.4Transportation 2,714 10,368 31.1 105 331 0.9Other 583 2,582 7.7 611 2,763 7.4

Subtotal 11,059 33,370 100.0 13,891 37,131 100.0

YogyakartaAgriculture 1,032 604 11.2 254 368 4.0Industry 529 1,306 24.3 1,391 2,878 31.6Trade 504 1,507 28.1 2,954 5,238 57.4Transportation 246 1,052 19.6 29 65 0.7Other 228 904 16.8 182 577 6.3

Subtotal 2,539 5,373 100.0 4,810 9,126 100.0

North SumatraAgriculture 799 2,206 16.5 722 1,100 5.2Industry 462 1,519 11.3 1,027 2,667 12.6Trade 1,112 2,791 20.9 5,823 14,630 69.0Transportation 1,370 4,998 37.4 103 441 2.1Other 375 1,861 13.9 544 2,367 11.1

Subtotal 4,118 13,375 100.0 8,219 21,205 100.0

- 79 -ANNEX 8Table 7Page 3 of 4

KIK loans KMKP loansNo. Amount % No. Amount %

South KalimantanAgriculture 248 756 18.9 46 155 3.3Industry 151 516 12.9 305 721 15.4Trade 138 544 13.6 1,182 3,438 73.4Transportation 520 1,970 49.3 36 87 1.9Other 64 209 5.3 91 279 6.0

Sttbtotal 1,121 3,995 100.0 1,660 4,680 100.0

Central KalimantanAgriculture 101 268 23.0 8 16 0.9Industry 94 366 31.4 104 307 17.8Trade 76 211 18.1 498 1,253 72.7Transportation 61 228 19.6 5 17 1.0Other 23 92 7.9 36 132 7.6

Subtotal 355 1,165 100.0 651 1,725 100.0

South SulawesiAgriculture 2,000 4,885 32.4 808 2,103 13.5Tndustry 531 1,350 9.0 800 1,578 10.1Trade 1,133 3,708 24.6 3,977 10,730 68.8Transportation 1,231 4,173 27.7 48 145 0.9Other 213 946 6.3 272 1,049 6.7

Subtotal 5,108 15,062 100.0 5,905 15,605 100.0

BaliAgriculture 1,701 2,072 28.9 655 885 7.8Industry 464 1,184 16.5 1,069 2,282 20.0Trade 509 1,949 27.2 3,050 7,727 67.9Transportation 317 1,360 18.9 25 81 0.7Other 157 612 8.5 166 406 3.6

Subtotal 3,148 7,177 100.0 4,965 11,381 100.0

- 80 -

ANNEX 8Table 7Page 4 of 4

KIK loans KMKP loansNo. Amount % No. Amount %

West Nusa TenggaraAgriculture 667 780 16.4 338 660 14.5Industry 271 774 16.3 357 476 10.5Trade 288 706 14.9 1,728 3,048 66.9Transportation 580 2,237 47.2 17 28 0.6Other 88 246 5.2 162 340 7.5

Subtotal 1,894 4,743 100.0 2,602 4,552 100.0

Total Nine ProvincesAgriculture 9,342 17,837 17.9 4,444 8,145 6.9Industry 4,241 13,454 13.5 9,045 21,598 18.2Trade 10,682 28,867 28.9 29,296 77,045 65.0Transportation 7,510 28,636 28.7 433 1,499 1.3Other 2,348 10,927 11.0 2,788 10,149 8.6

Total 34,123 99,721 100.0 46,006 118,436 100.0

Provinces Without RPMU CoverageAgriculture 3,060 5,312 11.5 1,272 2,129 3.3Industry 1,607 5,013 10.8 2,679 6,460 10.0Trade 2,627 9,429 20.3 17,595 46,943 72.6Transportation 5,818 21,123 45.5 469 1,352 2.1Other 1,211 5,532 11.9 1,758 7,760 12.0

Total 14,323 46,409 100.0 23,773 64,644 100.0

Whole of Indonesia (26 Provinces)Agriculture 21,390 36,044 16.9 20,583 24,260 7.8Industry 9,977 30,059 14.0 24,711 52,949 17.0Trade 22,092 60,685 28.4 89,597 206,523 66.2Transportation 17,765 64,770 30.3 1,366 4,069 1.3Other 5,100 22,248 10.4 6,504 24,257 7.7

GRAND TOTAL 76,324 213,806 100.0 142,761 312,059 100.0

Source: Bank Indonesia. Computer output based on Form A.

AEP Projects DepartmentFebruary 24, 1981

- 81 ANNEX 8

Table 8

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Cumulative KIK and KMKP Lending by Subsector as of June 30, 1980(Rp million)

KIK loans KMKP loansNo. Amount % No. Amount %

AgricultureFarming 10.458 17.474 8.2 11.567 14.022 4.5Livestock 3.728 6.186 2.9 4.042 5.763 1.9Forestry 8 37 - 11 49 -Fisheries 6.718 11.168 5.2 4.855 4.220 1.4Other 478 1.179 0.5 108 206 0.1

Subtotal 21.390 36.044 16.8 20.583 24.260 7.9

IndustryFood, beverages & tobacco 3.863 10.319 4.8 6.119 11.979 3.9

(of which: rice milling) (1.542) (3.563) (1.7) (746) (1.350) (0.4)Textiles, garments &leather 1.422 3.947 1.9 6.060 13.145 4.2

Wood, wood products &furniture 1.317 4.703 2.2 5.082 11.680 3.7

Paper, paper products,printing & publishing 492 2.018 0.9 745 2.287 0.7

Chemicals & chemicalproducts 160 546 0.3 381 963 0.3

Nonmetallic minerals 1.836 5.840 2.7 3.660 6.901 2.2Basic metals 40 142 0.1 172 366 0.1Machinery, tools & other

metal products 724 2.221 1.0 1.895 4.088 1.3Other 143 323 0.2 597 1.540 0.5

Subtotal 9.997 30.059 14.1 24.711 52.949 16.9

Trade and ServicesConstruction 841 4.486 2.1 3.348 16.420 5.3Wholesale trade 6.314 23.962 11.2 39.775 95.213 30.5Retail trade 14.453 31.257 14.6 48.600 108.385 34.7Hotels, restaurants 1.322 5.448 2.6 1.189 2.854 0.9

Subtotal 22.930 65.153 30.5 92.912 222.872 71.4

TransportationTransportation 17.674 64.492 30.2 1.352 4.044 1.3Storage 89 275 0.1 11 18 -

Subtotal 17.763 64.767 30.3 1.363 4.062 1.3

Other 4.244 17.783 8.3 3.192 7.916 2.5

TOTAL 76.324 213.806 100.0 142.761 312.059 100.0

Source: Bank Indonesia

AEP Project DepartmentFebruary 24. 1981

ANNEX 8

- 82 - Table 9

INDONESIA

SECOND SMALL ENTERPRISE DEVELOP1JENT PROJECT

Characteristics of Cumulative KIK and KPIKP Lending as of June 30, 1980(Rp million)

KIK loan approvals KMKP loan approvalsNo. % Amount % No. % Amount %

Distribution by AmountLess than 1 million 21,302 27.9 11,518 5.4 53,586 37.5 33,560 10.71 - 2 million 16,033 21.0 27,884 13.1 43,653 30.6 74,814 24.02 - 3 million 12,108 15.9 32,359 15.1 17,347 12.2 47,819 15.33 - 4 million 8,282 10.9 30,144 14.1 9,266 6.5 35,261 11.34 - 5 million 12,512 16.4 60,959 28.5 11,422 8.0 56,340 18.15 - 10 million } 6,087 7.9 50,942 23.8 7,487 5.2 64,265 20.6Over 10 million }

Total 76,324 100.0 213,806 100.0 142,761 100.0 312,059 100.0

Distribution by MaturityLess than 1 year 1,432 1.9 1,242 0.5 7,648 5.4 11,509 3.71 - 2 years 5,394 7.1 8,467 4.0 31,752 22.2 51,749 16.62 - 3 years 28,847 37.8 68,962 32.3 103,361/a 72.4 248,801/a 79.73 - 4 years 13,585 17.8 44,336 20.7 - - - -

4 - 5 years 24,374 31.9 77,625 36.3 - - - -

5 - 10 years 2,692 3.5 13,174 6.2 - - - -

Total 76,324 100.0 213,806 100.0 142,761 100.0 312,059 100.0

Purpose of FinancingBuildings 16,696 21.9 37,627 17.6Equipment 47,278 61.9 144,705 67.7Other 12,350 16.2 31,474 14.7

Total 76,324 100.0 213,806 100.0

Type of ProjectExpansion 58,885 77.2 178,206 83.4Nlodernization 9,273 12.1 16,897 7.9New development 8,166 10.7 18,703 8.7

Total 76,324 100.0 213,806 100.0

Existing project 138,016 96.7 304,488 97.6New project 4,745 3.3 7,571 2.4

Total 142,761 100.0 312,059 100.0

/a Including extensions.

Source: Bank Indonesia.

AEP Projects DepartmentFebruary 24, 1981

- 83 -

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- 84 -ANNEX 8Table 11

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Annual KIK Loan Approvals by Province and Sector(Rp million)

19801974/75 1976 1977 1978 1979 Qtr. 1 Qtr. 2 Total

By ProvinceCentral Java 4,636 2,636 2,090 2,790 6,617 2,989 2,690 24,441East Java 4,714 3,195 4,741 6,250 9,875 4,116 4,710 37,607West Sumatra 1,043 773 301 675 1,419 693 731 5,625

Subtotal 10,393 6,604 7,132 9,715 17,911 7,798 8,131 67,673

South Kalimantan 568 630 964 738 839 261 - 3,996Central Kalimantan 271 209 154 164 294 72 - 1,166South Sulawesi 1,815 1,800 1,264 2,430 4,484 1,492 1,785 15,062Bali 1,338 913 1,029 914 1,454 629 919 7,177North Sumatra 1,671 1,463 2,942 1,934 2,584 1,229 1,577 13,376West Java 4,007 3,024 2,654 4,980 10,065 4,370 4,284 33,369West Nusa Tenggara 466 429 471 523 1,486 511 873 4,743Yogyakarta 776 630 611 792 1,566 505 512 5,373Jakarta 2,710 897 1,691 2,153 4,380 1,808 1,860 15,461Other 4,482 3,702 5,720 7,194 12,738 5,905 6,517 46,410

Subtotal 18,104 13,697 17,500 21,822 39,890 16,782 18,327 146,133

Total 28,497 20,301 24,632 31,537 57,801 24,580 26,458 213,806

By SectorAgriculture 6.471 4.932 3.625 4.731 9.774 3.099 3.412 36,044Industry 6.604 2.884 3.441 4.465 6.800 2.968 2.897 30,059Trade 6.725 4.721 5.947 8.868 19.017 7.725 7.682 60,685Transportation 7.457 6.949 9.914 9.021 15.240 7.120 9.069 64,770Other 1.241 815 1.704 4.452 6.970 3.667 3.399 22,248

Total 28.497 20.301 24.632 31.537 57.801 24.580 26.458 213,806

Source: Bank Indonesia.

AEP Projects DepartmentFebruary 2, 1981

- 85 -ANNEX 8Table 12

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Annual KMKP Loan Approvals by Province and Sector(Rp million)

19801974/75 1976 1977 1978 1979 Qtr. 1 Qtr. 2 Total

By ProvinceCentral Java 5,451 4,405 4,669 8,221 18,299 7,645 7,819 56,468East Java 6,165 4,975 6,797 11,180 21,397 6,793 6,712 64,004

West Sumatra 1,022 843 583 1,179 2,388 1,172 1,346 8,507

Subtotal 12,638 10,223 12,049 20,580 42,084 15,610 15,870 128,979

South Kalimantan 415 514 563 1,013 1,749 448 - 4,680

Central Kalimantan 152 229 199 369 640 156 - 1,724

South Sulawesi 1,011 1,010 1,056 2,912 5,600 1,720 2,328 15,605Bali 1,354 1,389 1,449 1,474 2,629 1,176 1,365 11,382North Sumatra 2,242 1,953 2,338 2,686 6,769 2,248 2,985 21,205

West Java 2,884 2,692 3,229 5,762 12,793 5,565 4,239 37,134West Nusa Tenggara 357 356 459 647 1,544 475 724 4,553Yogyakarta 1,269 1,163 1,380 1,227 2,247 836 1,004 9,127

Jakarta 1,303 1,015 865 2,375 3,980 1,788 1,772 13,030Other 4,559 3,628 6,930 9,939 22,237 8,662 8,955 64,643

Subtotal 15,546 13,949 18,468 28,404 60,188 23,074 23,372 183,083

Total 28,184 24,172 30,517 48,984 102,272 38,684 39,249 312,062

By SectorAgriculture 3.839 1.974 2.255 3.927 7.716 2.304 2.245 24,260Industry 9.521 5.534 6.054 8.642 13.704 4.653 4.841 52,949Trade 12.621 14.660 19.850 32.196 71.172 27.522 28.502 206,523Transportation 742 405 464 676 941 433 408 4,069Other 1.457 1.601 1.892 3.543 8.740 3.772 3.252 24,257

Total 28.184 24.172 30.517 48.984 102.272 38.684 39.249 312,062

Source: Bank Indonesia.

AEP Projects DepartmentFebruary 2, 1981

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Characteristics of Annual RIK and KMKP Lending 1974-1979 and 1980 (6 months)

(Rp million)

1980

1974/75 1976 1977 1978 1979 Qtr. I Qtr. 2 Total

Amt. % Amt. Y Ant. X Amt. X Amt. X Amt. x Amt. Z Amt. X

A. KIK Loan Approvals

Distribution by AmountLess than I million 3,443 12.1 1,472 7.3 1,961 8.0 1,680 5.3 1,635 2.8 563 2.3 764 2.9 11,518 5.4

I - 2 million 5,448 19.1 3,678 18.1 4,316 17.5 5,324 16.9 5,522 9.6 2,166 8.8 1,430 5.4 27,884 13.0

2 - 3 million 6,077 21.3 5,530 27.2 4,610 18.7 5,242 16.6 6,636 11.5 2,060 8.4 2,204 8.3 32,359 15.1

3 - 4 million 3,206 11.3 3,072 15.1 4,504 18.3 4,990 15.8 8,624 14.9 2,555 10.4 3,193 12.1 30,144 14.1

4 - 5 million 10,239 35.9 6,083 30.0 8,025 32.6 9,767 31.0 16,515 28.6 5,153 21.0 5,177 19.6 60,959 28.5

5 - 10 million } 84 0.3 466 2.3 1,215 4.9 4,534 14.4 18,870 32.6 12,084 49.1 13,689 51.7 50,942 23.9

Over 10 million }

Total 28,497 100.0 20,301 100.0 24,632 100.0 31,537 100.0 57,801 100.0 24,580 100.0 26,458 100.0 213,806 100.0

Distribution by

DurationLess than 1 year 675 2.4 57 0.3 82 0.3 90 0.3 168 0.3 83 0.3 87 0.3 1,242 0.6

1 - 2 years 1,454 5.1 801 3.9 1,450 5.9 1,258 4.0 1,984 3.4 779 3.2 741 2.8 8,467 4.0 1

2 - 3 years 9,766 34.3 6,455 31.8 9,224 37.4 11,884 37.7 16,320 28.3 7,523 30.6 7,790 29.4 68,962 32.3

3 - 4 years 5,936 20.8 4,565 22.5 5,948 24.1 6,846 21.7 11,451 19.8 4,513 18.4 5,077 19.1 44,336 20.7 OD

4 - 5 years 10,454 36.7 7,827 38.6 7,171 29.2 10,239 32.5 21,845 37.8 9,409 38.3 10,680 40.4 77,625 36.2

5 - 10 ye4rs 213 0.7 596 2.9 757 3.1 1,218 3.8 6,034 10.4 2,273 9.2 2,082 8.0 13,173 6.2

Total 28,497 100.0 20,301 100.0 24,632 100.0 31,537 100.0 57,801 100.0 24,580 100.0 26,458 100.0 213,806 100.0

B. KRKP Loan Approvals

Distribution by AmountLess than I million 6,208 22.0 3,982 16.5 4,183 13.7 4,752 9.7 8,191 8.0 3,531 9.1 2,713 6.9 33,560 10.8

1 - 2 million 8,435 29.9 7,358 30.4 8,561 28.1 1,998 24.5 21,909 21.4 9,413 24.3 7,140 18.1 74,814 24.0

2 - 3 million 4,906 17.4 5,046 20.9 5,608 18.4 7,662 15.6 14,180 13.9 4,721 12.2 5,696 14.5 47,819 15.3

3 - 4 million 3,060 10.9 2,846 11.8 4,015 13.2 6,019 12.3 11,224 11.0 3,580 9.3 4,517 11.5 35,261 11.3

4 - 5 million 5,549 19.7 4,606 19.1 6,136 20.1 9,742 19.9 17,449 17.1 6,103 15.8 6,755 17.2 56,340 18.1

5 - 10 million } 26 0.1 334 1.3 2,014 6.5 8,811 18.0 29,320 28.6 11,337 29.3 12,423 31.8 64,265 20.5

Over 10 million

Total 28,184 100.0 24,172 100.0 30,517 100.0 48,984 100.0 102,272 100.0 38,684 100.0 39,246 100.0 312,059 100.0

Distribution by

DurationLess than 1 year 1,599 5.7 1,034 4.3 1,247 4.1 1,453 3.0 2,921 2.9 1,402 3.6 1,853 4.7 11,509 3.7

1 - 2 years 6,167 21.9 5,244 21.7 6,643 21.8 8,754 17.9 13,681 13.4 5,618 14.5 5,642 14.4 51,749 16.6

2 - 3 years 20,418 72.4 17,894 74.0 22,626 74.1 38,778 74.1 85,670 83.7 31,664 81.9 31,751 80.9 248,801 79.7 H .

