.Docuient of The World Bank.' FOR OFFICIAL USE ONLY 1,1 32V?. 1 Reprt RNo. 8644-iND STAFF, APPRAISAL REPORT ZNDONESIA - SE,COND BRI IMPEDES S4ALL CREDIT PROJECT July 10, 1990 Industry and Energy Operations Division - Cotntry Department V Asia Region . is do_etl has a esotd dubufte ad may be usd by recienonly in th pdoa of thek ofticW dute. Its contents may not otherw be disdosed without Word Bak authoizon. -=- CURRENCY EQUIVALENT Currency unit = Indonesian rupiah (as of May 1, 1990) US$1.00 Rp 1,830 Rp 1.0 billion - US$0.546 million FISCAL YEAR Government of Indonesia - April 1 - March 31 Bank Rakyat Indonesia - January 1 - December 31 PRINCIPAL ABBREVIATIONS AND ACRONYMS USED BAPINDO - Bank Pembangunan Indonesia (Development Bank of Indonesia) BI - Bank Indonesia BKK - Badan Kredit Kecamatan (Rural Credit Institutions) BPKP - Agency for Financial and Development Supervision BRI - -Bank Rakyat Indonesia CP&F - Credit Processes and Procedures DMB - Deposit Money Bank GDP - Gross Domestic Product GNP - Gross National Product GOI - Government of Indonesia JSE - Jakarta Stock exchange IMP - International Monetary Fund -- IPTW - Prompt.Repayment Incentive (KIK - Kredit Investasi Kecil (Small Investment Credit Ptogram) MKPm - Kredit Modal Kerja Permanen (Small Permanent Working Capital Program) IUPEDES - Kredit Umum Fedesan (General Village Ciredit Program) LPPI - Indonesia Bafiking Development Institute MOP - Ministry of Finance NES - Nucleus Estate Smallholder Projects PDFCI - Private Development Finance Company of Indonesia PIP - Performance Improvement Program PPAR - Project Performance Audit Report PT ASKRINDO - PT Asuransi Kredit Indonesia (Credit Insurance Company of 4 . Indonesia) SBI - Sertifikat Bank Indonesia SBPU - Surat Berharga Pasar Uang SCB - State-Owned,Commercial Bank SEDP Small Enterprise Development Project SIMPEDES - Simpanan Pedesan (Village Sayings Program) TABANAS - Tabungan Nasional (Small Saving Program) UBM - Untt Desa Business Manager UDO - Unit Desa Qfficer ) USAID - United States Agency for International Development X FOR OFFICIUL USE ONLV INDONESIA SECOND BRIIKUPEDES SMALL CREDIT PROJECT Loan and Project Summary Borrowers Republic of Indonesia Beneficiaryt Bank Rakyat Indonesia (BRI) Amounts $125 million equivalent Termss Twenty years, including five years of grace, at the Bank's standard variable interest rate, Onlending Terms: The proceeds of the loan would be onlent to BRI for twenty years, including a grace period of five years, at a variable interest rate pegged to Bank Indonesia's (BI) three-month domestic money market certificate (Sertifikat Bank Indonesia--SBI). The rate would be adjusted on January 1 and July 1 of each year, based-on the average of SBI three-month maturity quotations during the preceding six months, not to exceed the average of end-of-day quotations of the five state-owned commercial banks' three- month time deposits during the same period. The Government would bear the foreign exchange risk.: On July 1 of each year, at the request of either the Borrower or the Bank, the basis for determining the onlending rate would be reviewed. BRI would also pay commitment fees equal- to those payable by the GOI to the,Bank under the loan. End- users would borrow these funds at rates reflecting prevailing market conditions; effective annual-interest rates currently range from 22.7 to 31.7 percent, based on loan amount. Project Description: The primary objective of the7project is to promote BRI's- ongoing efforts to strengthen and expand its Unit Desa system as a financially viable subbranch network that mobilizes resources and provides nonsubsidized credit (KUPEDES loans) nationwide to creditworthy small borrowers. The project will also support continued development of BRI's institutional capability as related to its Unit Desa system. The project comprises three componentss (a) a credit component for general-purpose KUPEDES financing; (b) _q capital expenditure component for the expansion of BRI's five regional Unit Desa training centers, including computer equipment; and tc) technical assistance for long- This documrent has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may *ot otherwise be disclosed without World Bank authorization. . l v---eriM advisory and shortterm counsulting services le- developing and iproving BRI's Unit Desa and rural banking activities. Risks: The project supports a market rate-based scheme designed to meet the needs of small borrowero and small savers. Under the project, the Unit Desa system would be expanded and continued access to credit by eligible borrowers would be ensured. Substantial socioeconomic benefits can be expected from an expanding KUPEDES program. The major risk--portfolio deterioration--is mitigated by BRI's satisfactory track record to date. Appropriate staff' training and advisory support services will contribute towards the continued implementation of sound lending and supervision procedures that are assoclated with the maintenance of high-quality loan portfolio. Estimated Costes: Local Foreian Total ----- (US$ million)- Total KUPEDES Loan Disbursements 1,827.1 783.0 2,610.1 (Of whichs incremental portfolio growth) (357.3) (153.2) (510.5) Capital Expenditure - Construction of training centers 2.- 2.5 !.9 Computer equipment 0.1 02 _ 0.3_ Policv Development Technical Assistance - 2.3 2.3 Total Project Cost 1,829.6 788.0 2,617.6 Financing Plans IBRD - 125.0 125.0 Incremental Unit Desa saVings mobilization 263.1 33.2 296.3 Other BRI/.Unit Dela system resources 96.7 - 96.7 Repaymentslof previous KUPEDES loans 1,469.8 629.8 2,099.6 Total Financing 1,829.6 788.0 2,617.6 Estimated Disbur_ements Sank FY 1991 1992 1993 1994 …-------- (US$ million) ---------- Annuall 32.3 61.1 30.8 0.8 Cumulative 32.3 .93.4 124.2 125.0 Rate of Returns Not applicable.. - iti - INDONESIA SECOND BRIIKUPEDES SMALL CREDIT PROJECT Table of Contents Pama No. I. SECTORAL ASPECTS . .......... ............... I...... 1 A. The Financial Sector ... .. ..... .. *9 * * * * * ........ 1 Background .......... ****#**# 1 The Reform Program ........................* * a * *............. 1 Future Agenda and Priorities ........................... 3 B. Characteristics of Small and Family Enterprises ........ .... 3 C. Financial Services for Small Savers and Borrovers ......... 4 D. Bank Objectives, Strategy and Role in the Pinancial Sector ........ ............................................... 6 U1. EXPERIENCE UNDER PAST WORLD BANK GROUP FINANCIA SECTOR LENDING OPERATIONS ............................... ,.*9* .. 7 III. PRESENT STATUS OF THE BENEFICIARY AND THE KUPEDES PROGRAM .... 8 A. Bank Rakyat Indonesia .. ...................... ... ... 8 B. The BRT Unit Desa System and the KUPEDES Program .......... 9 Background ........ ........ 9........*.. 9 Project Implementation Under Loan 2800-IND ............. 10 Organization ............................... ..*... ....... ...0...... ll Scope and Terms of KUPEDES Lending..................... 13 IUPEDES Lending Operations ................ ........... 15 Characteristics and Impact of KUPEDES Lending .......... 15 Unit Desa Administration and Financial Operations ...... 18 Funding of the Unit Desas and Resource Mobilization .... 18 Financial Position and Performance of the Unit Dsss a... 20 IV. THE PROJECT........ ........................................ 23 A. Project Rationale, Objectives and Content .............. ... 2S3 B. The Credit Component - Operational Projections and Resource Requirements ..............................9 24 C. Capital Expenditure and Technical Assistance Components... 26 D. Project Cost Estimates and Financing Plan ................. 27 This report is based on the findings of an appraisal mission in March 1990. Mission members were Charles Magnus (AS51E-task manager), Kathlien McCollom (ASTDR) and Victor Agius (AS5RS). - iv - Pate No. IV. THE PROJECT (cont'd) E. Features of the Loan ...................................... 29 Lending Arrangements ...................... 29 Loan Administration ............................. 30 F. Project Benefits and Risks ................................ 33 V. AGREEMENTS AND UNDDERITAN1)INGS.. . ...... ........................ 33 TABLES IN TEXT 1.1 Financial Institutions Serving Small Borrowers and Savers in Indonesia ... ..... .*.................... . ..... .4 3.1 Total Resources Available to the Unit Desa System, End-1989... 20 3.2 Indicators of Unit Desas' Financial Performance, 1984-89 ..... 22 4.1 Actual and Projected Total Resources Available to the Unit Desa System, End-1989 and End-1992 ............ ..........*.. 25 4.2 Sensitivity of Projected Total Resources Available to the Unit Desa System to Changes in Growth Rates, End-1992 ..... 26 4.3 Total Project Costs. ...... . ............ .. .... .. 28 4.4 Financing Plan ....................................... 29 4.5 Procurement Method ...................... . . ......... 31 ANNEXES 1. Documents Available in the Project File 2. Bank Rakyat Indonesia - Institutional Aspectsi 3. World Bank Group/ADB Funds to BRI, 1972-89 4. Bank Rakyat Indonesia Unit Desa Policy Statement 5. Bank Rakyat Indonesia Unit Desa Strategy Statement 6. BRI Unit Desa System Table l Summary of Actual KUPEDES Lending Operations, 1984-89 Table 2s Balance Sheets, 1984-89 Table 3: Income Statements, 1984-89 Table 4: Analysis of RUPEDES Loan Portfolio, 1984-89 Table 5: Projected KIPEDES Lending Operations, 1990-92 Table 6: Projected Resource Requirements/Funds Utilization of BRI Unit Desa System, 1990-92 7. Estimated Cost of Capital Expenditure Component 8. Terms of References Long-Term Advisory Positions 9. Estimated Disbursement Schedule CHART 1. BRI Business Unit Desa De,artment MAP IBRD 20514R1 INDONESIA SECOND BRIIKUPEDES SMALL CREDIT PROJECT l. SECTORAL ASPECTS A. The Financial Sector Background 1.1 The financial sector of Indonesia has undergone a major transforma- tion towards a competitive, market-based system since the initiation by the Governrent of Indonesia (GOI) in 1983 of a comprehensive program of policy reforms. These reforms were introduced in stages, in conjunction with real sector reforms, and within the context of an open capital account and a G0o policy of refraining from domestic financing of budget deficits. As a result, the reforms contributed to a strong revival of private sector investment, non- oil export growth, improvements in the efficiency of capital use and faster- than-expected economic growth. 