Total 28,184 100.0 24,172 100.0 30,517 100.0 48,984 100.0 102,272 100.0 38,684 100.0 39,246 100.0 312,059 100.0

Source: Bank Indonesia.

AEP Projects Department

February 19, 1981

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Rediscount Obligations to 81 by Handling Bank as ofDecember 31, 1974-1979 and 1980 (as of June 30)

(Rp million)

1974 1975 1976 1977 1978 1979 1980 (as of June 30)Out- Out- Out- Out- Disburse- Repay- Out- Disburse- Repay- Out- Disburse- Repay- Out-

Bank standing standing standing standing ments ments standing ments ments standing ments meats standing

RRI 4,407 8,849 13,431 16,138 43,370 23,907 19,463 62,510 35,600 26,910 82,226 46,275 35,951

BBD 1,585 2,081 3,417 4,436 12,374 6,469 5,905 20,486 9,073 11,413 29,886 12,368 17,518

BDN 1,553 1,307 1,374 1,610 5,721 3,155 2,566 10,930 4,277 6,653 18,202 5,791 12,411

BEI 797 827 1,102 1,333 3,326 1,616 1,710 5,026 2,428 2,598 6,937 3,067 3,870

NNI 46 1,088 1,472 2,411 4,112 12,398 6,188 6,210 20,708 8,574 12,134 27,406 11,357 16,049

BAPINDO 219 1,018 1,978 2,734 6,783 2,613 4,170 7,698 4,879 2,819 8,630 5,909 2,721

RDBs - - - - 668 134 534 2,962 797 2,165 5,298 1,836 3,462

Private banks - - - - - 169 48 121 548 61 487

Total 9,649 15,554 23,713 30,363 84,640 44,082 40,558 130,489 65,676 64,813 179,133 86,664 92,469

Source: Bank Indonesia.

AEP Projects DepartmentFebruary 19, 1981

41

-88 - ANNEX 8Table 15

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

KIK Loan Collections and Arrears of the Five State Commercial Banks1974-1979 and 1980 (June 30)

(Rp million)

1974 1975 1976 1977 1978 1979 1980

(Jan-Jun)

Outstanding portfolio /a(beginning of year) - 12,672 20,222 33,381 46,107 58,597 91,629

Disbursements duringyear 14,810 11,571 19,845 21,949 28,313 53,088 56,247

Repayments due during yearArrears (beginningof year) /b - 885 2,051 6,212 11,570 13,776 16,993

New repayments due 3,023 5,187 10,847 14,581 18,029 23,273 23,635

Total Due 3,023 6,072 12,898 20,793 29,599 37,049 40,628

Collections during year 2,138 4,021 6,686 9,223 15,823 20,056 15,506

Collections Rate (Z) 70.7 66.2 51.8 44.4 53.5 54.1 38.2

Arrears (end of year) /b 885 2,051 6,212 11,570 13,776 16,993 25,122Portfolio

(end of year) /a 12,672 20,222 33,381 46,107 58,597 91,629 132,370

Arrears as % of Out-standing Portfolio 7.0 10.1 18.6 25.1 23.5 18.5 19.0

/a Data do not tally with Annex 4, Table 1 as they do not contain privatebanks' and BAPINDO/RDBs' portfolios.

/b Principal arrears only.

Source: Bank Indonesia.

AEP Projects DepartmentFebruary 19, 1981

- 89 - ANNEX 8Table 16

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

KIK Arrears as Percentage of Outstanding Portfolio by Bank,1974-79 and 1980 (as of June 30)

1974 1975 1976 1977 1978 1979 1980(as of 06/30)

BRI 8.7 8.3 18.9 28.4 27.9 30.2 31.7

BBD 9.0 11.2 19.7 19.0 18.0 7.5 8.4

BDN 2.0 15.3 22.9 27.2 21.7 5.1 1.9

BEII 3.2 11.1 17.2 24.3 19.0 13.7 12.7

BNI 1946 6.3 14.1 13.1 16.2 14.8 2.1 5.7

Total 7.0 10.1 18.6 25.1 23.5 18.5 19.0

Source: Bank Indonesia.

AEP Projects DepartmentFebruary 19, 1981

- 90 - ANNEX 8

Table 17

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

KIK and KMKP Program (Massal) Loans Outstanding by Bank(Rp million)

1979 1980Bank (as of Dec. 31) (as of June 30)

A. Total KIK Loans Outstanding

Bank Rakyat Indonesia 6,489.6 6,739.9Bank Bumi Daya 1,036.2 524.2Bank Dagang Negara 489.5 492.4Bank Ekspor Impor Indonesia - -Bank Negara Indonesia 1946 84.8 106.3BAPINDO 578.0 468.6RDBs 186.7 325.3Private Banks - 30.3

Total 8,864.8 8,687.0

B. Total KMKP Loans Outstanding

Bank Rakyat Indonesia 31,188.5 24,016.9Bank Bumi Daya 637.5 174.7Bank Dagang Negara - -Bank Ekspor Impor Indonesia 332.6 537.6Bank Negara Indonesia 1946 103.8 53.2BAPINDO - -RDBs 18.4 40.2Private Banks - 68.2

Total 32,280.8 24,890.8

Source: Bank Indonesia.

AEP Projects DepartmentFebruary 24, 1981

- 91 - ANNEX 8Table 18

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Current Terms of KIK/KMKP Lending

KIK KMKP

Direct LoansFor BorrowerMaximum loan amount Rp 10 million Rp 10 millionMaximum amount includingsupplementary loan Rp 15 million Rp 15 million

Interest rate 10.5% p.a. 12% p.a.Maximum duration 10 years 3 yearsMaximum grace period 4 years /aCollateral requirements Assets financed by loan and, if required,

additional collateral up to 50% of loanamount

Borrower's financial contri-bution ----------------- None /b ------------------

For Handling BankRediscount rate 3% p.a. 4% p.a.Rediscount share 80% 75%Credit insurance fee (front-end charge)Up to 5-year duration 3% /c 3% /cOver 5-year duration 5% -

Risk exposure 25% 25%

Co-Financing ArrangementsCo-Financing ShareRDBs 10% 10%BAPINDO 10% 15%BI 80% 75%

Interest Income ShareRDBs 50% 33-1/3%BAPINDO 27%. 33-1/3%BI 23% 33-1/3%

Risk ExposureRDBs 10% x 30% = 3% of the loan amountBAPINDO 90% x 30% = 27% of the loan amount

/a Loan is normally extended as an overdraft facility./b Supplementary KIK credit above Rp 10 million requires 10% self-financing.

7_ To be absorbed by BI and HBs in equal shares.

AEP Projects Department

February 2, 1981

- 92 - ANNEX 9Page 1 of 6

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

The Indonesian Credit Insurance Corporation (P.T. ASKRINDO)

1. The Indonesian Credit Insurance Corporation (P.T. Asuransi KreditIndonesia, or P.T. ASKRINDO) was established in 1971 primarily to encouragelending to small- and medium-size enterprises by insuring the banks againstmost of the default risk of loans to such enterprises. P.T. ASKRINDO operatesas an autonomous commercial enterprise with capital stock owned by the Govern-ment and Bank Indonesia. A two-man Supervisory Board consisting of the repre-sentatives of the Governor of Bank Indonesia and the Minister of Finance setsgeneral policies and supervises the Board of Managing Directors comaposed ofthe President and two full-time Directors. It has ten departments (Researchand Development, Underwriting, Insurance Credit Claims, Reinsurance, InsuredCredit Control, Administration and Finance, Internal Audit, Personnel, Secre-tariat and Public Relations and Statistics). The total staff is about 210.

2. P.T. ASKRINDO engages in insurance of the small enterprise creditprograms including the Small Investment Credit (KIK) and the Small PermanentWorking Capital Credit (KMKP) and small short-term general commercial credit(KEB - Kredit Exploitasi Biasa). While the cumulative number of KEB loansinsured is slightly higher than the KIK/KMKP loans, the insured value ofKIK/KMKP loans is about twice that of KEB loans (Table 1). P.T. ASKRINDO alsoengages in reinsurance (of fire, transport, marine, engineering, aviationand miscellaneous insurance).

3. P.T. ASKRINDO insures 75% of KIK/KMKP loans. For individualKIK/KMKP loans, the 75% insurance cover is automatic. For KIK/KMKP "massal"programs, P.T. ASKRINDO evaluates each program before agreeing to insure. Insome cases, such as KIK fishing boat loans and KMKP cattle fattening loans,P.T. ASKRINDO has required "extended coverage," i.e., the borrower's boats orcattle must be insured with P.T. ASKRINDO as a condition of P.T. ASKRINDO pro-viding credit insurance. (The net effect is simply a higher insurance fee forthe risky operations, with the borrowers themselves paying a portion of it.)

4. For KMKP loans which have a maximum repayment period of three yearsand KIK loans up to five years, P.T. ASKRINDO's fee is 3%, of which 1.5% ispaid by BI and 1.5% by the handling bank. For KIK loans of longer than 5years, the fee is 5%, of which two-thirds is paid by BI and onethird by thehandling bank.

5. Credit insurance for KIK/KMKP approved by P.T. ASKRINDO hasincreased sharply during the past three years, from 80,707 loans amounting to

- 93 -ANNEX 9Page 2 of 6

Rp 59 9 billion in 1977 to 2114198 loans amounting to Rp 151.3 billion in1979. The upward trend continued in the first half of 1980 when the amountapproved by ASKRINDO reached Rp 106.2 billion, although the number of loansdropped to 81,729 (Table 1). This is attributable to the increase of themaximum size of KIK or KMKP loans from Rp 5 million to Rp 10 million,effective as of April 1979. Total credit insurance approved by P.T. ASKRINDOamounted to Rp 760.6 billion as of June 30, 1980. Trade and agriculture arethe dominant sectors receiving 42.6% and 25.8% of the total respectively,followed by services (16%), industry (8%) and others (7.6%).

6. Payment: of claims also rose sharply, from Rp 1.4 billion in 1977 toRp 4.3 billion in 1979 and to Rp 3.4 billion in the first half of 1980.Amounts recovered by P.T. ASKRINDO during the 3-1/2 year period (January 1977to June 1980) totalling Rp 2.6 billion constituted only 22% of the totalclaims (Rp 11.5 billion) processed during the same period (Tables 2 and 4).

7. However, P T. ASKRINDO's overall operations are still profitable.Based on its existing system of accounting (40% of premiums written isallocated to "Unearned Premium Reserves"), P.T. ASKRINDO has been incurringlosses on small credit insurance which has been more than offset by itsincome on reinsurance and interest income on its liquid funds. Its netincome amounting to Rp 382 million in 1977 dropped slightly to Rp 365million in 1978 but went up to Rp 974 million in 1979. This profitabilitylevel was maintained in the first half of 1980 (Table 4). Its total assetshave increased from Rp 13.1 billion at the end of 1977 to Rp 24.9 billion asof June 30, 1980 (Table 3).

8. P.T. ASKRINDO's authorized share capital amounts to Rp 5 billion,of which Rp 3.7 billion has been paid in. It had accumulated a furtherRp 11.7 billion of contingency and other reserves as of June 30, 1980. Onthe other hand, its contingent liabilities for KIK/KMKP alone could havereached Rp 60-75 billion, assuming that around 20-25% of the handling banks'KIK/KMKP portfolio would become uncollectable. It is clear that instead ofspreading the risk, the system concentrates the risk of high KIK/KMKP defaulton a relatively small institution (P.T. ASKRINDO) which is much more vulner-able to insolvency than the handling banks themselves. While the Governmenthas agreed to guarantee any payments due from P.T. ASKRINDO, the recourse tothis last resort should by all means be avoided since it would mean that theinstitution cannot operate on a commercial basis and the system has failedto be self-sustaining. A relevant question raised is whether the fee paidto P.T. ASKRINDO is adequate to cover the risk which is great for suchsmall-enterprise financing plus the fact that foreclosing a collateral isextremely difficult in Indonesia.

9. P.T. ASKRINDO insures against commercial risks (not political orwar risks) which make the borrower unable to repay. A bank may claim forcompensation from P.T. ASKRINDO three months after the final maturity dateof the loan, or after the borrower is in default on his repayments. In thelatter case, the bank has to demonstrate to P.T. ASKRINDO-s satisfaction

ANNEX 9- 94 - Page 3 of 6

that there is little prospect of any further repayments, so that the entireloan has to be called in. The system has functioned smoothly for short-termKMKP loans, but has created difficulties with the longer term KIK loans.P.T. ASKRINDO does not wish to honor the claims when the bank still stands agood chance of collecting. To minimize such cases, P.T. ASKRINDO hasestablished drawn-out procedures for settling claims, with the unfortunateside effect of delaying the settlements considerably. The completeness ofinformation to justify the claims is essential but oftentimes the bankschallenge the need for additional information required by P.T. ASKRINDO.

10. The slow pace of settling claims by P.T. ASKRINDO has become a pub-lic issue in the banking community. There is a great need for P.T. ASKRINDOto strengthen its organizational set-up and staff in order to increase thelevel of its operational efficiency and open branches in strategic locationsto provide efficient services to its clients.

11. As agreed upon between the Government and the Bank during negotia-tions for the last IDA Credit, a major review of the credit insurance systemfor KIK/KMKP was undertaken by SGV and Co. in 1978. The study was financedby BI and a full report entitled, "Credit Insurance Study P.T. ASKRINDO" wasissued in January 1980.

12. In the course of a preliminary study, it has been found thatP.T. ASKRINDOs existing management structure and systems are inadequate tocope with the anticipated expanding activities. Already, signs of shortcom-ings and problem areas are evident in such aspects as responsibilities-delineation, workload distribution, staff development, cash forecasting,internal control and financial reporting. To enable P.T. ASKRINDO to streng-then itself along these lines, SGV and Co. suggested the following programs:(a) organizational improvement; (b) operations upgrading; (c) financialreporting system improvement; and (d) finance and accounting systemsimprovement.

13. Further work followed which includes a thorough evaluation of thefinancial position and prospects of P.T. ASKRINDO and the need for improve-ments in underwriting operations, financial systems, training, and alterna-tive credit insurance arrangements.

14. SGV and Co.-s main conclusions and recommendations are summarizedbelow:

(a) Financial Aspects

(i) P.T. ASKRINDO's Equity Position Needs to be Improved. Theliabilities are increasing more rapidly than the equity. Inview of the high risk related to the insurance of KIK/KMKPloans, P.T. ASKRINDO should have a strong capital andretai-ned earnings base to meet unpredictable future largeclaims. This would require P.T. ASKRINDO's shareholders

ANNEX 9- 95 - Page 4 of 6

to provide additional share capital and other funds forP.T. ASKRINDO to invest.

(ii) The Premium Rates Need to be Revised. The 3% rate (5% forloans longer than 5 years) was based on the estimatedability of the handling banks to pay rather than on thepremium income need of P.T. ASKRINDO to ensure its solvency.That this rate is inadequate has become increasingly evidentgiven the exposure of P.T. ASKRINDO, the inherent high risk ofsmall enterprise financing, and the difficulties of fore-closing on collateral. P.T. ASKRINDO's contingent liabilitieshave grown considerably, and although payment of claims hasreached significant levels, recoveries have been very modest.Determination of an adequate premium rate is therefore themost pressing problem in P.T. ASKRINDO's credit insuranceoperations). The proposed approach in developing the newrates was an upward adjustment of the existing rates with someamount of "external assistance". A premium rate set at 80% ofthe self-supporting level was selected with the remaining 20%to be made up by investment income, for which purposeP.T. ASKRINDO's investible funds would have to be increased.On this basis, an overall increase of 50% over present premiumrates is recommended.

(b) Organizational Aspects. After reviewing the information onP.T. ASKRINDO's organization, the SGV Consulting Team has identifiedand evaluated problem areas and their causes. To strengthen theexisting organization structure and management, and consequently,the operating efficiency of P.T. ASKRINDO, SGV Team recommended thatbranches be established and departments be regrouped according tofunctional relationship to attain effective coordination. It isalso suggested that: (i) top management try to delegate authority tothose who are capable; (ii) the operating departments haverelatively more staff than the support departments to strengthen theoperational capability of P.T. ASKRINDO; and (c) formulate atraining and development program to upgrade personnel capabilities.

SGV Team has also made detailed recommendations for the improvement ofP.T. ASKRINDO's underwriting and claims procedures, financial reportingsystem, general accounting systems and budgetary control system. Variousmanuals have also been prepared.

(c) Alternative Credit Insurance Arrangements. The present systemhas been subjected to the following criticism. First, therather liberal risk coverage on small loans tends to be anegative incentive to loan supervision and collection effortsof handling banks, since they can always expect to recover 75%of losses from P.T. ASKRINDO for defaulted loans. Second, the

ANNEX 9- 96 - Page 5 of 6

system tends to concentrate credit risks on one institution,P.T. ASKRINDO, rather than distribute the risks among the handlingbanks themselves. The consultant firm has looked into and commentedupon the following alternative arrangements under which theobjective of the present credit insurance system may be betterachieved.

(i) Self-insurance by Handling of Banks. One alternative tospread the risk of lending to small enterprises is for thehandling banks to set aside their own reserves to insureagainst all bad debts. This would have the effect ofspreading the risk over the handling banks instead ofconcentrating it all in P.T. ASKRINDO. Under this system,however, the handling banks will want to be assured of higherinterest spread before they will make such loans. A thoroughassessment of the effect of higher interest rates on thesmall enterprise development program would be necessary.Since it will take away the main function of P.T. ASKRINDO,as a centralized organization, its role toward building up agood credit insurance system will be greatly curtailed.

(ii) Co-insurance by Handling Banks. This would decrease thecoverage by P.T. ASKRINDO from its present 75% of the loanamount. While it may motivate the handling banks to applytighter lending procedures and more effective loan super-vision, the size of the interest spread will again be aproblem.

(iii) Limits on Coverage. One way to reduce P.T. ASKRINDO-s over-exposure is to set maximum limits of coverage by program,economic sector and region. Consideration may also be givento establishing minimum loan amounts that could be insured,say Rp 500,000. Any amounts lower than this could be coveredby others such as rural cooperative societies.

(iv) Reinsurance. To reduce the concentration of risk on KIK/KMKPloans that P.T. ASKRINDO is assuming, certain reinsurancearrangements could be worked out. The Government, forexample, could ask other state-owned insurance companies toaccept quota share reinsurance on these loans. In thismanner, the state-owned insurance companies would be able todischarge their social responsibility and assist in theimplementation of the high-priority small enterprisedevelopment program.

(v) P.T. ASKRINDO as a Party to the Loan Agreement. P.T.ASKRINDO would be in a position to play a more active rolein implementing the small enterprise development if it is

97 ANNEX 9Page 6 of 6

officially made a party to the loan agreement. If this isdone, P.T. ASKRINDO can directly intervene in supervisingloans and prevent the arrearages from accumulating. It canalso directly assist the banks in enforcing collections onclaims paid to improve the percentage of recoveries.

14. Since the SGV and Co.'s report was completed in early 1980, theGovernment and BI have been reviewing its conclusions and recommendations.Given the fact that the recommendations relate to all aspects of P.T. ASKRINDOand the overall policies of the Government in connection with the creditinsurance system, it understandably would take some time for the relevantGovernment agencies to reach agreement on the steps that are necessary toimplement the acceptable recommendations, especially those related to policychanges. In August 1980, the Ministry of Finance has commented on such itemsas alternative insurance schemes, the calculation of unearned premium reserve,the calculation of the premium rate without subsidy, underwriting procedures,claims procedures, and organizational and procedural changes needed to streng-then P.T. ASKRINDO. These comments are still under review by BI and P.T.ASKRINDO. In the meantime, an ad hoc committee has been formed by BI to studyways to improve the underwriting and claims procedures. After a few meetingsartended by representatives of BI, the handling banks, and P.T. ASKRINDOduring August-November 1980, agreement has been reached to simplify theapplication forms for underwriting and claims. Since this Committee's termsof reference are limited, it has not been able to deal with policy matters.In order to assure that the credit insurance system will operate more effec-tively to support the expanding KIK/KMKP Program, it is recommended that theBank ask the Government and BI to prepare a Program of Action to strengthenP.T. ASKRINDO and a timetable for its implementation and present them to theBank for review during the forthcoming loan negotiations.

AEP Projects DepartmentFebruary 2, 1981

- 98 - .M"NEX 9- 98 - ~~~~~~Table 1

INDONESIA

SMALL ENTERPRISE DEVELOPMENT PROJECT

Credit Insurance Approved by P.T. ASKR.iD0

Calendar Number of debtors Loan amount approved /ayear T1IK/KMKP KEB !b Total KIK/KMIKP KEB /b Total

1971 - 61 61 - 12.9 12.9

1972 - 589 589 - 216.6 216.6

1973 - 4,660 4,660 - 1,388.3 1,388.3

1974 15,175 74,392 89,567 23,659.7 12,622.2 36,281.9

1975 34,483 73,459 112,942 23,693.3 20,215.2 43,908.5

1976 74,362 64,665 139,027 56,948.7 13,767.4 70,716.1

1977 80,707 78,736 159,443 59,925.7 34,523.4 94,449.1

1973 109,282 126,794 236,076 86,208.0 61,220.7 147,428.7

1979 211,198 140,570 351,768 151,332.6 72,790.6 224,123.2

1980 81,729 66,889 148,618 106,236.3 35,831.6 142,067.9(Jan.-June)

Total 606,936 635,815 1,242,751 508,004.3 252,588.9 760,593.2

/a P.T. ASKRINDO's liability is limited to 75% of the loan amounts approved.

lb Kredit Exploitasi Biasa (general commercial credit).

Source: P.T. ASKRILiDO.

AEP Projects DepartmaentFebruary 2, 1981

- 99 - ANNEX 9Table 2

INDONESIA

SMALL ENTERPRISE DEVELOPMENT PROJECT

Outstanding Insurance Claims and Amounts Recoveredby P.T. ASKRINDO, 1973 - June 1980

(Rp million)

KIK/KMKP KEB TotalOutstanding Outstanding Outstandingclaims Recoveries claims Recoveries claims Recoveries

1973 - - 10.8 1.0 10.8 1.0

1974 - - 18.7 1.0 18.7 1.0

1975 5.2 - 34.1 3.5 39.3 3.5

1976 92.9 3.2 175.7 24.8 268.6 28.0

1977 844.1 75.5 425.6 77.6 1,269.7 153.1

1978 2,222.9 253.7 957.1 202.2 3,180.0 455.9

1979 4,224.5 624.3 1,760.0 371.9 5,984.5 996.2

1980 4,750.4 412.8 1,904.1 254.6 6,654.5 667.4(June)

1,369.5 936.6 2,306.1

Source: P.T. ASKRINDO.

AEP Projects DepartmentFebruary 2, 1981

- 100 - ANNEX 9Table 3

INDONESIA

SMALL ENTERPRISE DEVELOPMENT PROJECT

Summarized Balance Sheets of P.T. ASKRINDO as ofDecember 31, 1977-79 and June 30, 1980

(Rp million)

Dec. 31, Dec. 31, Dec. 31, June 30,1977 1978 1979 1980

AssetsCash on hand in banks 1,047.4 927.2 1,330.0 1,264.7Term deposits 8,910.0 10,798.5 14,299.0 16,844.0Marketable securities - - 78.8 128.8

Premiums receivable - creditinsurance 555.6 1,068.4 1,094.4 2,016.3

Due from reinsurance 937.6 1,264.4 1,957.3 2,547.0Accounts receivable/other 417.6 507.3 575.9 507.7Fixed assets (net) 1,189.7 1,154.0 1,148.5 1,533.7Intangible assets (net) 50.7 39.5 28.5 17.8

Total assets 13,108.6 15,759.3 20,512.4 24,860.0

Liabilities and Stockholders Equity

Claims payable - credit insurance 420.6 1,324.5 2,187.1 3,720.3Claims payable - reinsurance 633.0 300.2 284.9 1,187.0Technical reserves 2,962.5 3,085.8 4,470.0 3,587.1Reserves for employees welfare 109.7 111.3 48.9 49.6Changes in foreign exchange values - 207.4 195.8 195.7Tax liabilities 269.1 269.1 269.1 269.1Other 522.5 444.3 418.4 420.3

Total liabilities 4,917.4 5,742.6 7,874.2 9,429.1

Paid-in capital 2,959.0 2,959.0 3,209.0 3,709.0General reserves 572.0 1,548.2 1,621.2 1,621.2Special reserves 572.0 648.2 721.2 721.2Contingency reserve for claims -

credit insurance 3,706.2 4,496.1 6,112.7 7,910.0Profit 382.0 365.3 974.1 1,469.5

Total stockholders equity 8,191.0 10,016.8 12,638.2 15,430.9

Total liabilities andstockholders equity 13,108.4 15,759.4 20,512.4 24,860.0

Source: P.T. ASKRINDO.

AEP Projects DepartmentFebruary 2, 1981

- 101 - ANNEX 9Table 4

INDONESIA

SMALL ENTERPRISE DEVELOPMENT PROJECT

Summarized Income Statement of P.T. ASKRINDOfor 1977, 1978, 1979 and Jan.-June 1980

(Rp million)

Jan-June1977 1978 1979 1980

IncomeCredit Insurance:Premiums 2,129.0 3,185.1 5,264.0 3,594.5Recoveries 153.1 455.9 1,172.1 803.8Claims paid (1,372.1) (2,408.6) (4,311.2) (3,439.7)Allocation to statutory reserves (1,064.4) (1,592.5) (1,543.5) (1,797.3)Allocation to technical reserves (793.0) (459.7) (1,025.6) 389.4

Net credit insurance income (947.4) (819.8) (444.2) (449.3)

Reinsurance:Premiums, commissions andclaims, earned 3,637.2 7,021.6 9,893.1 5,967.3

Premiums, commissions andclaims, paid (3,179.9) (6,607.2) (9,090.4) (6,041.3)

Allocation to technical reserves (224.4) (234.3) (358.5) 493.5Net reinsurance income 232.9 180.1 444.2 419.5Underwriting result credit

insurance and reinsurance (714.5) (639.7) 0.0 (29.8)

Other income:Interest on deposits 1,689.8 1,674.4 1,617.6 807.7Miscellaneous - - 40.0 154.4

Gross income 1,423.8 1,674.4 1,577.6 653.3

Expenses 593.3 669.4 683.5 436.9

Income before tax 382.0 365.3 974.1 495.5Corporate tax

Net income after tax 382.0 365.3 974.1 495.5

Source: P.T. ASKRINDO.

AE-P Pro jects DeparIqnt

February 2, 1981

- 102 - ANNEX 9Table 5

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Status of P.T. ASKRINDO's KIK/KMKP Credit Insurance,1974-1979 and 1980 (as of June 30)

(Rp million)

KIK/KMKP loans insured Settlement of RecoveriesNumber Amount HBs claims by P.T. ASKRINDO

1974 15,175 23,659.7 -

1975 34,483 23,693.3 5.2 -

1976 74,362 56,948.7 87.7 3.2

1977 80,707 59,925.7 751.2 75.5

1978 109,282 86,208.0 1,378.8 253.7

1979 211,198 151,332.6 2,001.6 624.2

1980 81,729 106,236.3 525.9 412.8

Total 606,936 508,004.3 4,750.4 1,369.4

Source: P.T. ASKRINDO.

AEP Projects DepartmentFebruary 2, 1981

- 103 -

ANNEX 10Page 1 of 11

INDONESIA

SMALL ENTERPRISE DEVELOPMENT PROJECT II

The Regional Development Bank's Upgrading Program

The RDBs' Special Characteristics

1. The regional development bank system, whose history dates back tothe 1950s, was originally introduced to serve as channel of finance for theimplementation of the overall National Development Plan at the regionallevel./l In the light of this objective and given the regional governments'regulatory and supervisory authority, the RDBs differ from their commercialcounterparts in a number of ways. They are fully government-controlled,function as the regions' fiscal agents, and are required to give priorityto: (a) financing of development activities in their respective regions andmunicipalities; (b) lending to the "economically-weak" group within regions;(c) financing of regional infrastructure projects; (d) developing regionalentrepreneurs- managerial and technical skills; and (e) providing temporaryequity financing. In practice, however, the RDBs have mainly renderedcommercial banking services, and have failed to carry out developmentalfunctions. The RDB system comprises 26 individual institutions, one in eachprovince, which altogether operate 129 branches, and 7 cash offices coveringthe whole of Indonesia.

The Legal Framework

2. The legal framework governing RDBs is complex and is characterizedby several layers of control from both the regional and central governmentallevels. Attempts to adjust it to the requirements of a modern and efficientdevelopment banking system have not been successful. A much needed reformof the RDB legislation, already initiated in 1975, has not yet brought aboutany tangible results; finalization and enactment are still pending andshould be pursued further. RDBs obtain their operating licenses from theMinistry of Finance, but their establishment and operation are governedby provincial regulations based on the stipulations of the principal RDBlegislation./2 While the assignment of certain functions such as theauthority to operate as the regional government-s treasurer is theGovernor's prerogative, BI decides if and when RDBs should be authorized tooperate the Tabanas/Taksa Savings schemes. BI eventually exercises

/1 Law 13/1962.

/2 Acts No. 13/1962, 14/1967, and 5/1974.

- 104 -

ANNEX 10

Page 2 of 11

technical control (Law 13/1962). In addition, various operational aspectsof RDBs are governed by the Department Dalam Negeri (Ministry of theInterior) through the Director-General of the Department of GeneralAdministration and Regional Autonomy (Pemerintahan Urusan dan Otomi Daerah(PUOD) and the Sub-Directorate Ownership of RDBs Urusan Pemilikan BankPembangunan Daerah.

Ownership, Capital Requirements and Profit Distribution

3. Provinces, regencies and municipalities are shareholders of theRDBs, whose authorized capital stood at Rp 34.9 billion (paid-in capital:Rp 20.4 billion) at end-1980. According to instructions of the Ministriesof Finance and Interior their capital bases should be broadened every yearby allocations from the provincial budgets and a 10% regional developmenttax (IPEDA). Individual minimum capital requirements of currently Rp 20million must be considered as totally inadequate in the light of the expandedrole the RDBs are expected to play; an increase to Rp 500 million isenvisaged in conjunction with the proposed revision of the RDB legislation.Current RDB legislation requires that net profits after depreciation andprovisions for bad debts be allocated as follows: (a) 15% for theDevelopment Fund of the Province; (b) 40% for distribution to shareholders;(c) 25% for the general reserve account and (d) the remaining 20% for staffpension funds and similar benefits in accordance with the Articles ofAssociation.

Supervisory Authority and Management

4. The Governor, as head of the Province, is the customary chairmanof the Shareholders Meetings as well as Supervisory Board. Shareholders'Meetings must make their decisions unanimously, but if unanimity cannot beachieved, the Governor may decide for the shareholders, after consulation withthe Board of Supervisors. The Board of Supervisors /1 determines the broadmanagement outlines (to be approved by the Governor) and exercises controlover the company. A Management Board, comprising up to three directorsincluding the President Director, takes charge of the RDBs daily affairswithin the framework of these outlines; the President Director is appointed bythe Governor.