1.2 Until the early 19809, the development of the financial sector in Indonesia was constrained by the imposition of interest rate and credit ceilings. The Government played a large role in the allocation of resources through the liquidity credit system, under which low interest loans to priority sectors were automatically eligible for refinancing with Bank Indonesia (BI), and often with substantial government guarantee. The financial system compriied mainly the banking sector, which was dominated by BI and the five state-owned commercial banks (SCBs),1/ accounting for about 80 percent of the total assets of the deposit money banks. Strict control was kept on the entry of new banks and of the branching of existing institutions. As a result, the growth of financial assets stagnated and the securities market did not develop. The Reform Program 1.3 In June 1983, the GO implemented the first in a series of reforms to improve the efficiency of the financial sector. Interest rates were deregulated and credit ceilings were replaced with a system of reserve money management. These reforms were followed by the introduction of new money market instruments in 1984 and 1985. Additional financial sector reforms were undertaken during October-December 1988. The main objectives of these reforms were: (a) to enhance financial sector efficiency by encouraging competition by eliminating entry barriers; (b) to increase the availability of long-term finance by promoting the development of capital markets; and (c) to improve the stability of the financial system by strengthening prudential regulations. 1/ These are Bank Dagang Negara (BDN), Bank Negara Indonesia (BNI), Bank Rakyat Indonesia (BRI), Bank Ekspor Impor Indonesia (BEII) and Bank Bumi Daya (BBD). All are participating in the Bank's Second Export Development Project (Loan 2979-IND) and the Industrial Restructuring Project (Loan 3040-IND). All except BEII are participating in the Small and Medium Industrial Enterprise Project (Loan 3041-IND). -2 -; Specific reform measures includeds (i) permitting the entry of new banks, including joint ventures with foreign banks; (ii) easing restrictions on establishing new branches; (i1i) allowing banks and nonbank financial institutions (NBFIs) to increase their cap. 1. through share issues; (iv) permitting public enterprises to place p to 50 percent of their deposits with private banks; (v) easing the requirements to become a foreign exchange bank and allowing NBFIs to issue certificate of depositsl and (vi) allowing banks to have subsidiaries that are multiservice financial companies that provide leasing, factoring, consumer finance and venture capital facilities. To spur the development of the domestic short-term money markets, restrictions on interbank borrowing were removed and required reserves reduced to 2 percent of all bank third party liabilities. To encourage mobilization of long-term funds and risk capital, the reformss (a) moved towards equalizing the net returns to savers holding different financial assets; (b) allowed the private sector to operate stock exchanges and established an over-the-counter (OTC) markets and Cc) permitted foreign investors to buy up to 49 percent of the shares in each company listed on the stock exchange. In addition, measures were adopted to enhance prudential regulations by defining loan concentration ratios and by establishing rules to prohibit insider trading on the stock exchanges. These measures were complemented by a program of institutional strengthening of BI to strengthen its supervisory capabilities. 1.4 The reform measures yielded substantial positive results as evidenced bys (i) the increase in the number of new banks and other financial Institutions; (ii) a quadrupling of the gross assets of the finAncial sector, reflected by an increase in the ha:GNP ratio from 21 percent to 33 percent and a more than doubling of private sector financial savings over 1982-89; and (iii) a fifteen-fold increase, albeit from a smaller base, in the issue value of listings on the stock market. 'While all banks showed strong growth, the private banks by far surpassed the SCBs both in relative and absolute terms. The share of the SCBs' total banking sector deposits declined from 67 percent to 59 percent within one year of the reforms. The level of interest rates remained high, but both deposit and lending rates declined in 1989. There was also a substantial lowering of the very high intermediation margin enjoyed by the banks in the past. Meanwhile, the share of subsidized directed credits declined from over 50 percent to less than 30 percent between 1982 and 1989. However, the directed credit program continued to distort and segment the financial market, leading to the misallocation of resources and weakened finaneial discipline. 1.5 The GOI announced another round of policy reforms in January 1990 to eliminate distortions created by the subsidized directed credit programs. The number of programs eligible for refinancing was reduced drastically, and the interest rate moved closer to the market. Insurance, which was compulsory prior to the reform, was made voluntary and premiums would be market-based. At the same time, banks were required to allocate 20 percent of their loan portfolio to small enterprises, defined as those having fixed asset (excluding land) of up to Rp 600 million (US$330,000 equivalent). In order to foster further the development of capital market, the GOI also announced its intention to privatize the Jakarta Stock Exchange. The impact of these reform measures is expected to be increasingly felt in the near-term, as the efficiency of financial intermediation improves further and the distortions caused by the liquidity credits are minimized. Future ARenda and Priorities 1.6 The Indonesian financial sector is now well integrated with the international financial markets. The reform measures have led to a rapid increase In the proportion of private savings intermediated through the financial system. However, the sector remains relatively small in relation to the size of the economy (H2 represents just over 30 percent of GDP compared to 60 percent in Malaysia and Thailand). The sector needs to sustain high but stable growth to enable it to support continued expansion in the real sector. The January 1990 reforms have put in place the last main component for the deregulation of the financial sector. The GOI's priority now is to proceed with a comprehensive program to strengthen financial institutions. To this end, the GOI is currently preparing new legislation covering the banking sector, and insurance and pension plans. The GOI also recognizes that a freer, market-based system requires appropriate supervision. Attention has thus focused on strengthening the prudential control and supervisory apparatus for both the banking sector and the capital market. With IMF assistance, efforts are underway to strengthen BI's supervisory functions. Similarly. with the assistance of consultants, the regulatory body for the capital markets is being strengthened, and efforts are underway to deepen the money markets and to develop a credit information system. Beyond this, the main concern for the healthy development of the sector is to ensure that the SCBs, which, despite their diminished market share, still account for almost 60 percent of the deposit banking sector, develop into efficient and financially autonomous institutions. This is likely to require both portfolio restructuring and equity infusions, as well as follow-up on the institution- building programs that each of these institutions has al-eady initiated on its own. The Bank is discussing with the GOI the possibility of assisting in the areas mentioned above, particularly in restructuring the SCBs, as part of a proposed Financial Sector Restructuring Operation. B. Characteristics of Small and Family Enterprises 1.7 Most small-scale economic activities in Indonesia, particularly in rural areas, are carried out by individuals, or within the family, generally without the use of hired labor. Families usually have several economlc activities, and they shift labor and working capital among these to take advantage of opportunities available. Rather than continuing to expand one particular activity, families often prefer to shift part of their resources into new areas. This reduces the risk of failure. Apart from agricultural production, these activities incluie the processing and marketing of agricultural products, trade, cottage-level industries, and work in private or public construction. 1.8 Ahe most recent data available indicate that the total number of small enterprises, including those engaged in farming, fisheries, forestry and livestock, exceeds 27 million. Most are small and employ an average of fewer than three people, often family members. Over a quarter of the labor force is self-employed. Small and family enterprises probably account for about 75 percent of total employment in Indonesia, with the majority engaged in agricultural and trading activities (often, of agricultural products). Small farms produce the bulk of staple food output and a significant proportion of export crops such as rubber, coffee and pepper. In manufacturing, the -4 _ contribution of small entrepreneurs is greatest in domestic resource-based industries, such as rice milling, furniture and bakery products. Much of the road transport services is carried out by individual private operators. In construction, most projects are also undertaken by small entrepreneurs. Small wholesale and retail traders are essential intermediaries between producers and consumers, financing and holding stocks of raw materials and finished products. A number of surveys also indicate that small traders have been an important source of informal credit in rural areas to farmers who have limited access to formal credit. C. Financial Services for Small Savers and Borrowers 1.9 Despite the rapid expansion of the larger financial institutions' branch networks since the start of the GOl's financial sector reform program in 1983, except for BRI, few have had more than a mint-al presence outside the larger provincial towns. At this level and below, banking services are provided by a wide range of numerous formal and informal small financial institutions. These are presently estimated to exceed 17,000 in number. Most operate at the Kecamatan (subdistrict) or desa (village) level, and are owned by the national, provincial or local governments. Nevertheless, they are generally market-oriented and serve relatively large numbers of clients. On the lending side, their focus is usually on short-term trade-related working capital loans. Table 1.1 below summarizes the formal institutions operating at the subdistrict and village level, TW&Ia1.X:; PMWJAL DVJ1fUM SERV8Wl SML 80R11WOR AM) SA IN DONESA I,atituticn/Progran Omereip Garaphil Foe A1nal Interest ft." Ha-Min Siz ve r Lau- laturt Col later Svng eon eclining balance) t" )ge ir Sd Privote 8J"WS: Priveta, Main In*ao., 20 - JO 8 million * n.e. Ipte frl yOD I01 Provincial cili S ear title to end Dietrict le, real sees IlRSfUnit Oee/ ilRSS _ n t b S - u t.000 a te mEO toal yes Kotes district l2) IS llti t title to land a year or ther t Ibble Sank Peoa, Private Kecamte 40 - USO u to 780,000 up to full limited atarpom (abdi.tri.t) I .illIon 1 year aI"na reetor tvl invntr Copeative. Prowvicial Prewvnctnl Vil te I - 510 , 000 - 60.000 up to r limitd credit b dana So"raunt v1 1 -100,000 1 yer rm OX") O"d Cooperatives OWd b Vii, 8SI ve. by - up o minimal limited Cooptiv Cooper,tiva 2 yer 1.10 By far the most important of these operations is BRI's Unit Desa system which now accounts for over half of the total loans outstanding of the rural financial institutions. The next most important is the more than 200 Bank Pasars (market banks) which account for about 30 percent of the the market. Cooperatives and provincial government-owned institutions each account for about 5 percent. The Bank's Rural Credit Sector Review (Report No. 6917), dated April 29, 1988, details the structure and characteristics of the sector and the various institutions. 1.11 At the lowest level, by loan amount, are the credit activities of the Xoperasi Unit Desas (KUDs), or cooperatives. Their credit programs are usually funded from official sources with little savings mobilization efforts. Loans are to KUD members. Most of the credit programs carried out by the KUDs are conceived at the national level and are imposed on the KUDs. Their past track record has been poor, with arrears of 20 percent and more. Only about 14 percent of the KUDs are classified as well-run and self-sufficient. Over the past four years. the Bank Umum Koperasi Pinjaman (BUKOPIN), with assistance from the Dutch Government and the Rabobank Foundation, has embarked on a pilot program to improve the credit and savings mobilization efforts of the KUDs. Initial results have been encouraging. 1.12 At the next level are the provincial-owned banking networks. The best known and most developed is the Badan Kredit Kecamatan (BRK) in Central Java which was started in 1972. Others include the Kredit Usaha Rakyat Kecil (KURR) in East Java, Lembaga Perkreditan Kecamatan (LPK) in West Java and the Lumbung Pitih Negari in West Sumatra.21 Most of these institut$ons are locally administered and financially autonomous. The main characteristics of BKK-type credit operations ares little paperwork, no collateral and reliance on local social pressure for repayment; a post system, or mobile service (usually by motorcycle) operating at village markets, which compensates for the limited mobility of most villagers; and the willingness of borrowers to pay the high interest rates necessary to cover the costs of such a program. BKK loans are very small and finance mostly market traders. These institutions have been successful in keeping arrears low (about 5 percent of outstanding loans) and enabling them to operate profitably. The BKKs' funding comes from the initial capital provided by the provincial authorities, mandatory savings paid in by borrowers as part of their loan agreement, and from annual net revenues. Recently, some of these institutions have started to provide savings facilities on a pilot basis. The BPD (Bank Pembangunan Daerah--Regional Developmzw.,Banka) have at times provided technical supervision to sawt-ThTe BKKs, particularly in the areas of bookkeeping, reporting ajwtEi and personnel policies. 1.13 There are now over 200 Bank Pasars (Market Banks), of which more than half are privately owned, mostly by commercial banks. The others belong to either government or cooperatives. Bank Pasars are generally located in a province's main city and conduct business in the city and in the markets nearby. Bank Pasars tend to specialize in short-term loans to small traders, for which they charge about 3.5 percent per month. Borrowers are normally required to hold compensating balances of at least 5 percent in noninterest- bearing deposit accounts (raising the effective annual interest rate to about 44 percent). They also require collateral in the form of inventory, fixed assets or durable goods with a value of 150 percent of the amount of the loan. 1.14 The BRI Unit Desa network is the single most important nationwide banking system throughout Indonesia. It comprises some 2,850 Unit Desas 21 Central Java has about 500 subdistrict level institutions (the BRKS) with about 3,060 village posts. East Java has about 1,600 KURUs and West Java about 200 LPKs. Best Sumatra has about 150 active LPNs. Bali has abobt 50 similar institutions. -6- (subdistrict or village-based subbranches) and 835 posts. This networtk bridges the gap between the provincial-owned banking institutions and the large, usually city-based, private banks and SCB branches. The development of the Unit Dess system over the past six years has impressively demonstrated the large potential for small savings mobilization and for introducing small savers to the formal bankin8 system. Prospects for further growth in this area, and for developing other banking services, e.g., cash transfers and new savings instruments, remain significant. On the lending size, the KUPEDES loan program has developed into the main source of financing for small borrowers at onlending rates which are not subsidized, permit full cost recovery, and yield BRI a profit. As of end-1989, KUPEDES loans outstanding numbered 1.6 million and amounted to Rp 845.6 billion (about $460 million equivalent). Loan collection experience has been very good. A recent impact study undertaken by BRI (financed by USAID) shows that KUPEDES has had a significant impact in poverty alleviation and in facilitating the access of women to credit. D. Bank Obiectives, Strategy sand Role in the Financial Sector 1.15 The Bank fully supports the GOI's objectives and its priotiti%Žs in the further development and efficient growth of the financial cector. Over the last several years, the Bank has been involved in policy dialogue with the GOI through sector and economic reports, informal policy notes and discussion on specific issues. The Bank has also supported the 6OT's reform initiatives through adjustment loans. In the past, the Bank's involvement in the financial sector focused primarily on supporting the development of institutions and the provision of lines of credit to redress market failures either in the availability of long-term credit or in the access to such credit for "targeted, groups of borrowers. In light of the mott recent developments in Indonesia's financial sector (paras. 1.3-1.5), priority will now be accorded to: (i) reducing further and/or eliminating the residue 104n market segmentations (ii) remedying infrastructural inadequacies for formal finance; (iii) strengthening the SCBs in order for them to compete in the new financial environments and (iv) fostering the further development of capital markets. The Bank is currently discussing with the GOI how it may support most effectively its strategy for addressing the above issues within the context of a proposed Financial Sector Restructuring Operation. It is expected that the targeted approach reflected in the Bank's financial sector lending operations to date will be phased out as the policy environment for resource allocation improves and the financial system becomes increasingly competitive and sophisticated. As a transitional measure, however, the Bank would continue to support efforts, on the basis of demonstrated financial viability and sustainability, to expand and to improve the efficient delivery of credit to groups of borrowers whose access to nonsubsidized credit has been constrained in the past. BRI's Unit Desa system represents such an effort that-warrants continued Bank support. The proposed Second BRI/UPEDES Small Credit Project supports the further development of a nationwide, market-based banking system that not only provides financial servi^es to small borrowers and-savers, but also has achieved substantial socioeconomic benefits (para. 3.19-3.26). II. EXPERIENCE UNDER PAST WORLD BANK GROUP FINANCIAL SECTOR LENDING OPERATIONS 2.1 To date, the Bank Group has approved a total of $1,488.1 million in 16 operations for financing investment through financial intermediaries. The general focus of loans made prior to the onset of the GOI's financial reform program in 1983 reflected the Bank's traditional DFC lending focus on single financial intermediaries with emphasis on institution-building. These projects comprised one credit and five loans to BAPINDO ($367.4 million) and two to the Private Development Finance Company of Indonesia (PDFCI--$25.O million). The Bank Group's participation in the three Small Enterprise Development Projects (SEDPs--$350.7 million) aimed at supporting the development of Indonesia's small-scale enterprises through BI. Success in meeting the project objectives of these operations was mixed. 2.2 The most recent Proiect Performance Audit Report (PPAR) No. 6403, covering the Bank Group's relationship with BAPINDO (Loans 1054-IND, 1437-IND and 1703-IND) over 1979-83, noted that, while BAPINDO had made some progress in terms of institutional development, its achievements fell short of mutual expectations and BAPINDO continued to face substantial problems. The PPAR made a number of recommendations for improvements. Subsequently, during implementation of Loan 2277-IND (BAPINDO V), BAPINDO undertook a comprehensive portfolio review, carried out a reorganization, and strengthened its capital base through an Infusion of equity from the GOI. PPAR No. 3862 on the second PDFCI project (Loan 1363-IND) found that, although Bank loan proceeds were transferred to sound industrial projects, performance towards institutional and policy goals was disappointing, primarily because of the restrictive macro-policy environment prior to the 1983 reforms. 