Sources of Funds

5. Besides equity funds (Rp 41.3 billion at end 1980) and deposits, theRDBs major resource requirements have been provided by BI. Its rediscountfacilities are available for the following purposes:

/1 The Board of Supervisors comprises between three (minimum) and five(maximum) members, appointed by the Governor for a period of three years.

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(a) KIK/KMKP lending at rediscount rates of 3% p.a. and 4% p.arespectively;

(b) short-term lending at a rediscount rate of 7.5% p.a.; and

(c) special purpose lending such as construction loans for headoffices of enterprises (Central Java, Bengkulu, West Sumatra,Lampung, South Sumatra and Bali) at a rediscount rate of 6% p.a.

Basically, RDBs have access to BI's General Investment Creditrediscounting facilities, however, no RDBs utilize these facilities so far,due to lack of term resources from their own parts.

6. Lack of term resources, has specifically restricted the RDBs intheir term lending operations and BI has so far authorized only 8 of them toaccept savings under the Tabanas/Taska schemes for which they compete, overand above, with the state banks. The RDBs were less constrained, on the otherhand, in their short-term lending operations due to the availability ofgovernment budgetary deposits, and time and demand deposits, notwithstandingBI's ceilings for the acceptance of' the latter category.

Lending Operations and Equity Participation

7. In addition to their role as the regional governments' fiscalagents, the RDBs have mainly operated as commercial banks, mainly supplyingbusinesses in their regions with the required short-term financing. Theirrole has been limited to around 2.4% of total hank lending as of end-1980 andloans with a duration of up to one year and three years accounted for 61%and 39% of their total lending. The system-s bias towards short-termlending is even more pronounced for loans to the manufacturing sector ofwhich 98% had short durations. More recently they have become more activelyinvolved in the KIK/KMNP lending program mostly through cofinancingarrangements with BAPINDO. Ten of them have already "graduated" from thisarrangement and have gained direct access to BI's KIK/KMKP rediscountfacilities.

8. With regard to KIK loans, both direct and cofinanced loansoutstanding totalled Rp 9.76 billion and Rp 4.53 billion, respectively,accounting for 4.7% and 2.2% of total KIK lending as of December 31, 1980.The corresponding KMKP shares were 3.2% and 1.0%. Since the inception ofthe program, the RDB system has achieved a combined share of 3.1% of totalcumulative KIK/KMKP lending. As expected, KIK lending of those RDBs havingdirect access to BI rediscount facilities has increased from 2.3% in 1979 to

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3.7% in 1980 while, on the other hand, the share of cofinanced KIK loans hasdeclined from 5.9% in 1979 to 3.8% in 1980. This trend is also confirmed bythe outstanding amounts of direct KIK loans, which have increased from 3% in1979 to 4.7% in 1980. KMKP lending operations show a comparable trend.Transportation, trade, agricultural and industrial sectors have absorbed about35%, 29%, 15% and 11%, of total KIK lending, while the trade and industrialsector accounted for almost 64% and 22% of KMKP lending. Notwithstanding itsstill rather small KIK exposure, the RDB system is expected to play a moreactive role in the future, bringing to bear the shift from commercial todevelopment banking as envisaged by the upgrading efforts.

9. However, some of the RDBs (Central Java, West and North Sumatra)have started playing a remarkable role in industrial development by virtue oftheir enlightened management, supported by equally enlightened provincialgovernment officials, engaging in KIK/KMKP lending, project financing incooperation with UPPINDO, supplying of equity funds and extension services.They have accepted the responsibility for specialized programs such as budgetinvestment credits in support of the Regional Five-Year Development Plan(e.g., the RDB in Central Java), with durations between 10-15 years. Loanstotalling Rp 1.35 billion have so far been disbursed, funded by the ProvincialAdministration of Central Java, which is also responsible for the loanapproval decision. The same institution has also been entrusted with aspecial working capital credit program (Badan Kredit Kecamatan - BKK) foragricultural trade and handicraft purposes, aiming at the improvement of thesituation of small businesses. Credit is extended through 486 small financeunits, which have so far (March 1979) extended 270,000 loans totalling Rp 422million with an average size /1 of Rp 5,300. The RDB in Central Java has alsoconcluded a cofinancing arrangement with UPPINDO (since September 1977) toextend term loans for "graduated" KIK clients up to an aggregate total of Rp750 million; individual loans for amounts between Rp 30-110 million carryinterest rate between 10-12%.

10. Only a few RDBs have so far been assisting projects by temporarilyparticipating in their equity. At the end of 1980, the amount of suchparticipations has totalled some Rp 389 million.

11. In comparison with their commercial counterparts, the RDBs did notfare too badly in their financial performance, considering that they had lessaccess to term resources from the Government and have not had the benefit ofparticipating in BI's technical assistance programs. As indicated by theconsolidated financial statements as of December 31, 1980 /2 the RDB system's

/1 Ranging from Rp 3,000-35,000.

/2 In compliance with BI's requirements, the RDBs must publish theirfinancial statements four times a year in at least one local newspaper.

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system's growth performance, financial structure and performance were satis-factory by Indonesian standards. The aggregated current, total debt/equityand long-term debt/equity ratios stood at 13.2:1, 13.9:1 and 0.6:1, respec-tively. Net income before tax accounted for a reasonable 42.1% of totalequity and for 2.8 of total assets.

12. In accordance with BI's scoring system which is based on the HBs'financial position, quality of assets and administrative ability, accountingfor 50%,/l 30% and 20% respectively, 16 RDBs were considered sound, 8 fairlysound, and only 2 not fully sound at the end of 1980.

13. Data on loan for nine sample RDBs representing about 56% of thetotal portfolio of all 26 RDBs indicate that the quality of the portfolio ofthe RDB system as a whole can also be considered satisfactory within theIndonesian context. Arrears account for about 17%, while 83% of the portfoliois considered free from arrears, i.e., with not more than one installmentoverdue, not exceeding six months. The sample RDBs expect to recover 90% oftheir lending.

Rationale for RDB Upgrading

14. Given their knowledge of the local business scenario, theirprovincial government ties, their stated local orientation and developmentfocus, the RDBs have a tremendous development potential, if their efforts canbe redirected and their capabilities upgraded. However, being beset with avariety of problems ranging from weak organizational procedures, insufficientcapitalization to inadequate staff in quantity and quality, most of the RDBscould not comply with their original objective and could thus not realizetheir development potential. The serious lack of financial resourcesparticularly for term lending and the frequent absence of a strategy forindustrial developnent has further aggravated this development. The upgradingconcept per se probably came as a result of a Bank mission in 1978 which hadfocussed on the RDB system with the view of its potential as a suitableintermediary for the Apex loan. Since then BI has started embarking on astrengthening and upgrading program, specifically aimed at an improvement ofthe system's operational standards, using BAPINDO and UPPINDO as its executingagencies. A technical assistance program accompanied by intensified traininghas been designed to raise the technical expertise specifically in termlending and development banking in the participating bank officers. Theseefforts are expected to enable the RDBs to refocus their business activities,emphasizing development-oriented long-term lending and de-emphasizing theirone-sided short-term activities.

/1 Made up by: liquidity, profitability and solvency, accounting for 20%,16% and 14% respectively.

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Survey Results

15. With the support of a team of BAPINDO and UPPINDO staff, BI conduc-

ted a survey of 20 RDBs that were classified as sound or fairly sound by BI'scriteria. The findings were jointly reviewed and constituted the basis forspecific Action Programs for each individual RDB.

16. According to the survey results, most participating RDBs are facedwith a similar set of problems; some of them have, nevertheless, emerged to be

critical for the RDBs' future role, such as weaknesses both in staff quantityand quality, over-dependence on government resources, insufficient funds forterm lending operations partly owing to inadequate capital formation, and aperfunctory knowledge and experience in term lending and development banking.Last but not least, the RDB system was initially not very successful inestablishing a competent image and thus could not sufficiently solicit theMinistry of Finance's and BI's support.

17. As compared with its commercial counterparts, the RDB system, neverthe-

less,largely appears to operate reasonably efficient, but is not yet geared upto venture into term/KIK lending on a large scale. In summary the followingproblems have emerged from the survey which will be tackled during thestrengthening and upgrading exercise;

(a) Organization: general organizational weaknesses, manifested bya lack of job descriptions for most major desks and the absence ofspecial development banking units to accommodate term lending;

(b) Management: unclear general policy framework, communicationdifficulties between Boards and Governments and lack well thoughtout work priority orders of Management Boards;

(c) Personnel: uneven staff reallocation and recruitment decisions,absence of merit-oriented rating and wage systems, inadequatetraining programs and staff selection procedures for theseprograms;

(d) Research and Planning: lack of consistent procedures and compre-hensive manuals for lending operations, systematic budgeting, datacollection and project identification;

(e) Funds Management: inadequate policies and programs to increaseand manage resource base;

(f) Lending Operations: overemphasis on commercial operations at theexpense of more development-oriented term lending commensuratewith the development objective; absence of project promotion and

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lack of experience in preparing manuals covering projectappraisal, supervision, loan administration, collection, and baddebts management;

(g) Accounting: uneven posting and accounting procedures, inadequaterecord keeping and flow of document practices;

(h) Reports: unsatisfactory management reporting and informationsystems; and

(i) Auditing: inadequate auditing procedures.

BI's Measures to Strengthen the RDB System

18. In parallel with the upgrading program, BI has initiated severalpolicy adjustments which were intended to strengthen the RDB system as awhole. To alleviate their resource constraints, for instance, BI hasprogressively opened its rediscount window for both KIK/KMKP and investmentloans either on an individual basis' or via co-financing arrangements withBAPPINDO. BI has also introduced an additional credit facility to strengthenthe system's capital basis. So advanced funds are expected to be repaidfrom either IPEDA tax collections, budget allocations or net income.Furthermore, to smoothen the impact of the withdrawal of government depositson the RDBs liquidity position, BI has introduced a new rediscount facilityfor their clients' promissory notes. BI-s training subsidies, absorbing 507of the cost of LPPI courses for RDB managers and similar high level staff, isyet another means of facilitating the RDB reorientation process.

The Proposed Upgrading Program

19. Purpose, Coverage and Duration. The upgrading program has beendeveloped with the above-mentioned problems (paras. 15-16) in mind. Itsmain purpose is to enable the RDBs to function as channels for developmentfinancing in their regions in line with their original develoment objectives.

20. Detailed action programs have been developed for each of the 20 RDBson the basis of the survey results. Technical assistance will be rendered byBAPINDO and UPPINDO, whose selected staff have visited the RDBs for variouslengths of time depending on individual requirements. In support of thetechnical assistance efforts, intensified training will also be provided,

conducted by BAPINDO, UPPINDO and LPPI. A total of 480 staff and managershave been identified as requiring training on various aspects of bankingoperations. The proposed RDB upgrading program covering three years beginningin October 1980, constitutes a SEDP II component. According to schedule,the remaining six RDBs will also be included in the upgrading program. Afterthe initial upgrading phase has yielded some results, it will be determinedwhether additional technical assistance is required.

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21. Organizational Framework. The individual action programs contain,

inter alia, the terms of reference, objectives, organizational framework,responsibilities, and type and course of action. They were eventuallyapproved by BI after detailed review by the respective RDB management. Atthis juncture, the RDBs were also requested to appoint the responsiblepersonnel for the Steering Committees (Senior Managing Director and ProjectOfficer), and to identify suitable counterparts for BAPINDO's and UPPINDO'sstaff. Consultancy agreements between BAPINDO, UPPINDO and the respectiveRDBs were eventually concluded (15 had been concluded at appraisal).

22. The technical assistance given by BAPINDO and UPPINDO is limited toareas where those institutions have sufficient expertise specifically in theareas of term financing and development banking. For subjects beyond theircapabilities, outside consultants will be used. BAPINDO and UPPINDO havedecided to share the upgrading work commensurate with their capabilities andstaff resources, assuming responsibility for the upgrading of 15 and 5 RDBs,respectively. Meanwhile BAPINDO is preparing to assume responsibility for

upgrading the 6 remaining RDBs starting in 1982.

23. Almost all RDBs assigned to UPPINDO for upgrading appear torequire a less intensive approach than those assigned to BAPINDO by virtueof their advanced organizational systems and term lending experience,however limited. UPPINDO as well as BAPINDO have decided to use staff fromtheir own ranks for the technical assistance to be rendered. However,UPPINDO's officers will only work on a part-time basis on this program,which is expected to absorb between 40-60% of their time. The work programis coordinated by a steering committee, comprising, inter alia, the ProjectOfficers from UPPINDO and the respective RDB. The program is managed atUPPINDO½s level by its Project Officer, who is supported by a team of eightUPPINDO officers from its management personnel (three deputy managingdirectors and three department heads) and two outside consultants. In itsdaily work, UPPINDO's team is guided by a supervising officer who issupported by territorial and sectoral staff. The UPPINDO team cooperateswith the corrresponding Project Officer at the RDB level, normally the mostsenior person, and the counterparts recruited from those divisions which areundergoing upgrading.

24. All 12 officers of the BAPINDO team are expected to work full timeon their special assignments. This is particularly required in the light ofthe fact that most of BAPINDO's RDB clients require more intensive attentionthan UPPINDO's. In view of this, the mission and BAPINDO have alsoagreed to lengthen the duration of its staff visits to between 1-6 monthsdepending on individual requirements. BAPINDO's officer in charge of theadministration, monitoring and evaluation of the program (Project Officer)is supported by a Chief Consultant, a consultant specialist and three teamscomprising three consultants each including the supervisor. Each team willbe assigned five RDBs for upgrading. Besides these pecularities, BAPINDO-sapproach of the upgrading assignment does not differ from UPPINDO's.

ANNEX 10- lll - Page 9 of 11

Program Implementation

25. Work Organization. The RDB upgrading program would be carried outunder the direction of 10 UPPINDO and 12 BAPINDO staff who would work directlywith the RDBs as advisors/consultants. By the time BAPINDO has to assist 21RDBs starting from 1982, the number of its consultants should be increased to16. Technical assistance would focus on strengthening the RDB's organization,management, personnel administration, planning, research, funds mobilization,lending operations, accounting systems, management reporting systems,supervision and auditing. Having no available expertise in the fields ofpersonnel administration and accounting systems, UPPINDO plans to subcontractthese tasks to outside experts; similarly, BAPINDO would subcontract to alocal accounting firm and/or university its technical assistance obligation onaccounting and management reporting systems. It is worth noting that theimplementation program from beginning to end directly involves theparticipation of a cross-section of RDB senior and middle management staff,while the UPPINDO/BAPINDO staff and outside consultants would merely functionas advisors.

26. Modus Operandi. UPPINDO and BAPINDO plan to send their experts toeach RDB. Frequency and duration of these visits, however, will depend oneach individual RDB's requirements. Coverage of individual RDBs is, neverthe-less, quite intensive by virtue of the close sequence of visits by consultantsof various backgrounds although the average individual visit may normally notexceed one week, but may be longer if special circumstances so require. Thevisiting experts are expected to explain the implementation of the program,introduce the use of manuals for lending, accounting, reporting etc., andoversee their utilization by RDB staff. During these visits in-house lectureswould selectively be given to RDB staff and managers and additional trainingrequiremnents would be identified. UJnder the proposed action plan each RDBwould be visited a number of times, in close succession, by varying expertswho would also continously review the progress of implementation. A total of240 man-months of consultancy over the period Mlarch 1981 to October 1982 wouldbe devoted to these visits by UPPINDO/BAPINDO staff. In addition, fouroutside consultants would provide specialized advice on accounting procedures,personnel administration and management reporting systems.

27. Both UPPINDO and BAPINDO consider it unnecessary (and unduly costly)to place "resident advisors" in the RDBs' premises, although several RDBsvisited by the mission were willing to accommodate such advisors. Themission, nevertheless, took the view that more intensive advisory services,bordering short-term attachments, are required particularly by those 15 RDBsassigned to BAPINDO for upgrading. Accordingly, BAPINDO has agreed tolengthen the visit: duration of its staff to between 1-6 months, but would beunable to place long-term advisors in any of the RDBs under its wing owing tostaff shortages.