2.3 The three SEDPe (Credit 785-IND, Loan 2011-IND and Loan 2430-IND) were In support of BIIs XIK/JMKP program.31 This program was funded through liquidity credits and provided subsidized loans to end-users. As highlighted in the two Prolect Completion Reports on these lending operations, the SEDPs met their objectives of generating jobs and training bank staff; however, as credit operations they failed to achieve their policy and Institutional development objectives due to several factorss poor borrower selection criteria; subsidized interest rates; insufficient spreads to intermediaries; and overly generous credit insurance. This combination resulted in poor collection rates and high arrears. The major design flaws that were identified as having contributed to the failure of the SEDPs were avoided in setting up BRI's small credit (KUPEDES) scheme. 2.4 Following the 1983 reforms and in light of its previous experience, the Bank made two significant shifts in the mid-1980s in its approach to financial sector lending operations. One, it moved away from subsidized lending; and two, it limited significantly single beneficiary lending, thus enabling end-users to have greater access to the Bank's term resources through a larger number of competing financial intermediaries. Recent projects (i.e., the Export Development Projects--Loans 2702-tID and 2979-IMN for $229.5 31 Iredit Investasi Recil (KIK - small investment credit) and Kredit Modal Kerja Permanen (RhIP - small working capital credit). million, the Industrial Restructuring Project--Loan 3040-IND for $284 million, and the Small and Medium Industrial Enterprise Project--Loan 3041-INM for $100 million) have incorporated an increasing number of participating financial institutions (from three under Loan 2702-IND to 13 under Loan 3041-IND). While specific subsector/entrepreneurial groups continued to benefit from the Bank's lending activities to redress market failures either in the availability of long-term credit or in the access zo such credit for targeted groups of borrowers, all loan proceeds are passed on to the financial intermediaries at variable, market-determined interest rates; these funds, in turn, are onlent to qualifying enterprises at competitive and prevailing market rates as determined by the individual intermediaries. Increasing emphasis on environmental concern have also been incorporated in recent financial intermediation operations. Under Loans 2979-IND, 3040-IND and 3041-IND, the assessment of environmental impact and the identification of appropriate environmental safeguards are included in the subproject review processes provided under these loans. These projects are ongoing and implementation has proceeded satisfactorily. The BRI/KUPEDES Small Credit Project (Loan 2800-IND) had the objective of helping promote the development of a market-based, financially viable, nationwide rural banking network (paras. 3.6 and 3.7). 2.5 To summarize, both the very substantial reforms of the financial system, which will lead increasingly to the allocation of credit according to competitive market signals, and the lessons from past operations, which have demonstrated the ineffectiveness of supporting subsidized, directed credit programs, will guide the Bank's further inv%i'vement in credit operations. Targeted credit and single beneficiary operations will be phased out appropriately, and replaced by the sectoral and system-wide approach now evident in the proposed Financial Sector Restructuring Operation under preparation (paras. 1.6 and 1.15). III. PRESENT STATUS OF TEE BENEFICIARY AND THE KUPEDES PROGRAM A. Bank Rakyat Indonesia 3.1 Bank Rakyat Indonesia (BRI) was founded in 1896 as a small savings bank in central Java. It was later established as a fully state-owned bank under Law No. 21 of December 18, 1968. The statutory mandate established for BRI under the 1968 law required it to: (a) assist the Government in implementing national agricultural policies and rural development programs; (b) undertake commercial banking activities, primarily short- and medium-term lending to farmers, fishermen, small-scale industries and traders; and (c) supervise secondary rural banks in accordance with BI directives. Prior to the financial sector reforms of June 1983, BRI functioned largely as an agent of the Government charged with nationwide administration of a number of liquidity credit programs for the rural and small-scale sectors. For several of these programs, BRI had little or no say in client selection and very limited, if any, credit risk as many program loans were insured or otherwise guaranteed by the Government. Even so, the narrow spreads allowed to BRI under most of the directed programs did not adequately cover its costs and, in combination with repayment guarantees, provided BRI with little incentive to emphasize loan collections, leading to a portfolio characterized by relatively high arrears. As a result of these policies, BRI developed into a large, -9- relatively bureaucratic institution reliant on BI funding, operating at high costs and realizing little profit. 3.2 Impact of the June 1983 Reforms. The introduction of the June 1983 reforms (para. 1.3) coincided with the appointment of a new (and current) President-Director for BRI, who quickly recognized that BRI would no longer be able to survive solely as an administrative agent of the government and would need to develop into a profitable and effective financial intermediary. Thus, BRlI's management put priority on defining a strategy for developing into a broad-based, sound and commercially viable bank. The strategy called for: (a) diversification of income generating activities to ensure BRI's short-term financial viability; (b) a comprehensive review of its organization and procedures to improve internal efficiency and productivity; and (c) a product profitability analysis to determine which activities to pursue, modify or drop so as to maximize profitability. To achieve the needed transformation, BRI sought outside technical assistance. In consultation with the Bank and with funding initially provided under Loan 2430-IND and continued under Loan 2800-IND, BRI in 1986 engaged a management consulting firm to provide an experienced banking team to assist it in focusing on the main institutional issues facing it and in recommending appropriate institutional, operational and marketing changes (including an action program for implementing these recommendations). This program was planned and implemented under the direct supervision of BRI's President and Board of Managing Directors. 3.3 BRI's institutional strengthening efforts have been encouraging. Its management has taken the initiative to proceed with a number of far-reaching actions designed to improve its financial position and performance in an increasingly competitive financial sector. Annex 2 provides a more detailed discussion of these institutional efforts as well as an overview of BRI's Ci) organizational structure, (ii) loan portfolio, and (iii) financial condition and performance. 3.4 Project Aid to BRI. Since 1972, BRI has participated extensively in numerous projects funded by bilateral and multilateral agencies. As shown in Annex 3, IDA (five credits) and IBRD (eight loans) credit lines, including technical assistance, totaling $284.3 million equivalent have been made available directly to BRI since 1972. ADB (through nine loans) has extended another $122.5 million equivalent of such funding. As of December 31, 1989, the outstanding balances of IDAIIBRD and ADB funds were Rp 304.9 billion and Rp 55.4 billion, respectively. BRI was also a participating bank in the SEDPs (KIKIKMKP programs), and is an executing bank for the Bank's Nucleus Estates and Smallholders and tree-crop projects. BRI's performance as an implementing agency in ongoing Bank projects is satisfactory. B. The BRI Unit Desa System and the KUPEDES Program Background 3.5 Following the June 1983 liberalization measures, BRI was encouraged by the GOI to develop its Kredit Umum Pedesan (KUPEDES) scheme. Today, this program makes available to creditworthy small borrowers, primarily in rural areas, loans for directly productive activities (e.g., agriculture, trading - 10 - and cottage industry) at market-determined interest rates. It operates exclusively through a subdistrict-based Unit Desa (village subbranch) system, which was established by the GOI in 1970 and originally administered by SRI to provide credit related to the GOI's rice crop intensification (BIMAS) program.41 BIGOI bore up to 75 percent of the credit risk on these BINAS loans and provided an administrative subsidy to BRI to cover Unit Desa operating expenses. In 1983, the 001 recognized thst the BIMAS program had outlived its usefulness and it was discontinued. BRI then faced the choice of eithers (i) abandoning the Unit Desa system (comprising some 3,500 offices and 14,000 employees), since the operations would no longer be subsidized by the GOI5 or (ii) changing its role and functions in an effort to make it profitable. Based on the fact that ongoing Kredit Mini and Kredit Midi operations 5/ had shown that there was a large loan demand for all kinds of village-based entrepreneurial activities, and that Unit Desa staff had already learned how to administer smill credit programs, BRI opted for the second alternative. As a result, BRI organized the Unit Desa system as an autonomous financial entity within the bank that would be operated as a separate profit center and would no longer participate in administered credit programs. While financial services outside the large urban centers, especially those for small-sized borrowers and savers, are provided by a variety of formal and informal financial intermediaries (paras. 1.10-1.13), BRI's Unit Desa system has become the most important nationwide scheme for both mobilizing savings and serving the credit needs of the rural population. Proiect Implementation Under Loan 2800-IND 3.6 In April 1987, the Bank approved a loan of $101.5 million for the BRIIKUPEDES Small Credit Project (Loan 2800-IND). This first KUPEDES Project allowed the Bank to support an approach, which it had long advocated, that neither promoted nor extended subsidized funds. Major design flaws that were identified as having contributed to the failure of the Bank's SEDPs (para. 2.3) were avoided in setting up the RUPEDES scheme. This project had the specific objectives of% (a) supporting BRI's efforts to develop the Unit Desa system into a financially viable network that would be able to provide credit on a nonsubsidized basis to all creditworthy small borrowers, to mobilize savings and to provide other banking services; (b) encouraging BRI to improve its resource mobilization efforts so that it could eventually fund KUPEDES loans with deposits raised through the Unit Desa system; (c) reducing BRI's reliance on DI liquidity credits, which had been initially provided for the start-up of the KUPEDES program; and (d) improving the overall institutional capability of BRI as well as that of the KUPEDES program. This 4/ The BIMAS program aimed at improving agricultural production and practices through the provision of physical inputs, technical assistance and short-term credit through the Unit Desas at a subsidized interest rate of 12 percent per annum. 5/ Established in 1973 and 1979, respectively, these programs made credit available to small borrowers outside of the BIMAS program, primarily for off-farm economic activities. Under Kredit Mini, the loan ceiling was Rp 200,000; under Rredit Midi, it was Rp 500,000. - 11 - first KUPEDES Project comprised a credit component of $96.7 million and a technical assistance (TA) component of $4.8 million, which was complemented with a TA grant of $10.0 million provided by USAID. 3.7 Implementation of the first KUPEDES project has proceeded very satisfactorily. The project's credit component was fully disbursed within the 27-month period estimated at the time of appraisal; Bank loan proceeds accounted for 9.4 percent of total KUPEDES disbursements and 46 percent of the incremental growth in the KUPEDES portfolio during this period. Of the TA component, $3.5 million has been disbursed and BRI recently submitted to the Bank its proposal for utilizing over the next two years the remaining $1.3 million for research and training activities as outlined under the project. BRI's efforts and success in achieving project objectives have not only generally met original appraisal expectations, but often exceeded them. Implementation of the USAID project has also proceeded satisfactorily and the grant is expected to be fully disbursed in early 1991. With the USAID grant proceeds, (i) a team of long-term consultants was recruited to advise BRI senior management on rural banking policy and training matters, (ii) a team of long-term consultants developed and implemented a computerized accounting program for the Unit Desas, (iii) 600 Unit Desas were equipped with computers, (iv) the first-phase construction of five regional Unit Desa training centers was undertaken, and (v) approximately $2.0 million of Unit Desa training expenses were funded. A formal evaluation of this coma?onent will be done by USAID in July 1990. Organization 3.8 The Read Office. BRI's Board of Managing Directors is the main authority for establishing policy regarding Unit Desa activities. Policy directives (in the form of operational circulars) art communicated from the Board through the regional offices and branches to their respective Unit Desas. BRI's Unit Desa Policy and Unit Desa Strategy Statements (Annexes 4 and 5, respectively) outline the overall goals and operational objectives of the Unit Desa system. These statements were reviewed and agreed with the Bank during appraisal, and the adoption of these statements by BRI's Board of Managing Directors was a condition of loan negotiations. During loan negotiations, it was agreed that neither statement would be amended in a material way without the prior agreement of the Bank. In late 1988, in recognition of the growing importance of the Unit Desas as a major service and profit center within BRI, the Village Unit Development Division, originally created for overall responsibility of Unit Desa operations within the then existing Cooperatives, Farmers and Fishermen Credit Department, was reorganized and upgraded to a full Department known as Business Unit Desa (Chart 1). BRI senior management is assisted on Unit Desa and rural banking- related matters by a team of advisors who report directly to the President Director and coordinate on a day-to-day basis with the Business Unit Desa Department. Funding for the retention of this advisory team, currently financed with USAID grant assistance, is provided under the proposed project (para. 4.5). 3.9 Regional and Branch Offices. While the regional offices oversee the operations of the branches, branches have primary responsibility for the day- to-day supervision of Unit Desa activities. Each branch has at least one Unit - 12 - Desa Business Manager (UBM--one for every four Unit Desas), who routinely visits and monitors Unit Desa operations, cash balances and financial controls; in those branches where there are more than ten Unit Desas, a Unit Desa Officer (UDO) is assigned to oversee the UBMs. As of December 31, 1989, there were 839 UBMs and 127 UDOs. Although the Unit Desa itself collects data and compiles standardized monthly reports, Unit Desa operational and financial data are consolidated and analysis is undertaken at the branch level. Overall, the present information system for Unit Desa operations is adequate. 3.10 The Unit Desa. The standard Unit Desa comprises a manager, a loan officer, a bookkeeper and a cashier. Standardized workload coefficients (based on number of loans, number of savings accounts and average daily cash transactions) have been developed that determine the number of additional loan officers, bookkeepers and cashiers needed in order to operate efficiently a Unit Desa. Once the volume of Unit Desa operations requires 11 staff members, a Unit Desa is split into two. 'Posts", comprising two-person teams, are attached to those Unit Desas where there is significant business activity in outlying areas but insufficient transactions to justify the creation of a fully-staffed Unit Desa. As of end-1989, BRI's Unit Desa system constituted 2,843 Unit Desas and 835 Posts;6/ total employees numbered 13,666: 2,805 managers. 3,323 loan officers, 4,109 bookkeepers and 3,429 cashiers. Due to the tremendous growth in operations during 1989, the Unit Desa system is currently understaffed, with vacancies estimated at around 900; this situation could jeopardize both the continued growth and the quality of Unit Desa operations. To rectify the problem, BRI recently implemented a new system that should ensure, in future, that Unit Desa staff vacancies are promptly filled by qualified staff. Each region identifies its total annual Unit Desa personnel requirements on the basis of 'projected* needs (taking into consideration lending and savings growth prospects, internal promotions and natural attrition, as well as establishing a 5 percent reserve at the branch level to fill temporary vacancies resulting from regular Unit Desa staff being sick, on leave or in training), rather than on current vacancies only. Second, for entry-level cashier and bookkeeping positions, psychological testing will no longer be required; this should produce a larger pool of candidates available for final placement. (A recent survey of trainee candidates showed that 40 percent of those applicants who passed the oral interview and the security clearance test then proceeded to fail the final major recruitment hurdle, the psychological test.) 3.11 Training. Recognizing that its existing training facilities were physically incapable of accommodating the type of training program that was needed for its Unit Desa system, BRI decided in 1986 to establish five training centers exclusively for Unit Desa personnel at Bandung, Padang, Yogyakarta, Surabaya and Ujung Padang. With USAID technical assistance, two of these centers are now operational, another two will become operational around mid-1990 and the remaining one is expected to be finished in early 1991. To date, 52 trainers have been locally recruited and trained by BRI and 61 As of end-December 1989, approximately 7 percent of BRI's Unit Desas are located in urban centers (defined as those cities, including Jakarta, in which BRI's regional headquarters are located) and account for about 9 percent of total Unit Desa savings deposits and 5 percent of the outstanding KUPEDES portfolio. - 13 - its advisory team (another group of 30 trainers will be ready for assignment in aid-1990). Courses, based on vell-prepared curricula, range from four weeks for bookkeepers and cashiers, to 12 weeks for the Unit Desa manager. Shorter courses (two weeks) have also been developed for the UDOs and UBMs. Formal training began in 1988, with priority given to the Unit Desa managers and loan officers. Total staff trained in 1988 were slightly less than 3,000; another 5,200 were trained in 1989. BRI plans to train 7,950 staff in 1990, 8,750 in 1991 and 11,850 in 1992. This program is ambitious, but attainable. Scope and Terms of KUPEDES Lending 3.12 Eligibility. The main criterion for loan approval is the creditworthiness of the borrower. KUPEDES loans are generally intended for directly productive activities, although fixed-income earners can also qualify (less than 5 percent of total loan volume is currently extended to this group). Borrowers are required to provide proof of income sources and/or a certification of their business activities. All loan applications require a cosigner, who is normally the applicant's spouse. 3.13 Collateral. All borrowers must provide collateral sufficient to cover the value of their loans. While land, buildings or any other property may be accepted, most borrowers use land (including house plots). A borrower is classified on the basis of his repayment record, and this establishes the person's limit for subsequent loans. Since the legal system for realizing collateral in the case of loan default is time-consuming and complicated, the documentation of collateral for each loan is more for the purpose of establishing the borrower's ability and serious intent to repay than it is to provide a basis for legal action or an alternative source of loan repayment. 3.14 Repayment Schedule. Repayment schedules for working capital loans range from three to 24 months, with or without grace periods of three to nine months. Single balloon payments for three- to 12-month maturities are also available. Repayment schedules for loans for investment purposes range up to a maximum term of 36 months, including grace periods. 