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Training

28. Training is an integral part of the upgrading program, which willbe conducted by BAPINDO, UPPINDO and LPPI. For this purpose, trainingadvisors will be assigned to BAPINDO's and UPPINDO's training institutionsboth to identify training needs and elaborate appropriate programs. The costof these advisors will be contained in the training component of SEDP II.UPPINDO has prepared its training program and has been implementing it sinceJanuary 1981; while BAPINDO is expected to start its training program by mid-June 1981. The training will focus on term financing and development bankingincluding project appraisal, supervision, follow-up and promotion. It isintended to subject around 10% of the RDB staff to such courses with anaverage duration of 50 days each. During the upgrading period of initiallytwo years, UPPINDO and BAPINDO plan to absorb 180 and 120 officers for formalclassroom training at an estimated total cost of $918,000 and $784,000,respectively, while another 180 RDB officers are expected to attend LPPIcourses, costing $747,000. The cost for formal classroom training of around480 RDB staff is expected to amount to $2.4 million equivalent and willthus absorb around 32% of the entire budget for the three-year upgradingprogram.

Program Monitoring

29. BAPINDO and UPPINDO as the executing agencies for the upgradingprogram monitor its progress, evaluate their officers' achievements andreport to BI on a quarterly basis in compliance with their terms of

reference. However, BI's Savings and Rural Bank Supervision Division, whichis part of its Bank Supervision Department, handles overall program monitor-ing and reports the results to the CPMU on a regular basis. This unit,which coordinates SEDP, will thus be enabled to gauge whether specialguidance of the RDB System is required particularly with respect to itsKIK/KMKP lending operations.

Projected Cost and Financing

30. The appraisal mission believes that the upgrading program wouldactively encourage the RDB system to expand significantly its share in KIKlending and thus realize its tremendous development potential. Hence, SEDP IIwould include a technical assistance component for the upgrading of theRDB system-s operational capabilities. Consultancy contracts with UPPINDOand BAPINDO will initially cover a period of two years, starting October1980. Given the scope of the program, however, it appears unlikely thatdesired results can be reached within a two-year period. The two-yearperiod should consequently be considered as a time slice of an ongoingprogram, which might realistically stretch over a four to five year period.

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31. Total costs of the upgrading ($5.2 milion) and training program($2.4 million) for the three-year period are estimated to amount to theequivalent of $7.6 million equivalent. Except for 50% of the training costand between 10% and 25% of the advisors' per diems which will be borne by theRDBs, the cost of this program would be borne by BI./1

Evaluation of the Proposed Upgrading Program

32. Although the RDB strengthening and upgrading program appears tobe well focussed and steered by BI, UPPINDO's and BAPINDO's performancerecords as bank advisors and training experts have yet to be established.Furthermore, given the scope of the program, it appears unlikely that thedesired results can be reached within a two-year period, particularly in thelight of the Bank's experience with similar programs in Indonesia (e.g.,BAPINDO and PDFCI), which show the need for continuous sustained effortsspanning many years before tangible results can be realized. BI concedes thatthe first two years could be considered as a first phase of developmentefforts with a much longer time horizon and agreed to review the need forfurther technical assistance at the end of the two-year period, i.e., aroundOctober 1982. However, the upgrading program is but one aspect of theoverall strengthening plan for the RDB system, which should include acomprehensive review and evaluation of its legal framework. BI should take aleading role in this process and may encourage finalization and enactment ofthe still pending legislative work. An understanding to this effect shouldalso be reached during negotiations.

/1 Further details and cost specifications are contained in the projectfile.

AEP Projects DepartmentApril 24, 1981

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INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Training Component

1. In 1980, more than 1,000 branches of private and state banks wereinvolved in SEDP lending in Indonesia (Table 1), and in excess of 5,000 staffwere directly involved in processing these loans. It is expected that duringthe period 1981-84, a substantial increase in the number of branches and aneven greater increase in the number of staff occupied in processing SEDP loanswill take place. Through 1980, a shortage of suitably trained and qualifiedstaff to carry out the SEDP lending program hindered the program in terms ofboth volume of lending and the quality of loans actually made. The GOI hasindicated a firm commitment to develop the staff required to carry outKIK/1KMP lending to meet its quantitative and qualitative targets for theprogram.

2. Tinder SEDP I, training of handling bank staff was delegatedprimarily to Institute for the Development of Banking (LPPI), and the projectprovided for two expatriates to assist LPPI in carrying out the task. Theconsultants' time was largely occupied in directing the six courses per yearwhich were required to prepare each new cycle of counterparts before sendingthem to the RPMUs for ten months of on-job training. Nevertheless, with theassistance of other staff of LPPI, the consultants provided classroom trainingto approximately 120 loan officers and gave one-week SEDP orientation seminarsfor 575 branch managers of handling banks during 1978-80. Recognizing thatthe task of training handling bank staff was too large for LPPI to handlealone, LPPI and its consultants started in 1980 to prepare a plan fordecentralizing part of the training function to those handling banks which hadin-house training capability.

3. During appraisal, a training plan for 1981-84 for SEDP lending wasagreed between the Mission, LPPI, and CPMU. The Plan includes the followingmajor elements:

(a) decentralizing part of formal training responsibilities to thosehandling banks which have in-house training programs (BRI, BNI,BAPINDO and UPPINDO);

(b) promoting staff development as a line management functionin which the manager must take part of the responsibility fortraining his own staff;

(c) targeting training to areas of largest effect to economize onscarce training resources;

Cd) deje1opient of a focused ap-proach so that training deals -withspecific problems hlich hamper achievement of lending objectives;

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Page 2 of 8

(e) assisting line managers in meeting their staff developmentresponsibilities and motivate them to carry out this functionand providing self-directed training materials for staff;

(f) development of materials to assist managers, trainers, and trainedcohorts in directing the in-house training of other staff;

(g) increase the frequency of present types of courses and introduceadditional courses to reach new target groups; and

(h) major additions of training resources to help carry out theabove.

Decentralizing Training

4. The decentralization of training would take place in two ways: (a)the primary responsibility for training BRI, BNI, and regional developmentbank staff would be given to the Training Divisions of BRI, BNI and toBAPINDO and UPPINDO; and (b) a further spread of responsibility for trainingwould be realized by introducing staff development and self-directedmaterials through which managers and trained cohorts could assist in thein-house training of other staff.

5. LPPI would have the responsibility for training staff from theparticipating private banks and from the state banks not covered by othertraining units. In addition, LPPI would continue to train counterpart stafffor the RPMUs and run training courses for trainers from all participatingbanks and in cooperation with CPMU and RPMUs would run short seminars forbranch managers. LPPI would also take a lead role in the preparation ofself-directed training materials for use in on-job training in all handlingbanks. Expressed by number of branches for which each training unit wouldhave training responsibility this would come to:

LPPI approximately 430 branchesBRI approximately 300 branchesBNI approximately 250 branchesBAPINDO approximately 90 branches of RDBsUPPINDO approximately 40 branches of RDBs

Targeting of Training

6. Training resources are scarce and costly. Thus, training mustbe targeted to achieve maximum impact on SEDP lending objectives in termsof volume and quality of loans. Targeting would occur in two ways:

(a) by selecting and continuously adapting training content and topicsfor which training is deemed productive; and

- 116 -ANNEX 11Page 3 of 8

(b) by directing and training target groups and individuals where theimpact is expected to be greatest.

Targeting training effectively requires efficient feedback from students,superiors, the handling banks and other project units and also that trainingbe viewed by managerment as one of the tools available to deal with specificproblems within the lending system. Managers throughout the system have toparticipate in identifying staff for training and in the identification oftraining needs. A formal system to reach this participation will include thefollowing:

(a) continuous consultation between training staff and managersat all levels within the handling banks. Local travel andsubsistence for training staff to visit regional and branchstaff and managers periodically would be provided;

(b) feedback would be obtained during short seminars for branchmanagers and through the built-in feedback of the self-directedtraining program;

(c) RPMUs would provide the Training Coordinator and LPPI with infor-mation on performance problems, training needs and appraisalreports on a regular basis, as well as through theannual workshops with LPPI staff; and

(d) the Management Information System being installed in CPMUshould eventually provide performance data from which follow-upby management would provide input into training programplanning. This process would be strengthened by the presencein CPMU of the Training Coordinator and the Staff DevelopmentAdvisor (para. 14).

Improving In-House Training

7. Two compelling reasons exist for seeking to train staff in-houseand on the job:

(a) it is more cost effective; and

(b) giving managers the responsibility and the ability to train theirown staff has proven through experience over time to be one ofthe most effective ways to improve system performance.

Strengthening the abilities of the handling banks to carry out formal andon-job training would be provided for through the following:

(a) provision of fellowship assistance for overseas training of13 staff in training units of handling banks and LPPI;

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(b) assistance by LPPI in training of trainers for handling banks;

(c) training by BRI of a corps of trainers to train mantris on thejob;

(d) preparation of training materials by LPPI and by training staff ofhandling banks; and

(e) phased introduction of staff development modules in branch managerseminars and in other courses taught by LPPI and the handlingbanks.

8. It is envisaged to systematically develop the personnel managementand on-job training skills of line managers to enable them to carry out thestaff development/training function. Materials on these topics would bedeveloped by LPPI and by the handling bank training units. Where suchmaterials already exist, consultants would work with trainers to improve thecontent and method of presentation. In addition, training of staff to carryout the in-house training of mantris and related support staff would beexpanded (e.g., BRI has trained 28 trainers in 10-day courses to trainmantris in 11 regions for carrying out expanded KIK/KMKP lending).

Development of Self-Directed Training Materials

9. As a further means of training the handling bank's staff, self-directed training materials would be developed by LPPI and by the staff ofthe handling bank training units. Overall direction of this effort would bethe responsibility of LPPI, while training units of the handling banks wouldbe responsible for developing specialized training materials for theirrespective banks and work with LPPI staff to develop general trainingmaterials which can be used in a large number of handling banks. Of thefour additional consultants and staff to be provided to LPPI, one would bean expert on developing self-directed training materials.

10. Resources would be provided for the purchase of books, materialsdeveloped by others and copyrights to such material for translation intoBahasa Indonesia. In addition, funds would be provided for art work,translation services, printing and distribution of training materials to thehandling banks. Equipment for printing, collating and binding of trainingmaterials would be provided for LPPI, BRI, and BNI 46 (Tables 11 and 12).

Training of Counterparts

11. During the period of SEDP I, the training of counterparts to alarge extent occupied the two consultants provided to LPPI under theproject. The training program for counterparts consists of two weeks of

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language training, followed by four weeks of intensive class work at LPPI,after which the counterparts are assigned to RPMUs. Under the firstproject, the number of RPMUs for which counterparts had to be trained each

year increased from three to nine. During SEDP II, the total number ofcounterpart courses at LPPI would go up from six to eight per year. Part ofthe additional resources to be provided to LPPI by SEDP II will go toward

meeting the expanded counterpart training requirements.

12. Careful selection of counterparts ensures that the quality ofparticipants in the counterpart training courses at LPPI is higher than thatof participants in the loan officers- courses. Thus, though the content ofthe courses is substantially the same, the depth of coverage of topics in

the counterpart courses is greater. During the period of SEDP I, mostcounterparts selected had not previously participated in courses for loanofficers, and there was no problem of duplication of training. However, inthe future, it is likely that counterparts increasingly will be selectedfrom loan officers who have previously participated in other trainingprograms, and measures will be taken to prevent duplication and wastage oftraining resources. LPPI is working on plans to deal with this problemwhile assuring that the depth of training the counterparts is not sacrificed.

13. Except for the possible changes implied by the preceding paragraph,no substantive change in the training of counterparts were contemplated atappraisal. However, the training plan for the period of SEDP II wouldinclude a closer monitoring of the counterpart training program and theTraining Coordinator and the Staff Development Advisor in CPMU would beresponsible for recommending improvements in the program for trainingcounterparts. Feedback on the effectiveness and recommendations for improv-ing the training of counterparts would be achieved through the following:

(a) each year a workshop of three days attended by SEDP staffof LPPI and two staff members from CPMU, RPMU s and representativesof the training units- of the handling banks would be held for thepurpose of exchanging information, ideas, and materials and forplanning the content and approach of counterpart training for thefollowing year; the workshop would be chaired by the TrainingCoordinator;

(b) regular visits between LPPI staff and RPMU staff would be carriedout, including broader use of RPMU staff and consultants aslecturers in LPPI courses; and

(c) the Training Coordinator would develop a formal system formonitoring the feedback of information on counterpart training fromLPPI, the RPMUs and from the graduated counterparts and theirsupervisors.

- 119 - ANNEX 11

Page 6 of 8

Integrating Training with Management Information

14. One of the approaches to be followed during SEDP II involveslinking the training program with the "management information system"currently being developed by CPMU. Under this approach, attention is paidlargely to those units which are not performing satisfactorily, andresources would be directed to improve those units. Training would be oneof the tools available to management in dealing with performance problems.However, using training in this way requires continuous interplay betweenmanagement information and direction of training. To facilitate thisinteraction, a Training Coordinator and Staff Development Advisor will beposted in the CPMU. The Training Coordinator and the Staff DevelopmentAdvisor will be responsible for:

(a) coordinating the training activities at LPPI and in training unitsof the handling banks (BRI, BNI 46, UPPINDO and BAPINDO);

(b) continuous monitoring of the effects of training activities in termsof lending program objectives; and

(c) working closely with senior management of the project and thebanks in helping identify problems in lending system performanceand where staff development/training options can be utilized tocorrect those problems (as well as where they do not provide thebest options).

The Training Coordinator would be assisted by a senior expert with extensiveoperational experience in staff development and in introducing change inlarge organizations. Posting the Training Coordinator and his advisor inCPMU would facilitate coordinating the training program and would give theProject Manager ready access to advice in dealing with staff developmentissues in CPMU and in the RPMUs as well.

Training Role of RPMUs

15. Notwithstanding the other operational responsibilities of theRPMUYs, one of the tasks of RPMUs would be training the counterpartson-the-job with the objective to provide a core of banking staff trained ingreater depth. The RPMUs will be involved in the feedback of both thecounterpart program and the general SEDP training program along the lines ofthe feedback system.

16. The role of the RPMUs, as regards training and staff developmentof handling banks, should include the following:

(a) continue to carry out on-job training of counterparts;

(b) assist in identifying training needs and target groups;

- 120 - ANNEX 11Page 7 of 8

(c) assist LPPI and handling banks in developing case materials;

(d) participate in regional training activities, including:

(i) advice on curricula;

(ii) assistance in conducting sessions;

(iii) assistance in preparing and selecting training materials;

and

(iv) help in organizing and implementing training programs;and

(e) assist in evaluating staff development and training programs.

Strengthening of Training Units

17. To assist in decentralizing training, one Training Specialist willbe placed in each of the following handling banks: BRI, BNI 46 and UPPINDO.A Training Coordinator and a Staff Development Expert will be placed in theC PMU.

18. Because LPPI would retain responsibility for training staffof the remaining state banks and the participating private banks,additional strengthening of LPPI would be required. In addition to thetwo existing SEDP consultants, the following experts would be providedfor LPPI:

(a) one Staff Development Expert; and

(b) three Material Development Experts for Development Banking/CreditAnalysis.

19. The Staff Development experts should be highly skilled and experi-enced people. Academic credentials are not as important as successfulexperience in performing a similar task elsewhere.

Annual Trainers Workshop

20. An annual workshop for the trainers involved in SEDP trainingat LPPI and in the training units of the handling banks would be held. Theobjectives of the workshop would be:

(a) to discuss and coordinate further improvements of training andstaff development;

- 121 - ANNEX 11Page 8 of 8

(b) to plan and coordinate the training programs of thetraining units and LPPI for the following year;

(c) to plan and coordinate the preparation of training materialsfor the following year; and

(d) to exchange materials and ideas between trainers and toassist in maintaining communication between individualsand institutions.

The Training Coordinator would be responsible for scheduling, calling andchairing the workshop.

Language Instruction

21. Because of the nature of the tasks to be performed by the trainingconsultants, ability to converse in Bahasa Indonesia is essential. Inter-nationally recruited consultants for these posts would undergo two months ofintensive language instruction in the country before beginning work. Theywill have no additional obligations other than orienting themselves to thelocal environment and learning the language during this period. Thelanguage training would include the two expatriate consultants at LPPI whodid not undergo intensive language training during SEDP I.

AEP Projects DepartmentMarch 26, 1981

- 122 -ANNEX 11Table 1

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Approximate Number of Bank Branch Offices /a (Including Head Offices), 1980

State banks and BPDs Private banksOther Totalstate statebanks banks KIK/KMKP Other Total Bank

BNI incl. and private private private Indo-46 BRI BAPINDO BPDs banks banks banks nesia Total

D.I. Aceh 8 11 11 30 0 1 1 2 33Sumatra Utara 14 15 34 63 0 30 30 3 96Sumatra Barat 7 10 16 33 0 6 6 1 40Riau 8 10 14 32 0 0 0 1 33Jambi 3 4 6 13 0 1 1 1 15Bengkulu 1 3 4 8 0 0 0 1 9Sumatra Selatan 8 11 12 31 0 7 7 1 40Lampung 3 4 11 18 0 4 4 1 22Jakarta Raya 27 9 84 120 9 88 97 1 218Jawa Barat 32 29 58 119 9 14 23 3 145Jawa Tengah 24 39 41 104 3 31 34 4 142Jogyakarta 4 7 4 15 2 1 3 1 19Jawa Timur 23 34 36 93 5 46 51 4 148Bali 4 9 21 34 1 4 5 1 40Nusa Tenggara Barat 4 5 13 22 0 1 1 1 24Nusa Tenggara Timur 1 13 5 19 0 0 0 1 20Kalimantan Barat 7 4 16 27 0 3 3 1 31Kalimantan Tengah 4 6 7 17 0 0 0 0 17Kalimantan Selatan 5 11 5 21 1 2 3 1 25Kalimantan Timur 5 6 18 29 0 1 1 2 32Sulawesi Utara 7 7 8 22 2 3 5 1 28Sulawesi Tengah 5 4 5 14 0 2 2 1 17Sulawesi Selatan 10 23 20 53 2 11 13 1 67Sulawesi Tenggara 2 3 4 9 0 1 1 1 11Maluku 2 6 5 13 0 0 0 2 15Irian Jaya 0 0 11 11 0 0 0 1 12Timor Timur 0 0 1 1 0 0 0 0 1

Total 218 283 470 971 34 257 291 38 1,300

/a Excluding branches at hotels and joint venture banks.

Source: Financial Directory of Indonesia 1980 and Statistik Perkembangan IJsahaPerbankan di Indonesia, March 1980.

AEP Projects DepartmentMarch 26, 1981

- 123 -

ANNEX 11Table 2

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Approximate Distribution of Loan Officers to be Trained for KIK/KMKP

(1980 figures)

Low count /c High count /dOther Otherstate Private state Private

BRI BNI BPD banks /a banks /b Total BRI BNI BPD banks /a banks Total

D.I. Aceh 22 16 7 6 0 51 44 32 13 12 0 101

Sumatra Utara 30 28 2 18 0 78 60 56 4 36 0 156Sumatra Barat 20 14 25 4 0 63 40 28 49 8 0 125

Riau 20 16 5 16 0 57 40 32 9 32 0 113Jambi 8 6 3 10 0 27 16 12 5 20 0 53Bengkulu 6 2 7 2 0 17 12 4 13 4 0 53Sumatra Selatan 22 16 7 13 0 58 44 32 13 26 0 115Lampung 8 6 5 9 0 28 16 12 9 1.8 0 55Jakarta Raya 19 55 18 80 18 190 37 109 34 156 27 363Jawa Barat 58 64 41 26 18 207 116 128 81 52 27 404Jawa Tengah 78 48 21 29 6 182 156 96 41 58 9 360Yogyakarta 14 8 3 0 4 29 28 16 5 0 6 55

Jawa Timur 68 46 17 33 10 174 132 92 33 70 15 342Bali 18 8 21 8 2 57 36 16 41 16 3 112Nusa Tenggara Barat 10 8 14 5 0 37 20 16 27 10 0 73Nusa Tenggara Timur 26 2 9 0 0 37 52 4 17 0 0 73Kalimantan Barat 8 14 21 8 0 51 16 28 41 16 0 101Kalimantan Tengah 12 8 7 7 0 34 24 16 13 14 0 67Kalimantan Selatan 22 10 3 4 2 41 44 20 5 8 3 80Kalimantan Timur 12 10 5 22 0 49 24 20 9 44 0 97Sulawesi Utara 14 8. 3 17 4 46 28 16 5 34 6 89Sulawesi Tengah 8 0 3 24 0 35 16 0 5 48 0 69Sulawesi Selatan 46 20 25 8 4 103 92 40 49 16 6 203Sulawesi Tenggara 6 20 5 0 0 31 12 40 9 0 0 61Maluku 12 4 5 4 0 25 24 8 9 8 0 49Irian Jaya 0 0 5 16 0 21 0 0 9 32 0 41Timor Timur 0 0 0 2 0 2 0 0 0 4 0 4

Total 567 437 287 371 68 1,730 1,129 873 548 742 102 3,394

/a Including BAPINDO.Th Banks involved in KIK/KMKP. Low count 2, high count 3 loan officers for all branch types./c Low count - 3 loan officers per head office, 2 loan officers per branch office, 1 loan officer per

subbranch should be trained./d High count - 5 loan officers per head office, 3 loan officers per branch office, 2 loan officers per

subbranch should be trained. Excluding joint venture banks.

AEP Projects DepartmentMarch 26, 1981

- 124 -ANNEX 11Table 3

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Dormitory Facilities Available for All Training /aby Handling Banks and LPPI, 1981-84

Dormitory beds1981 1982 1983 1984

LPPI /b 95 56 160 230

BRI Regional Centers /cSurabaya 75 75 75 150Semarang 75 75 75 150Bandung 60 60 60 1203 new centers - - - 180

BNI Regional Centers /dJakarta - - 200 200Yogyakarta - - 50 50Ujung Pandang - - 50 50Medan - - 50 50

Total 305 266 720 1,180

/a Of which KIK/KMKP training is only a part.

/b Beds decrease to 56 in 1982/82 as old domitory is demolished to make roomfor a new one.

/c Plan $14.1 million project to double capacity of existing centers and con-struct three new ones, available 1984.

/d Expect four regional centers to be ready within three years.

AEP Projects DepartmentMarch 26, 1981

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Manpower Requirements at LPPI, and its Distribution by Man-Month or Session

1981 1982 1983 1984 TotalType No. Activity For. Tnd. For. Ind. For. Ind. For. Ind. For. Ind.

---------------------- (man-months) ----------------------

Managtr 1 Chief coordinator of LPPI, SEDP activities - 6 - 12 - 12 - 6 - 36

1 Manager for self-directed training program - 6 - 12 - 12 - 6 - 36

Faculty 2 Assistant for self-directed training program - 12 - 24 - 24 - 12 - 72

1 Trainers training - 6 - 12 - 12 - 6 - 36 ~3 Lecturers on current program - 18 - 36 - 36 - 18 - 108 >

Consul- 2 On current program 12 - 24 - 24 - 12 - 72 -

tants 3 Material developers 6 12 12 24 12 24 6 12 36 72

2 Training needs researchers 4 4 - - - - - - 4 418 Specialized short-term consultants - 2 4 4 4 4 - - 8 101 Staff developer - 6 - 12 - 12 - 6 - 36

Guest - Branch managers seminars } - 264 - 330 - 330 - 264 - 1,188lectuters - Trainers training course } Sessions - 66 - 198 - 198 - 66 - 528

- Remaining SEDP training } - 106 - 251 - 344 - 172 - 873

Clerks 1 Secretary of chief coordinator - 6 - 12 - 12 - 6 - 36

3 Clerks for self-directed training program - 18 - 36 - 36 - 18 - 108

1 Secretary for trainers training manager - 6 - 12 - 12 - 6 - 361 Secretary for material development staff - 6 - 12 - 12 - 6 - 36

>AEP Projects DepartmentMarch 26, 1981

I-.'

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Manpower Requirements Outside LPPI(Distributed by man-month)

1981 1982 1983 1984 TotalType No. Position For. Ind. For. Ind. For. Ind. For. Ind. For. Ind.

Consultant 1 CPIIU Coordinator and Staff Developer 6 - 12 - 12 - 6 36

Consultant 1 BNI '46 Development Banker 6 - 12 _ 12 - 6 36

Consultant 1 UPPINDO 6 - 12 _ 12 - 6 36 -

Consultant 1 BRI Training Expert ------------…--- Not budgeted --------------------

Coordinator 1 CPMU Training Coordinator -------------------- Not hudgeted ------------- … ------

AEP Projects DepartmentMarclh 26, 1981

1F3 M

(D >X

- 127 -

ANNEX 11Table 6

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Schedule of Contract for Long-Term Consultants

1981 I 1982 1 1983 f 1984 I

I aI I I I I /aI/a /a

Foreign Consultants I I I iLPPI

Current program consultant |Current program consultant |Material developer II - I _________I___-_-

CPMU Assistant to coordinatorand staff developer

I I I* 1 - 1 1 1 IBNI '46Training expert I j

I I _ F 1- 1 I IUPPINDO I I I I I ITraining expert j

* 1---~~~ ~ ~ ~ ~~~~~~~~~~~1 1 I II ILocal Consultants I I I I I ILPPI iMaterial developer |

Material developer I iStaff developer

I I I 'I I II

/a Budget time limiter.

AEP Projects DepartmentMarch 26, 1981

- 128 -

ANNEX 11Table 7

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Cost of Long-Term Consultancy($'000)

1981 1982 1983 1984 TotalForeign Local Foreign Local Foreign Local Foreign Local Foreign Local

Foreign Consultants /aCPMU

Billing costs 54.0 - 108.0 - 108.0 - 54.0 - 324.0 -Nonsalary costs 7.7 15.9 10.5 26.6 10.5 26.6 7.7 13.4 36.4 82.5

LPP IBilling costs 162.0 - 324.0 - 324.0 - 162.0 - 972.0 -Nonsalary costs 18.1 47.4 31.5 79.8 31.5 79.8 22.7 39.9 103.8 246.9

BNIBilling costs 54.0 - 108.0 - 108.0 - 54.0 - 324.0 -Nonsalary costs 7.7 15.9 10.5 26.6 10.5 26.6 7.7 13.4 36.4 82.5

UPPINDOBilling costs 54.0 - 108.0 - 108.0 - 54.0 - 324.0 -

Nonsalary costs 5.3 15.9 10.5 26.6 10.5 26.6 7.7 13.4 34.0 82.5

SubtotalBilling costs 324.0 - 648.0 - 648.0 - 324.0 - 1,944.0 -Nonsalary costs 38.8 95.1 63.0 159.6 63.0 159.6 45.8 80.1 210.6 494.4

Local Consultants /bLPPI

Billing costs - 36.0 - 72.0 - 72.0 - 36.0 - 216.0Nonsalary costs - 43.5 - 79.9 - 79.9 - 43.5 - 246.8

TotalBilling costs 324.0 36.0 648.0 72.0 648.0 72.0 324.0 36.0 1,944.0 216.0Nonsalary costs 38.8 138.6 63.0 239.5 63.0 239.5 45.8 123.6 210.6 741.2

/a Billing costs at $9,000 per man-month. Nonsalary costs from Table 8.

/b Billing costs at $2,000 per man-month. Nonsalary costs from Table 9.

AEP Projects DepartmentMarch 26, 1981

- 129 -ANNEX 11Table 8

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Nonsalary Associated Costs for Long-Term Foreign Consultants(US$)

1981 1982 1983 1984

Relocation and resettlement ($4,700) /a 7,050 - - 14,100

Housing allowance (@ $1,300/mo) /b 46,800 93,600 93,600 46,800

Transportation allowance (@ $560/mo) /c 20,160 40,320 10,320 20,160

International travel (@ $3,000 return) /d 31,500 63,000 63,000 31,500

Local travel per diem (@ $50/day) /e 7,500 15,000 15,000 7,500

Out-of-station travel (air fares) /f 5,400 10,800 10,800 5,400

Language training for expatriates ($2,500) 15,000 - - _

Total 133,410 222,720 222,720 125,460

/a $2,350 transfer to Jakarta and $2,350 return home.

/b Assuming three foreign consultants already in Jakarta, one for CPMU, one forLPPI and one for BNI -46, all arriving July 1981.

Ic Assuming starting dates as in /b.

/d Assuming families of 3.5 persons, including the consultant.

/e Assuming 50 days/year per consultant.}} Travel cost for LPPI courses in the

/f Assuming 12 trips per year and } provinces separately.consultant at $150 each. }

AEP Projects DepartmentMarch 26, 1981

- 130 -

ANNEX 11Table 9

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Nonsalary Associated Costs for Long-Term Indonesian Consultants /a

(US$)

1981 1982 1983 1984

Relocation and resettlement ($2,350) /b 3,525 - - 3,525

Housing allowance ($1,300/mo) 23,400 46,800 46,800 23,400

Transportation allowance ($560/mo) 10,080 20,160 20,160 10,080

Local travel per diem ($50/day) /c 3,750 7,500 7,500 3,750

Out-of-station travel (air fares) /d 2,700 5,400 5,400 2,700

Total 43,455 79,860 79,860 43,455

/a Assuming three Indonesian consultants starting July 1981.

/b $1,175 for relocation to Jakarta and $1,175 at the end of the contract toreturn home.

/c Assuming 50 days/year per consultant.

/d Assuming 12 trips per year at $150 each per consultant.

AEP Projects DepartmentMarch 26, 1981

- 131 -

ANNEX 11Table 10

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Cost of Short-Term Consultants, 1981-84(US$)

1981 1982 1983 1984

Foreign Consultants /a 4 MM 4 MM 4 MM -

Fees at $9,000/mm 36,000 36,000 36,000 -

Return air fare /b 3,000 12,000 12,000 -

Local subsistence Ic 9,000 9,000 9,000 -

Domestic travel /d 600 1,200 1,200 -

Local Consultants /e 6 MM 4 MM 4 MM -

Fees at $2,000/mm 12,000 8,000 8,000 -

Travel per diem /f 1,200 1,600 1,600 -

Domestic travel g 900 1,200 1,200 -

Total 62,700 69,000 69,000 -

/a 1981 - one consultant for 4 months for training needs research.1982 - 4 consultants, 1 month each.1983 - 4 consultants, 1 month each.

/b Return air fare at $3,000 each, foreign consultant.

/c At $2,250 each, foreign consultant.

/d 1981 - 4 trips, 1982 - 8 trips, 1983 - 8 trips at $150 return air fare.

/e 1981 - one consultant for 4 months for training needs research, 2 monthsopen.

/f 1981 - 6 trips, 1982 - 8 trips, 1983 - 8 trips at 4 days each with $50 perdiem.

/g $150 per return ticket and trip.

AEP Projects DepartmentMarch 26, 1981

- 132 -

ANNEX 11Table 11

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Training Aids and Equipment(US$)

1981 1982/a 1983/a 1984/a

Training aids and equipment /b

LPPI 79,840 - -

BRI 80,000 - -

BNI 1946 45,824 - -

Total 205,664 - -

/a Purchases of training aids and equipment may spill into the followingyear(s).

/b From Table 12.

AEP Projects DepartmentMarch 26, 1981

- 133 - ANNEX 11Table 12

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Printing Equipment/Training Aids

Rp $

LPPI1 Printing camera 9,000,000I Paper cutter 2,000,0003 Binders or staplers 1,200,0002 Sorting machines 4,000,0001 Minicomputer with word processor and other software 22,000,0001 Episcope A4 1,600,0001 Slide producing equipment 700,0001 Hole drill 250,0001 Electric lettering machine 1,500,0003 Overhead projectors 1,750,0005 Screens for lecture rooms 1,500,0002 Transparency makers 1,400,000Miscellaneous equipment like video accessories, etc. 3,000,000

Subtotal 49,900,000 79,840

BRI1 Set of offset printing equipment 14,000,0001 Sorting machine 4,000,0001 Binder or stapler 400,00010 Overhead projectors 5,500,00010 Transparency makers 7,000,0001 Video equipment and accessories .4,000,0001 Slide producing equipment 700,0005 Slide projectors 3,750,0001 Episcope A4 1,600,00010 Projector screens 2,800,000

Miscellaneous 6,250,000

Subtotal 50,000,000 80,000

BNI 19461 Set of offset printing equipment 14,000,0001 Sorting machine 4,000,0001 Binder or stapler 400,0003 Overhead projectors 1,750,0003 Transparency makers 2,100,0003 Projector screens 840,0001 Episcope A4 1,600,0001 Slide producing equipment 700,0003 Slide projectors 2,250,000Miscellaneous 1,000,000

Subtotal 28,640,000 45,824

Total 128,540,000 205,664

Note: These items may be replaced by more convenient equipment for audiovisuallecturing.