3.15 Loan Size. The minimum size KUPEDES loan is Rp 25,000 ($14 equivalent). In practice, few loans of less than Rp 100,000 ($55 equivalent) have been made. The maximum KUPEDES loan amount was initially set at Rp 1 million. This was raised in April 1986 to Rp 2 million and to Rp 3 million in mid-1988. (On a pilot basis begun in late 1988, it was raised to Rp 5 million--$2,730 equivalent.) This upper limit is generally available only to repeat customers who have promptly and fully repaid previous loans. 3.16 Interest Rates. Unlike the approach reflected in previous official credit programs to support small borrowers, the market-based approach to setting interest rates for KUPEDES loans focuses on establishing rates that will ensure (a) prompt delivery of credit and (b) adequate profitability for the financial intermediary. The underlying assumption is that for small borrowers, access to credit is more important than the interest rates involved. The decision to base KUPEDES interest rates on prevailing market conditions meant that BRI had to: (a) set deposit rates sufficiently high to attract savings; and (b) set lending rates sufficiently high to cover its funding and operating costs, including adequate provisions for loan losses, - 14 - and to permit it to earn a reasonable profit. As a result, BR? set onlending rates of 1.5 percent per month for working capital loans, calculated on the original loan amounts, and 1 percent per month for investment loans, similarly calculated. [At the time, this differential was considered necessary to encourage investment activity. Recent changes in KUPEDES lending parameters, however, recognized the need to rationalize this aspect of KUPEDES interest rates (para. 3.17).] Since onlending rates are stated in terms of interest on the original amount borrowed rather than on the declining balance, the effective annual interest rates were 31.7 percent for working capital loans and 21.5 percent for investment loans.71 While these rates are higher than effective market rates for larger loans (which currently range from 17 to 22 percent), they compare favorably to rates charged by other lenders to smaller borrowers (Table 1.1). In addition to the basic interest rate, there 4s a sprompt repayment incentive (IPTW)" fee of 0.5 percent per month (also calculated on original loan amounts) collected monthly. This is effectively an upfront penalty for failure to pay loan installments on time. It is returned, in full, at the time of final loan payment to borrowers who have paid all installments on time. 3.17 Revised KUPEDES Londinf Parameters. BBl's experience to date indicates that there is room for increasing its XUPEDES op)rations by prudently expanlkng the scope of its coverage, specifically, by more actively soliciting urban borrowers as well as *larger* small borrowers (both rural and urban). During appraisal, the following new loan parameters were agreed with BRI and they became operationally effective on May 1, 1990t (a) an increase in the maximum loan size to Rp 25 million (approximately $13,700 equivalent); (b) a revision of the interest rate structures Ci) on loans of Rp 3 million or less--l.5 percent per month, calculated on a flat rate basis on the original loan principal; and (ii) on loans of more than Rp 3 millioa--l.5 percent per month, calculated on a flat rate basis on the first Rp 3 million of tne original loan principal and 1.0 percent per month, calculated on a flat rate basis on the amount of the original loan principal exceeding Rp 3 million. Working capital and investment loans would carry the same rate. The effective annual interest rate would be 31.7 percent for loans of Rp 3 million and less; for loans of more than Rp 3 million, the effective annual interest rate would range from slightly less than 31.7 percent to 22.7 percent for a maximum loan of Rp 25 million; (c) the IPTW (prompt repayment incentive) fee of 0.5 percent per month, still calculated on a flat rate basis on the original loan principal, 71 For loans (shorter as well as longer than one year) with grace periods, the effective interest rate is kept basically the same as for the standard one-year loan vith no grace period. - 15 - would be refunded to the borrower (on a pro-rata basis) on a semiannual basis if all repayments are made on time as per the original amortization schedule for each respective six-month periods and (d) in instances where the borrower decides to repay his loan before it becomes due, he/she would not be required (as previously) to pay all interest due on the prepaid amount as computed at the time the loan was extended. These changes achieve several objectives. They allow the Unit Desas to seek larger clients while providing competitive rates (economies of scale result in lower processing costs for larger loans, thus permitting lower onlending rates to the end-users). They also enable the Unit Desas to provide financial incentives to their good clients [i.e., items (c) and (d)] without jeopardizing their lending margins. In addition, the revised interest rate structure corrects the previous situation in which not only were investment loans being effectively cross-subsidized, but also Unit Desa staff were declining to extend investment loans because they realized that they were losing income on these loans. IMPEDES Lending Ooerations 3.18 During its six years of operations, the Unit Desas have disbursed about Rp 3.4 trillion in KUPEDES loans (almost $1.9 billion equivalent using the end-1989 official exchange rate); the total number of loans made during this time was 6.4 million (Annex 6, Table 1). Average loan size has increased almost threefold since 1984--from Rp 287,000 to Rp 777,000 in 1989. The number of annual loans made during this same period has increased twofold- -from 0.64 million to 1.38 million. After stabilizing at around 1.1 million loans annually over 1986-88, the number of loans in 1989 increased by 21 percent. Based on annual disbursement and repayment data, the average loan maturity remains around 12 months. Sector-wise, trading continues to account (by Rupiah) for about 60 percent of KUPEDES loans (compared to around 70 percent in 1987 and earlier years). Agriculture accounts for another 26 percent. industrial activities account for only 2 percent and transportationliervices for another 8 percent. General consumption loans, extended to fixed-income (salaried) borrowers only, account for the remaining 4 percent. Geographically, 70 percent of the KUPEDES loan portfolio is concentrated in Java (a decline from 75 percent in 1986). However, this is not unusual' considering that more than 60 percent of Indonesia's population lives on Java and that the level of economic activity there is relatively higher than in the other islands. Characteristics and Impact of KUPEDES Lending 3.19 In mid-1989, BRI undertook a general survey of KUPEDES borrowers to measure the socioeconomic benefits derived from the lending program. While the results of KUPEDES lending have been generally assessed as posit1v,i this 16 _ survey demdnstrates quantitatively the dramatic success of a relatively young program. The major survey findings are summarized in paras. 3.20-3.26 below.8/ 3.20 Profile of KUPEDES Borrowers. The survey results confirm that KUPEDES mainly serves nonagricultural sectors of the rural economy. Loans for small traders, cottage industries and service occupations accounted for 78 percent of total lending in the areas sampled. These activities are characterized by a very rapid turnover of working capital (an average of once every 23 days). Traders often turn over their entire working capital daily. Every time capital is turned over, a profit ranging from 5 percent to 25 percent is earned. For this reason, borrowers who take out working capital loans for nonagricultural activities are relatively unconcerned about the interest rate charged. With regard to agricultural lending activities, KUPEDES loans are used mainly for livestock rather than rice growing due to the existence of the government-sponsored KUT program which supports rice production. The working capital turnover on agricultural loans averages 153 days, but borrowers often opt for monthly repayments, which are paid from income earned on their other economic activities. 3.21 The majority of KUPEDES borrowers come from landless and near landless families. About 48 percent of the borrowing families surveyed own no rice land at all, while 25 percent own micro plots of 2,000 square meters or less. Although many borrowers own no cropland, they usually do own a small house plot which provides the security for the loan; the percentage of loans guaranteed by house plots is 66 percent. Only 3 percent of borrowers sampled have ever had a loan from a private bank and less than 9 percent have previously had a loan from a private bank or government bank/agency. For the majority of borrowers, the BRI Unit Desa office is their first-ever contact with a formal sector credit institution. 3.22 The participation rate of women in the RUPEDES program is high. About 25 percent of borrowers are women. The size of loans given to female borrowers does not vary significantly from the size of loans given to male borrowers. Moreover, about 32 percent of loan funds are utilized by enterprises that are owned and operated by women, reflecting the fact that loans taken out in the husband's name are often shared with the wife. 3.23 Development Impact. It appears that KUPEDES lending has directly contributed to poverty alleviation at the village level. Survey results indicate that RUPEDES lending has both increased employment for hired workers in borrower enterprises and increased the incomes for borrower families who were below the poverty line. Using Bank guidelines, 15 percent of first-time RUPEDES borrowers in 1986 fell below the poverty line; this roughly corresponds to the overall incidence of rural poverty which was established at 16 percent of the rural population in 1987. After an average three years of program participation, however, only 4 percent of KUPEDES borrowers were still below the poverty line. on a national scale, this means that an estimated 186,000 families have moved out of the seriously poor category. 