AEP Projects DepartmentMarch 26, 1981

- 134 -

ANNEX 11Table 13

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Overseas Training of Indonesian Teaching Staff /a(US$)

1981 1982 1983 1984

LPPI (5 staff) 12,000 36,000 12,000

BRI (3 staff) 12,000 12,000 12,000

BNI (3 staff) 12,000 12,000 12,000

UPPINDO (1 staff) 12,000 - -

BAPINDO (1 staff) 12,000 - -

Total 60,000 60,000 36,000

/a Based on eight-week courses, plus two weeks for travel, at $1,000-per-weekfees and subsistence and per diem. Return air fare of $3,000.

AEP Projects DepartmentMarch 26, 1981

- 135 -

ANNEX 11Table 14

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Cost of Annual Three-Day CPMU-LPPI Workshop for Training Program Planning /a(U S$)

1981 1982 1983 1984

Staff travel ($150) 5,400 6,000 6,600 -

Per diem (4 days at $50) 7,200 8,000 8,800 -

Miscellaneous costs 4,000 4,000 4,000 -

Total 16,600 18,000 19,400 -

/a Assuming 36 participants in 1981,

40 participants in 1982, and

44 participants in 1983.

AEP Projects DepartmentMarch 26, 1981

- 136 -

ANNEX 11Table 15

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Cost of Regional Seminars for Branch Managers - LPPI, 1981-84

(US$)

1981 1982 1983 1984

Staff travel /a 16,200 20,250 20,250 16,200

Staff per diem ($50/day) /b 21,600 27,000 27,000 21,600

Trainee per diem ($40/day) /c 84,000 105,000 105,000 84,000

Materials and shipment /d 720 900 900 720

Equipment rental and services /e 1,920 2,400 2,400 1,920

LPPI guest lecturer fees /f 1,008 1,260 1,260 1,008

Other guest lecturer fees /g 1,155 1,440 1,440 1,155

Total 126,603 158,250 158,250 126,603

/a Based on 5 LPPI faculty members per seminar plus 4 CPMU staff members perseminar. Includes guest lecturers.

/b Based on 4 days per LPPI and CPMU staff per seminar.

/c Based on 25 participants per seminar and 7 days per diem.

/d Rp 1,500 per participant.

/e Rp 100,000 per seminar as an overall average.

/f Based on a team of LPPI guest lecturers who teach 50% of the seminars (14sessions each) at Rp 7,500 per session.

/g Eight sessions of CPMU or BI guest lecturers per seminar at Rp 7,500 persession.

Note: Based on: 1981 - 12 one-week seminars, starting August 1981,1982 - 15 one-week seminars,1983 - 15 one-week seminars, and1984 - 12 one-week seminars.

AEP Projects DepartmentMarch 26, 1981

- 137 -

ANNEX 11Table 16

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Cost of SEDP Courses Conducted at LPPI

(US$)

1981 1982 1983 1984

Food and lodging ($24/participant day) /a 129,000 301,200 370,200 172,200Travel of participants ($150/participant) /b 18,750 45,000 56,250 26,250Language training for counterparts /c 7,000 12,250 14,000 7,000Guest lecturer's fee /d 3,432 8,976 10,824 4,752Course materials for participants /e 8,125 19,500 24,375 11,375Follow-up material /f 3,125 7,500 9,375 4,375Classroom supplies 79 3,325 7,980 9,975 4,655Miscellaneous costs 5,000 5,000 5,000 5,000

Iotal 177,757 407,406 499,999 235,607

/a 1981 - 4 counterpart courses, I trainers training course;

1982 - 7 counterpart courses, 3 trainers training courses,1 loan officers course, 1 middle management course;

1983 - 8 counterpart courses, 3 trainers training courses,2 loan officers course, 1 middle management course,1 regional head office course; and

1984 - 4 counterpart courses, 1 trainers training course,1 loan officers course, 1 middle management course.

Each course for 25 participants for 6 weeks (43 days) at $24 per day. Onlythe middle management and the regional head office course will last 4 weeks(29 days).

The calculations include two days for travel to the LPPI and for returninghome.

/b 1981 = 125, 1982 = 300, 1983 = 375 and 1984 = 175 participants./c At $1,750 per course; 4 courses in 1981, 7 in 1982, 8 in 1983 and 4 in 1984./d At Rp 12,500 or $20 per session.7e $65 per participant./f $25 per participant./g $665 per course.

AEP Projects DepartmentMarch 26, 1981

- 138 -

ANNEX 11Table 17

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Self-Directed Training Materials(US$)

1981 1982 1983 1984

Equipment 6,750

Office supplies 400 800 800 400

Materials /a 14,400 28,800 28,800 14,400

Personnel lb 9,696 19,392 19,392 9,696

Overheads, 10 2,400 4,800 4,800 2,400

Incentives 1,600 3,200 3,200 1,600

Total 35,246 56,992 56,992 28,496

/a Assuming 1,500 participants.

/b Assuming 1 program director, 2 junior assistants, 1 typist and 2 clerks.

AEP Projects DepartmentMarch 26, 1981

- 139 -

ANNEX 11Table 18

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

BRI - Cost of Training for Term Lending and Training Officers, N.E.I., 1981-84(US$)

Courses 1981 1982 1983 1984

Branch managers 15,200 -

Deputy branch managers 34,200 - - -

Credit analysts 38,000 114,000 114,000 38,000

Credit officers 26,600 68,400 19,000 19,000

Penilik 22,800 76,000 68,400 22,800

Mantri 182,400 547,200 547,200 182,400

Total 319,200 805,600 748,600 262,200

AEP Projects DepartmentMarch 26, 1981

- 140 -

ANNEX 11Table 19

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

BNI 1946 - Direct Training Costs, N.E.I., 1981-84 /a(US$)

1981 1982 1983 1984

Loan officers 54,252 73,854 73,359 /b

Credit analysts 201,203 271,843 273,218 /b

Clerks 22,968 36,531 40,491 /b

Total 278,423 382,228 387,068 /b

/a Comprises fees to guest lecturers, material reproduction, rental of facili-ties, testing and selecting, per diem and travel costs.

/b Depending on the definite training schedule, program and disbursement fundsmay spill into 1984.

-^%- AEP Projects DepartmentMarch 26, 1981

- 141 -

ANNEX 11Table 20

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Loan Officers Training Courses - BAPINDO Regional Development Banks, 1981-84

(US$)

1981 1982 1983 1984

Participants' travel ($175 per trip) 8,750 12,250 12,250 4,375

Daily allowance and accommodation 100,000 140,000 140,000 50,000

Material preparation 29,120 - 29,120 /a

Classroom rentals 4,800 7,200 7,200 3,400

Lecturers fees 13,440 20,160 20,160 6,720

Plant visits 13,440 20,160 20,160 6,720

Miscellaneous 8,395 12,595 12,595 4,198

Contingencies 17,670 21,060 29,970 7,540

Total 195,615 233,425 271,455 82,953

/a 1981: 2 courses, 50 participants, 50 days.1982: 3 courses, 70 participants, 50 days.1983: 3 courses, 70 participants, 50 days.1984: 1 course, 25 participants, 50 days.

AEP Projects DepartmentMarch 26, 1981

- 142 -ANNEX 11Table 21

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Loan Officers Training Courses - UPPINDO Regional Development Banks, 1981-84(US$)

1981 1982 1983 1984

Participants' travel ($175 per trip) 11,915 25,200 11,915 /a

Daily allowance and accommodation 103,880 169,400 103,880 /a

Course fee 52,430 110,213 52,430 /a

Upgrading courses 35,440 35,440 35,440 /a

Miscellaneous 56,680 57,043 56,680 /a

Total 260,345 397,296 260,345 /a

/a Depending on the definite training schedule, programs and disbursement ofthe funds may spill into 1984.

AEP Projects DepartmentMarch 26, 1981

- 143 -

ANNEX 11Table 22

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Total Costs of Training Component, 1981-84

($'°°°)

1981 1982 1983 1984 Total

Foreign Local Foreign Local Foreign Local Foreign Local Foreign Local

Costs of long-term consultancyBilling costs 324.0 36.0 648.0 72.0 648.0 72.0 324.0 36.0 1,944.0 216.0

Nonsalary costs /a 38.8 138.6 63.0 239.5 63.0 239.5 45.8 123.6 210.6 741.2

CPMUBilling costs 54.0 - 108.0 - 108.0 - 54.0 - 324.0 -Nonsalary costs /a 7.7 15.9 10.5 26.6 10.5 26.6 7.7 13.4 36.4 82.5

LPPIBilling costs 162.0 36.0 324.0 72.0 324.0 72.0 162.0 36.0 972.0 216.0Nonsalary costs /a 18.1 90.9 31.5 159.7 31.5 159.7 22.7 83.4 103.8 493.7

BNIBilling costs 54.0 - 108.0 - 108.0 - 54.0 - 324.0 -Nonsalary costs /a 7.7 15.9 10.5 26.6 10.5 26.6 7.7 13.4 36.4 82.5

UPPINDOBilling costs 54.0 - 108.0 - 108.0 - 54.0 - 324.0 -Nonsalary costs /a 5.3 15.9 10.5 26.6 10.5 26.6 7.7 13.4 34.0 82.5

Short-term consultancy /b 39.0 23.7 48.0 21.0 48.0 21.0 - - 135.0 65.7

Incremental support staffs tc - 33.8 - 67.6 - 67.6 - 33.8 - 202.8Overseas training of trainers /d 60.0 - 60.0 - 36.0 - - - 156.0 -Self-directed training material /e - 18.8 - 37.6 - 37.6 - 18.8 - 112.8CPMU-LPPI planning workshops /f - 16.6 - 18.0 - 19.4 - - - 54.0Training aids and equipment IT - 205.7 - - - - - - - 205.7

Other direct training costsLPPI /h - 304.2 - 565.7 - 658.2 - 362.2 - 1,890.3

BRI /1 - 319.2 - 805.6 - 748.6 - 262.2 - 2,135.6BNI /i - 278.4 - 382.2 - 387.1 - /m - 1,047.7

Subtotal pure SEDP training 461.8 1,375.0 819.0 2,209.2 795.0 2,251.0 369.8 836.6 2,445.6 6,671.8

BAPINDO /k - 195.6 - 233.4 - 271.5 - 83.0 - 783.5uPPINDO 7T - 260.3 - 397.3 - 260.3 - /m - 917.9Provision for additional programs - - - 186.8 - 373.5 - 186.8 - 747.1

Total Costs - Training 461.8 1,830.9 819.0 3,026.7 795.0 3,156.3 369.8 1,106.4 2,445.6 9,120.3

(in constant prices)

/a From Table 7./b From Table 10.7T From Table 4 and personnel item for Table 17./d From Table 13.

7e From Table 17, excluding personnel and equipment.7f From Table 14.

From Table 11lh From Tables 15 and 16.Ti From Table 18.f From Table 19.1k From Table 20.71 From Table 21.Tm Depending on definite training schedule, programs and funds from previous

years may spill into 1984.

AEP Projects DepartmentMarch 26, 1981

- 144 - ANNEX 12

Page I of 2

INDONESIA

SECOND S21ALL ENTERPRISE DEVELOPMENT PROJECT

Draft Terms of Reference of the Staff Development Expert - LPPI

1. The LPPI staff development expert would report directly to theDirector of LPPI. He/she would be an internationally-recruited expert withfive or more years experience in training and staff development in largeorganizations, at least two years of which should be in training LDCnationals. Direct experience would be more important than formal education,though training in staff development, adult education, or business/bankingadministration would be a useful addition to required experience. The expertshould be at least 35 years old and should have demonstrated the ability andinterest to learn a second language. In addition to the above requirements,training or experience in publishing or in preparing self-directed trainingmaterials would be a definite plus. If not already fluent in BahasaIndonesia, the expert would undergo two months of intensive language trainingat the beginning of the appointment.

3. The expert would work with the Director and staff of LPPI to pre-pare annual plans for the training of handling banks staff for which LPPIhas training responsibility (i.e., those not being trained by BRI, BNI 46,BAPINDO and UPPINDO). In carrying out this function, the expert and othertraining staff would consult with line nanagers and staff of handling banksand would seek their input in determining content, focus, and approaches tobe followed in training handling bank staff. With the Director and otherstaff of LPPI, and the staff of handling bank training units, the expertwould participate in preparing annual programs for the training of handlingbank staff from all participating banks, and in determining the role to beplayed by LPPI for the training program for that year.

4. The expert would prepare course modules and teaching materials onpersonnel management and staff development to be used in courses for linemanagers held by LPPI and other training units. The purpose of these modulesand materials would be to facilitate the development of improved on-jobtraining skills required to meet the training needs of KIK/KMKP lending.

5. The expert would assist other LPPI staff in developing self-directedlearning materials to be used in on-job training of handling bank staff.The self-directed materials should be sufficiently well-developed andfocussed that line managers of handling banks could use them with limitedtutorial input to develop the knowledge and skills of their staff to carryout the functions required for KIK/KMKP lending. The materials should notbe unduly general or abstract in nature, should be focussed on specifictraining needs of bank staff, and should draw upon directly-related experi-ence for examples. All such materials would be developed in or translatedinto Bahasa Indonesia.

- 145 -

ANNEX 12

Page 2 of 2

6. The expert would assist in developing and carrying out trainingprograms for trainers from handling banks and from training units of thosebanks, as required. He would provide advice and assistance to othertrainers in developing their training skills, upon request.

AEP Projects DepartmentFebruary 2, 1981

- 146 -ANNEX 13Page 1 of 2

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Draft Terms of Reference of the BI Staff Development Advisor

1. The Staff Development Advisor would be assigned to the CPMU andwould report directly to the Staff Development Team Leader. The Advisorwould be internationally recruited and would have extensive experience instaff development in a large and complex organization. The Advisor shouldbe at least 35 years of age and should have worked for at least two yearsin a developing country environment. In addition to experience in theareas of staff development/training, the Advisor should have training and/orexperience in organizational development and management information systems(MIS). The advisor should have demonstrated a capability and interest tolearn a second language. If not already fluent in Bahasa Indonesia, theexpert would undergo two months of intensive language training at thebeginning of the appointment.

2. The Advisor would be appointed initially for a period of two yearswith the possibility of extension for a third year by mutual agreement. Theterms and conditions of his appointment would be according to prevailingGOI policies regarding the employment of consultants.

3. The Advisor would work closely with the Staff Development TeamLeader in planning and coordinating the training of handling bank staff forKIK/KMKP lending. Under the direction of the Team Leader, the Advisor woulddevelop procedures for monitoring training needs and performance and forproviding information feedback to aid in redesigning/redirecting trainingto meet program needs. Parameters relevant to the assessment of needs andperformance of training would be integrated into the MIS, and proceduresfor following up on the information feed back would be developed.

4. Working with the Team Leader, the Advisor would maintain closeliaison between handling bank management and SEDP trainers to assure thattraining continues to be pragmatically focussed and concentrated on areasconsidered by management to be the major impediments to improved lendingprogram performance. The Advisor would provide advice and guidance totraining unit staff in developing training content, materials and proceduresrequired to meet the needs indicated by handling bank management.

5. The Advisor would work with the Team Leader and with the WorkshopPlanning Committee to plan the Annual Trainers Workshop. He would assistin preparing the agenda for the workshop and in drafting the annual trainingplan working paper which would serve as the basis for discussions for theannual training plan to be developed by the Workshop participants. Becauseultimate responsibility for getting plan approval from handling bank manage-

- 147 -

ANNEX 13Page 2 of 2

ment would rest with representatives of training units of the handling banks,the Team Leader and Advisor would work closely with handling bank managementand training units in drawing up the Workshop agenda and the draft annualtraining plan working paper.

AEP Projects DepartmentFebruary 2, 1981

- 148 -

ANNEX 14Page 1 of 2

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Economic Impact of KIK/KMKP Loans on a Sample of SSE Clients /a

Capital/Labor/d Economic/eRural(R)/ Output/b Employment /c (Rp 000) rate ofUrban(U) Book- increase Before After Before After return

Sector/Product Location keeping (x) -- KIK/IMKP … KIX/KMP --- (%)

AgriculturalChickens U yes 62 4 6 33 1,200 30Cattle raising R no 200 1 4 1,000 1,250 -Apples/vegetables R no -22 20 26 300 475 -Rice farming R no 17 15 15 3,000 3,900 <0Poultry/eggs U no 212 1 2 380 425 -Onions, rice, sweet potatoes R no 16 21 26 465 390 54Coconut U no -15 1 1 750 750 -Eggs R yes 150 3 4 10 175 -

Coastal fishing U no 150 3 3 1,633 1,667 50

IndustrialBadminton rackets U yes 67 20 76 128 188 42Printer U no 40 4 5 158 431 -Soya bean cakes R no 0 2 2 9 257 -

Ceramic handicrafts R yes 0 9 25 n.a. n.a. -

Kitchen utensils no 92 4 8 455 270 n.a.Krupuk maker (food) U yes 33 2 2 110 2,023 <0Woven mats R no 144 10 35 85 55 -Wood & floor tiles R yes 100 10 24 280 1,000 -Fruit beverages U yes 337 5 17 102 3,685 41Bricks R yes New business '0 11 - 593 24Medicine U yes 0 11 11 2,391 3,109 -Ground pepper mill U no 25 4 4 1,500 2,275 -Krupuk maker (food) U no 450 12 32 260 307 -Coconut oil/cakes R yes 11 14 16 675 812 -Rice hulling R yes 40 3 3 412 1,775 -Floor tiles U yes New business 6 25 2,142 1,461 -

Trade Sector EnterpriseBanana vendor U no 121 1 1 65 325 -Wood trader U yes 34 3 3 11,800 19,300 19Beef vender U no 23 1 1 130 591Mattress shop U yes 500 4 6 132 4,600 -

Window glass shop U no 14 4 6 1,600 4,000 -

Garment store U yes New business 0 4 - 5,400 -

Fried chicken warung U yes 67 10 10 560 704 -

Grain dealer R no 10 10 10 1,300 1,500 -

Furniture store U yes 14 3 3 730 2,600 -Kerosene agent U yes 18 5 7 1,579 2,100 13Grain, kerosene & sundries U yes 35 6 6 4,000 5,800 -Sundries store U no 0 2 5 2,700 2,840 <0Textiles shop R no n.a. 3 5 3,067 3,220 17Garments, personal item shop R no 70 2 4 1,175 763 -General store U no 23 4 4 1,625 2,925 -Kitchenware dealer U yes 19 2 4 1,022 2,519 <0Photo supply store U yes 260 6 8 3,650 12,312 -Food store U no 13 1 1 3,100 11,000 -Industrial materials dealer U yes 11 5 8 578 2,000 -Radio/TV store U no 40 3 6 75 1,158 -Sporting goods store U no New business 0 1 - 5,542 -Antique/souvenir shop U yes 26 15 5 800 5,300 -Mattress dealer U no New business 0 3 - 2,347 <0Hulled rice dealer U no 25 9 11 1,490 2,182 <0Floor mat and sundry dealer R yes 25 2 2 1,758 2,517 -

- 149 -

ANNEX 14Page 2 of 2

Capital/Labor/d Economic/eRural(R)/ Output/b Employment /c (Rp '000) rate ofUrban(U) Book- increase Before After Before After return

Sector/Product Location keeping (X) -- KIK/K P … KI/-K/MP --- (7)

Transport/Service EnterpriseInterisland freight expediter

& earth mover R yes 161 3 6 2,000 3,700 13Trucking R yes New business 0 2 - 2,400 -

Small bus U no 100 2 4 425 1,100 -

Bus R no 79 5 14 815 1,214 -

Mini bus R yes New business 0 2 - 2,475 -

Oplet taxi U yes 150 3 5 1,033 1,320 20Oplet & taxi U yes 1,100 1 3 1,700 1,667 -

Truck R no New business 0 3 - 1,067 <0Truck R no 100 3 5 1,050 1,350 -

Vehicle repair U no 0 8 8 591 1,922 -

Tailor U no 22 11 11 977 1,954 -

Inn U yes 57 5 7 1,800 2,500 -

Beauty shop U yes 25 4 4 2,961 5,682 (0Contractor U yes 100 2 7 6,000 3,357 -

/a Subsample of selected questionnaires from socioeconomic impact studies for East Java and West Sumatera.From this information median performance characteristics were calculated for each province in order toserve as a guide to selection of final customers for detailed economic analysis. The customers ultimatelyevaluated are those for which information appears in the last column, labelled "Economic Rate of Return."

lb Wherever possible increases in real volume were estimated. However in some cases nominal values are usedfor lack of sufficient information to estimate real magnitudes. Where possible pre-credit trends werealso taken into account in calculating the post-credit increase in output. Obviously, the increase in out-put following the credit cannot always be attributed to the credit itself.

Jc All workers reported in the questionnaires are counted equally, whether paid or unpaid, family or nonfamily.

/d Includes fixed capital plus working capital stocks, not corrected for inflation. Generally, the assetsdata on the questionnaires is of low quality due to incompleteness, ambiguity about inflation effects, andinadequate information on timing. Thus, the data recorded here is crude at best.

/e Economic rate of return calculations were attempted only for the final 20 customers selected for carefulanalysis. These final 20 were selected on the basis of this Table to reflect representative performanceby sector and by province. For a more complete explanation, see accompanying text.

AEP Projects DepartmentFebruary 2, 1981

- 150 -

ANNEX 15Page 1 of 6

INDONESIA

SECOND SM4ALL ENTERPRISE DEVELOPMENT PROJECT

Organizational Structure of the Credit Department - Bank Indonesia /

1. The organizational structure of the Credit Department and clarifi-cation of the principal tasks of the Desk for Small Enterprise Developmentand Desk for Small Credit are presented below.

Article 1

2. The working units within the Credit Department are as follows:

(a) Credit Administration Division(b) Investment Credit Division(c) Commercial Credit Division(d) Production Credit Division(e) Desk for Project Aid(f) Desk for Small Enterprise Development(g) Desk for Small Credit

Article 2

3. The Desk for Small Enterprise Development mentioned in Article 1 (f)above has the following principal tasks:

(a) formulate policies to promote the development of smallenterprises/entrepreneurs through technical assistance to thehandling banks;

(b) improve the approach of the banking system in promoting theextension of credit to small enterprises/entrepreneurs, especiallyKIK/KMKP;

(c) manage and monitor technical assistance activities to the handlingbanks to promote the development of small enterprises/entrepreneurs;and

(d) handle matters related to foreign assistance.

/1 Based on BI Board of Directors' Decision No. 14/5/KEP/DIR/UAO. datedApril 18, 1981 and BI Circular No. 14/1, April 18, 1981.

- 151 - ANNE X 15

Page 2 of 6

Article 3

4. The Desk for Small Credit mentioned in Article 1 (g) above hasthe following principal tasks:

(a) formulate policies to promote small enterprises/entrepreneursthrough extension of credits by the handling banks;

(b) formulate stipulations concerning credits to small enterprises/entrepreneurs, especially KIK/KMKP, and stipulations relating tocredits based on feasibility with light collateral and lightself-finance from the customers;

(c) study and develop credit schemes especially for priority projects,including implementation of required surveys;

(d) monitor and analyze the growth of credits to small enterprises/entrepreneurs;

(e) implement and administer liquidity credits required by the handlingbanks; and

(f) deal with matters related to credit insurance.

5. Circular NO. 14/1 - Miscellaneous dated April 18, 1981, regardingthe organization of Bank Indonesia (clarifying the principal tasks of the Deskfor Small Enterprise Development and the Desk for Small Credit, CreditDepartment) stipulates that:

The Desk for Small Enterprise Development

6. The detailed tasks of the Desk for Small Enterprise Developmentare as follows:

(a) Prepare and submit suggestions to the Board of Directors regardingpolicies to promote the development of small enterprises/entrepre-neurs through technical assistance to the handling banks.

(b) Improve the approach of the banking system in promoting theextension of credit to small enterprises/entrepreneurs,especially KIK/KMKP, through:

(i) project identification, studies and surveys;(ii) education, training and seminars; and(iii) pilot projects.

- 152 -

ANNEX 15Page 3 of 6

(c) Manage and monitor technical assistance activities to the handlingbanks to promote development of small enterprises/entrepreneurs,especially by:

(i) studying the needs, monitoring the development andcoordinating the activities of the Sections for SmallEnterprise Development (SPPKs);

(ii) recruiting, organizing and supervising the activities ofadvisors, experts and consultants and Bank staff attachedto the Sections for Small Enterprise Development; and

(iii) preparing project budget estimates.

(d) Handle matters related to foreign assistance, especially by:

(i) carrying out correspondence and preparing documents asrequired for discussions and negotiations with foreignassistance institutions, including necessary follow-upactivities;

(ii) managing, administering and implementing foreignassistance; and

(iii) preparing required reports.

7. In the above context, Sections for Small Enterprise Development havebeen established at the following BI branch offices: Surabaya covering EastJava Province; Semarang covering Central Java Province; Padang covering WestSumatra Province; Ujung Pandang covering South Sulawesi Province; Denpasarcovering Bali Province and Lombok Island Region in West Musa TenggaraProvince; Banjarmasin covering South Kalimantan and Central KalimantanProvinces; Bandung covering West Java Province not including Bogor, Tangerangand Bekasi Regencies; Medan covering North Sumatra Province; and Yogyakartacovering the special region of Yogyakarta. Sections for Small EnterpriseDevelopment have the following tasks:

(a) Improve the approach of the banking system in their workregions in promoting the extension of credit to the smallenterprises/entrepreneurs, especially KIK/KMKP, through:

(i) project identification and field surveys; and

(ii) study, investigation and preparation of pilot projects.

(b) Assisting in the implementation of education, training andseminar programs and staff development in their work regions,in the form of:

- 153 -

ANNEX. 15Page 4 of 6

(i) on-the-job training of Bank staff attached to the sectionfor Small Enterprise Development as well as

(ii) studying the education/training needs of the region, andmonitoring implementation.

(c) Monitoring implementation of projects mentioned in point (a)above.

(d) Reporting its activities to the Head Office, includingrecommendations as necessary.

8. The head of the Section for Small Enterprise Development at thebranch offices is directly responsible to the head of the local Bank Indonesiabranch.

9. To facilitate the implementation of its tasks, this section isassisted by consultants/experts and by Bank staff seconded from the handlingbanks.

10. To serve the above mentioned functions in the special capitaldistrict of Greater Jakarta and in Bogor, Tangerang and Bekasi Regencies(i.e., in the Jabotabek Region), there has been established at the Desk forSmall Enterprise Development, Credit Department in the Head Office, aspecial section called: "Jabotabek Section for Small EnterpriseDevelopment." The detailed tasks of this section are similar to thedetailed tasks of the sections for Small Enterprise Development of thebranch offices. The head of the Jabotabek section for Small EnterpriseDevelopment is directly responsible to the head of the Desk for SmallEnterprise Development. As in the case of the branch offices, the JabotabekSection for Small Enterprise Development is assisted by consultant/expertsand by Bank staff seconded from the handling banks.

The Desk for Small Credit

11. The detailed tasks of the Desk for Small Credit are as follows:

(a) Prepare and submit suggestions to the Board of Directorsregarding policies to promote the development of smallenterprises/entrepreneurs through extension of credit by thehandling banks, especially KIK/KMKP and credit based onfeasibility, light collateral and light self-finance fromthe customers.

(b) Formulate stipulations concerning credits to small enterprises/entrepreneurs, especially KIK/KMKP and credits based on

- 154 -

ANNEX 15Page 5 of 6

feasibility, light collateral and light self-finance from thecustomers.

(c) Study the development credit schemes especially for priorityprojects, including implementation of required surveys.

(d) Monitor and analyze the growth of credits to smallenterprises/entrepreneurs.

(e) Implement and administer liquidity credits required bythe handling banks.

(f) Deal with matters related to credit insurance.

(g) Study and evaluate applications for and administer extension ofliquidity credits for KIK/KMKP and for creditsbased on feasibility, light collateral and light self-financefrom the customers, as submitted by the handling banks in thespecial capital district of Greater Jakarta, and in Serang,Pandeglang, Lebak, Tangerang, Bogor, Karawang and BekasiRegencies.

12. As for the section for credit or Section for Small Credit at thebranch offices involved in the extension of credit to small enterprises/entrepreneurs, especially KIK/KMKP and credit based on feasibility, lightcollateral and light customer self-finance, the tasks are as follows:

(a) Monitor implementation and make suggestions to the headoffice concerning credit stipulations for small enterprise/entrepreneurs.

(b) Monitor and resolve problems which arise in relation tothe extension of credit to small enterprise/entrepreneurs.

(c) Study, make proposals and arrange the implementation ofcredit schemes especially for the purpose of priority projects,including implementation of required surveys.

(d) Monitor and analyze the growth of credit to small enterprises/entrepreneurs.

(e) Implement and administer liquidity credits required by the handlingbanks.

13. In the above context, correspondence from the branch officesmentioned to the head office will be carried out as follows:

-155 - ANNEX 15Page 6 of 6

- Correspondence concerning the Small Enterprise DevelopmentProject is addressed to the Desk for Small Enterprise Developmentwith copy to the Desk for Small Credit.

- Correspondence concerning implementation of KIK/KMKP andfeasibility credit is addressed to the desk for Small Creditwith copy to the Desk for Small Enterprise Development.

AEP Projects DepartmentApril 27, 1981

- 156 - ANNEX 16

INDONESIA

SECOND SMALL ENTERPRISE DEVELOPMENT PROJECT

Statements of Expenditures

1. As in SEDP I, statements of expenditures would form the basisfor disbursing the IBRD loan proceeds under SEDP II. The Desk for SmallEnterprise Development at BI would prepare the statements and disburse-ments would be made by the Bank covering 20% of amounts disbursed by BIto handling banks for eligible KIK lending under the project.

2. Loan-by-loan documentation on which statements would be basedconsist of, inter alia, documents indicating individual handling banks'KIK loan approvals by branches, disbursements, official invoices, creditagreements with subborrowers (Surat Perjanjian Kredit or SPK) and otherrelated documents showing that equivalent amounts had been disbursed tosubborrowers.

3. Documents mentioned in para. 2 above would be prepared andmaintained at the concerned branches of handling banks and would be madeavailable for review by the Bank.

AEP Projects DepartmentMay 5, 1981

- 157 - CHART NO. I

INDONESIABANK INDONESIA CREDIT DEPARTMENT

DESK FOR SMALL CREDITSORGANIZATIONAL CHART

T.

Credit Analysis | N on-AgriculItu ral Agricultu ral R DBS-KlI KN/KeMtKi P Liquidity Specialand Development, rdt'asl Credi, 'Massal and Insurance Cei rjc

Section Section Section Section for OKI Section

j Cooperatives l l Trade and l | Tobacco National Applications SmallholderMini Credit Markets Products Private from BR I, Export

Mini Credit Markets Products ~~~Banks BNI 46, BBD Commodity

Statistical Date Land Regional Applications RuraiTransport ~~Agro-industries Development from BEll.Crdi| An alysis q Transport _ AgrBanks BDN, Bapindo Project

Data ~~~Motor Boats Agricultural PT AskrindoBugtLn

SEDP, EEC 'Trawl Poultry andComrilSealBnProject Fishing ~~~Small Animal BomanBrachealSSpecialatC ank

LivestockBakBaceScatrt

Construction PUTP/PUSPMaterials and I PUTB 'Kelayakan'

Other Products Livestock Creditl I l | ~~~~~~Projects J I

IrFood, Textile, and Leather Transmigration

Products

Metal and SugarcaneLl Chemical P Sgrojcane

Products l 1 Poet

AEP Projects DepartmentFebruary 23, 1981 World Bank- 22342

- 158 -CHART Nc. 2

INDONESIABANK INDONESIA CREDIT DEPARTMENT

DESK FOR THE DEVELOPMENT OF SMALL BUSINESSORGANIZATIONAL CHART

0eek Che.f

Deeptt Chief DK

1 ooty Chief D.ep. Chief DepuV Chief

n~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~U S i. . .

Coordi nati on Adm i nistration Coord in ation Coordi natiogn Adm i nitration Adtni n ietrati on Coord ination Pla nn ing Coo rdi nati on Processing5) 2) 131 151 171 t2Sf 151 t (3) 14)

AEP Prolont- DepotmentFnbroar 2. 1931 WPodd Bank - 22344

- 159 -

CHART NO. 3

INDONESIABANK INDONESIA REGIONAL BRANCH (CENTRAL JAVA)

ORGANIZATIONAL CHART

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- 160 -

INDONESIABANK INDONESIA ORGANIZATIONAL CHART ARN.4

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