8/ A more detailed discussion of this survey (Briefing Booklet--KUPEDES Development Impact Survey) is available in the Project File. - 17 - 3.24 KUPEDES has had a major impact on profits earned by borrower enterprises. Prior to taking out their first XUPEDES loan, borrower enterprises earned an average of Rp 141,098 (about $75) per month. After an average three years of program participation, this monthly income had grown to Rp 327,595 (about $180); after adjusting for inflation, that is a real increase of 94 percent. The four major reasons why enterprise incomes have increased so substantially aret (a) borrowers with trade enterprises often double or triple the amount of goods bought and sold after getting their KUPEDES loans; (b) borrowers with small industry enterprises often double or triple the amount of goods produced after getting their KUPEDES loans; (c) borrowers who previously obtained trade goods or raw materials on credit from suppliers and paid high interest rates (an average of 5.7 percent per month) can now pay cash; and (d) borrowers who previously experienzed work stoppages du to a lack of working capital can now work continuously year-round. 3.25 KUPEDES lending has also contributed to employment growth. The average borrower surveyed has participated in the program for three years and has had three or more loans. In this time, employment, measured in terms of number of workers per enterprise, has increased an average of 65 percent; if employment is measured by annual labor hours per enterprise, the average increase is 84 percent. In absolute terms, employment has increased for both unpaid family workers and hired workers. Proportionally, however, the share of labor contributed by unpaid family workers has declined by about 7 percent, if measured in terms of number of workers, and by 18 percent, if measured in labor hours. The most dramatic increase in employment has been for piece-rate vorkers, many of whom are women who work in their own homes. These workers allow borrowers to enlarge their labor force without building new work places. 3.26 The standard of living of many KUPEDES borrowers has subsequently improved. Personal consumption has increased with many borrowers reporting that they are now able to purchase new clothing, radios, furniture and motorcycles. Many have made housing repairs, added rooms to their houses or even built new houses. Borrowers who formerly relied on a traditional medical specialist when ill now visit the local health worker or a doctor in town. Women who formerly relied on traditional midwives are now going to maternity clinics. Many families report an increased frequency in the consumption of protein foods such as meat and fish. Many families who had no savings three years ago now have savings in the form of gold jewelry or savings accounts. The average annual amount spent on school fees and related educational expenses by families who have received KUPEDES loans has increased from Rp 171,272 to Rp 338 791 per household, for a real increase of 65 percent. - 18 - Unit Desa Administration and Financial Operations 3.27 In 1984, BRI developed accounting and monitoring systems that permitted the Unit Doses to fund their respective operations and to identify their respective costs and profits. This entailed: (a) reconstruction of each Unit Desa's financial statements; (b) establishment of a mechanism to enable each Unit Desa to fund its loan operations, irrespective of the amount of deposits it could raise; (c) creation of a mechanism to allow the Unit Desa to invest (without incurring a loss) deposits it had mobilized in excess of loan demand; and (d) allocation of overhead costs associated with the branch's supervision of the Unit Desa. To ensure that the system's sustainability is not based on subsidized funds, BRI adopted an internal transfer pricing mechanism so that funds loaned to the Unit Desas are at an interest rate that is no less than the rate paid by the Unit Desas on three-month time deposits; at the same time, Unit Desas with surplus savings can deposit these funds with their branches and receive this same rate (currently 16 percent). This mechanism promotes savings mobilization (deposits are cheaper than borrowed funds), while those Unit Desas whose savings exceed loan demand are not penalized for having successfully mobilized resources. Another distinguishing feature of the Unit Desa system is its incorporation of an annual "bonus" incentive. The staff of each Unit Desa are paid a bonus of up to one month's salary that is based directly on the financial performance of the unit. A Unit Desa Development Fund was also set up under the first KUPEDES Project to which was allocated at least 50 percent of the margin between the cost of Bank loan proceeds to BRI and the onlending rate to the Unit Desas. These funds are used for expenditures in support of the Untt Desas. Funding of the Unit-Desas and Resource Mobilization 3.28 Funds available to the Unit Desas for extending RUPEDES loans come from several sources: (a) Equity. This consists of the proceeds of the Government's grant of Rp 66.7 billion to BRI for the Kredit Mini program which, in 1984, were reallocated for funding KUPEDES loans. BRI distributes this grant among the Unit Desas as 'an equity contribution' of Rp 19 million each; (b) Liquidity Credit from DI. This consists ofs (i) the conversion of Rp 43 billion in liquidity credit originally provided by BI for the purpose of funding the Rredit Midi program; and (ii) an initial Rp 100 billion of liquidiiy credit made available to BRI for KNUPEDES lending. Undor the first KUPEDES Project, it was agreed that BRI would pay a single consolidated rate of 12 percent per annum on these liquidity funds,9/ and that they would be repaid on a quarterly basis 9/ Originally, the interest rate to BRI on the BI liquidity credit was 15 percent, excepting amounts utilized for investment purposes on which the rate would be A percent. Since a working capital/investment blend of 75s25 was assun*d at the time, BI charged BRI an interest rate of 12 percent for the sake of administrative convenience, with an understanding that this rate would be adjusted at a later date. - 19 - over seven years, beginning in the first quarter of 1989. (BRI is current in making the agreed repayments.) This arrangement was reconfirmed at negotiations: (c) Official Loans. Under Loan 2800-IND, World Bank funds of Rp 165.7 billion have been disbursed (to be repaid semi-annually over 15 years, exclusive of a five-year grace period, beginning in January 1993). In 1989, BRI received from the Exim Bank of Japan Rp 50.7 billion for local cost financing associated with the first KUPEDES Project (to be repaid semi-annually over 15 years beginning in September 1991); and (d) Savings Mobilization by the Unit Desas. The Unit Desas provide two major savings instruments: TABANAS and SIMPEDES. Tabungan Nasional (Small Savings Program--TABANAS) is a national savings scheme sponsored by BI and available to depositors in all banks, both state and private. The interest rate is currently 16 percent on the minimum monthly balance (zero percent on balances of less than Rp 250,000). Under TABANAS, withdrawals are restricted to two per month. Simpanan Pedesan (Village Savings Program--SIMPEDES) was introduced by BRI as a Unit Desa savings instrument in 1985. SIMPEDES interest rates, calculated on the basis of minimum monthly balances, are zero percent on balances of less than Rp 25,000, 9 percent on balances from Rp 25,000 to Rp 200,000, and 13.5 percent on balances above Rp 200,000. The saver is permitted unlimited withdrawals; this is considered the key factor behind the success of tbe program. SIMPEDES accounted for 75 percent of total Unit Desa deposits as of end-1989. In addition to the TABANAS and SIMPEDES accounts,10/ Unit Desas offer time deposits with maturities ranging from three months to one year and checking (Giro) accounts, which are held primarily by local government agencies.11/ As of December 31, 1989, total resources available to the Unit Desa system amounted to Rp 1.4 trillion (approximately $765 million equivalent) as shown in Table 3.1 below. 10/ At the end-1989, the Unit Desas held 3.5 million TABANAS accounts (averaging Rp 32,700, or about $18 equivalent) and 2.65 million SIMPEDES accounts (averaging Rp 261,100, or about $143 equivalent). 111 BRI introduced a new savings instrument in December 1989 called SIHASKOT available at both Unit Desas (initially in urban locations only) and branch offices. It is similar to SINPEDES, but provides an interest rate of 14.5 percent on accounts larger than Rp 5.0 million. - 20 - Table 3.1t TOTAL RESOURCES AVAILABLE TO THE UNIT DESA SYSTEK, END-1989 Resource Rp (billion) Z of total Kredit Mini (equity) grant 66.7 4.8 Converted Kredit Midi } BI liquidity credit } 165.4 11.8 IBRD Loan 2800-IND 165.7 11.8 Exim Bank of Japan 50.7 3.6 TABANAS (Unit Desas only) 113.7 8.1 SIMPEDES 694.7 49.6 Deposits and Giro 145.1 10.3 Total 1,402.0 100.0 3.29 Auditing and Internal Control. Due to the sheer number of A.*nit Desas and the staffing constraints currently faced by BRI's Internal Audit Department (para. 11 of Annex 2), BRI has not audited annually each t1 its Unit Desas. In 1989, only 542;(or 19 percent) of BR1's 2,850 Unit Dotas were individually audited. Inasmuch as Unit Desa operations are reflected in the financial position of the branches, however, all Unit Desas are audited, albeit in a very limited fashion. SRI relies primarily on the financial review and supervision of the Unit Desas as performed by the branches and overseen by the regional and headquarters offices (para. 3.9). Thii does not mean that this supervision capability is intended or expected to replace the internal audit function. With the expansion and strengthening of BRI's Internal Audit Department, it is expected that 700 Unit Desas will be audited in 1990, with all Unit Desas being audited beginning in 1992. External auditing at BRI is performed by the Government's Agency for Financial and Development Supervision (BPXP). BPXP's audit teams visit all BRI,regional and branch offices, but they only audit Unit Desas on a sample basis.' Financial Position and Performance of the Unit Desas 3.30 Financial Position. The Unit Desas' financial position since 1984 is presented in Annex 6, Table 2. During'the past six years, the Unit pesa system has registered impressive growth. Between end-1984 and end-1989, total assets increased sevenfold, from Rp 0.18 trillion to Rp 1.29 trillion ($700 million equivalent). The outstanding KUPEDES portfolio has increased from Rp 110.7 million' to Rp 845.6 million ($465 million equivalent), although annual growth rates have fluctuated greatly, e.g., from 25 percent in 1987 and -~ 1988, to 57 percent in 1989, to'78 percent in 1985. During 1984-87, RUPEDES loans accounted for 62 percent to 84 percent of total assets. As of end-1988 and end-1989, however, as a result of the Unit Desas''very quccessfut resource mobilization efforts that produced large net surpluses of loanable funds, these respective ligures declined to 60 percent and 65 percent, respectively. Savings deposits (in particular, SIMPEDES5 have also increased dramatically, from Rp 40.2 billion at end-X984 to Rp 920.6 billion ($509 million equivalent) at end-1989. [At the end-1989, these savings represented 14 percent of BRU's ,- - l .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~' - 21 - total deposits.] Like the KUPEDES portfolio, annual growth rates have fluctuated widely, varying from about 75 percent in 1985 and 1988, to 132 percent :n 1986, to 94 percent in 1989. As of December 31, 1989, those Unit Desas with surplus liquidity showed a total cash position of Rp 452.5 billion, while those with negative liquidity positions showed net "branch borrowings' amounting to Rp 198.4 billion. In aggregate, adjusting for various reserve requirements and working cash margins, the Unit Desas' net liquidity position was Rp 545.5 billion (about $300 million equivalent). 3.31 Financial Performance. After incurring initial start-up losses (wbich were expected) in 1984 and 1985, the Unit Desa system has generated steadily increasing annual net profits (before taxes), totaling Rp 9.8 billion in 1986 and increasing to Rp 36.9 billion ($20.3 million equivalent) in 1989 (Annex 6, Table 3). As shown in Table 3.2 below, these annual profits reflect a reasonable and fair return on the Unit Desas average total assets. The Gait Desas' profitability performauce also demonstrates the system's increasingly important role in contributing to BRI's overall profitability--in 1988 and 1989, the Unit Desas accounted for 30 percent of BRI's total net income (before taxes). The key factors, as reflected in the other financial indicators shown in Table 3.2, that have enabled the Unit Desas to perform profitably includes (i) an adequate lending spread; (ii) the maintenance of a high-quality KUPEDES portfolio (para. 3.32); and (iii) firm control of personnel and administrative expenses. It should be noted that, in 1989, two policy changes resulted in a significant increase (in absolute Rupiah terms) in personnel and administrative expenses: one, all Unit Desa staff were upgraded to full BRI employee status (resulting in higher salary and employee benefits); and two, all training costs for Unit Desa personnel are now expensed directly against the Unit Desa system. Despite these changes, the Unit Desas' profitability remained very satisfactory and the upgrading exercise had the additional benefit of improving staff morale. 3.32 Quality of Portfolio. The quality of the KUPEDES loan portfo.io continues to be good. As of December 31, 1989, only Rp 45.7 billion (or less than 5.5 percent of the outstanding portfolio) were in arrears, with arrears very conservatively defined as any payment of principal overdue by one day or more (Annex 6, Table 4). Total arrears of more than one day beyond final installment due dates totaled Rp 20.7 billion, or 2.5 percent of the outstanding portfolio. Much of the Unit Desas' succes,' in keeping KUPEDES loan arrears low can be attributed to prudent lending and accounting procedures, intensive follow-up by Unit Desa staff of their borrowers, and close supervision and monitoring by the branches (as well as by the headquarter office). Recent steps taken by BRI to ensure adequate and timely recruitment of personnel will help ensure that this quality can be maintained in future (para. 3.10). The Unit Desas have also proved successful in collecting loans previously written off--about 25 percent of them as of end- December 1989. BkI's comprehensive and ongoing training program for the Unit Desa personnel also plays a positive role (para. 3.11). BRI has clearly demonstrated its commitment to ensuring that the experience of high arrearages under previous credit programs for small borrowers is not repeated. However, as under the first KUPEDES Project, to enable the Bank to provide timely guidance in case of unforeseen rapid portfolio deterioration, BRI agreed at negotiations to consult with the Bank and to draw up within three months a time-bound action program, acceptable to the Bank, for dealing with arrears once they reached a level of 8 percent over a continuous six-month period. BRI - 22 _ Table 3.2: INDICATORS OF UNIT DESAS' FINANCIAL PERFORMANCE, 1984-89 1984 1985 1986 1987 1988 1989 Average Total Assets (Rp billion) 89.4 239.6 364.2 469.9 624.1 1,013.7 Average Loan Portfolio la (Rp billion) 69.0 191.7 295.9 388.7 485.5 693.4 Average Borrowings (Rp billion) 62.5 176.2 289.5 382.1 516.1 885.8 As a I of Average Assets (a) Income from lending lb 20.2 20.8 23.6 24.6 23.2 19.3 (b) IPTW forfeited n.a. n-a. n.a. 2.0 2.4 1.9 (c) Other income 5.1j, 3.7Lc 4.1k 3.0 3.4 4.8 (d) Gross income 25.3 24.5 27.7 29.6 29.0 26.0 (e) Financial expenses 4.9 8.2 9.6 10.2 9.8 9.5 (f) Gross spread (d-e) 20.4 16.3 19.1 19.4 19.2 16.5 (g) Salary and personnel expenses id 34.0 13.8 9.3 8.4 7.0 6.0 (h) Administrative and other expenses 5.0 1.9 2.8 2.6 3.0 4.5 Mi) Provision for bad debt 9.4 1.0 3.3 3.6 4.3 2.4 (j) Profitiloss le (28.0) (0.4) 2.7 4.8 4.9 3.6 Lendint Margin (k) Income from lending as Z of average loan portfolio 26.2 25.9 29.0 29.8 29.8 28.3 (1) Financial expenses as 2 of average borrowings 7.0 11.2 12.1 12.6 11.9 10.9 (m) Spread on lending (k-i) 19.2 19.7 16.9 17.2 17.9 17.4 Provision for Bad Debt as I of Outstanding Loan Portfolio 6.6 4.3 5.9 4.9 6.3 4.7 Salary and Personnel Expenses 1d as S of Aver- age Loan Portfolio 44.1 17.3 11.4 10.2 9.0 8.7 /a Before provisions. Ib Income from lending excludes IPTW collected; likewise, IPTW collected (and which is set aside in a reserve) is excluded as an expense in the expense computations below. /c Includes IPTW forfeited. /d Excludes bonuses, which are included in administrative and other expenses. le Before taxes. Unit Desa annual profits (losses) are appropriated by BRI. - 23 - has also retained in its Unit Desa Strategy Statement, the coumultment that maintaining sound portfolio quality will receive management's highest priority and that arrears (of three months or more past final installment due date) of 6 percent or more would be considered unsatisfactory performance.121 Should this level of arrears be reached, BRI management would evaluate the overall program and organization of the Unit Desas with a view to redesigning it so as to ensure the continued financial viability of the Unit Desa system. IV. THE PROJECT A. Project Rationale. Obiectives and Content 4.1 Project Rationale and Objectives. BUI's Unit Des& system represents a program that is totally consistent with the GOt's financial sector policy reforms aimed at efficiently increasing resource mobilization and improving resource allocation. BRI's RUPEDES program provided the Bank (through its first XUPEDES Project) an excellent opportunity to support a small credit scheme, which had been long advocated by the Bank, that did not rely on subsidized funds. To date, BRI's small credit and savers scheme has proven efficient ant profitable (paras. 3.30 and 3.31), and has had significant socioeconomic benefits (paras. 3.19-3.26). It is the only nationwide network that serves a large group of small borrowers and savers whose access to competitive, nonsubsidized credit and savings facilities, in the absence of this program, would be limited. However, with only a six-year operational record, the Unit Desa system is still young. Continued Bank participation (including ongoing supervision assistance) will not only demonstrate the Bank's commitment to this type of program, but will also help ensure its long- term sustainability, particularly as the scope of operations is being expanded. The primary objective of the proposed project is to promote BRI's ongoing efforts to strengthen and expand its Unit Desa system as a financially viable subbranch network that mobilizes resources and provides nonsubsidized credit nationwide to creditworthy small borrowers. The proposed project would also continue support to develop BRI's institutional capability as related to its Unit Desa system. 4.2 Project Content. The proposed project would comprise three components: (i) a credit component for general-purpose financing in all sectors. This component would finance cottage and small-scale enterprises in all sectors, including manufacturing, agriculture, trade and services, and would be committed by the Bank on the basis of the formula described in para. 4.11; (ii) a capital expenditure component for the expansion of BRI's five Unit Desa training centers, including computer equipment [para. 4.5(a)]J and (11i) a technical assistance (TA) component aimed at supporting ongoing efforts to strengthen BRI's institutional capability for improving its Unit Desa and rural banking activities [para. 4.Sb)]. 121 Inclusion of this clause in BRI's Unit Desa Strategy Statement was agreed during negotiations for the first KUPEDES Project. _ 24 - B. The Credit Component - Operational Projections and Resource Requirements 4.3 Projected KUPEDES lending operations for 1990-92 (Annex 6, Table 6) are based on the Unit Desas' past experience and reflect BRI's strategy to reach a larger number of borrowers as well as make larger loans (para. 3.17). During this three-year period, annual disbursements are projected to increase at an average annual rate of about 35 percent (Rp 500 billion per year); the portfolio outstanding would grow at a corresponding rate, from Rp 845.6 billion (at end-1989) to Rp 1.94 trillion. This rate of growth, comparable with that achieved during 1986-89, appears reasonable and sustainable. Emphasis will also continue to be placed on resource mobilization, but the dramatic increases achieved during the last two years are unlikely to be sustained (deposits almost doubled each year--from Rp 288 billion at end-1987 to Rp 493 billion at end-1988 to Rp 953 billion at end-1989). A major uncertainty is the extent to which competition for small savers from other financial intermediaries will materialize. Therefore, a more modest 20 percent average annual growth rate is projected. with total deposits at the Unit Desas increasing from Rp 954 billion at end-1989 to Rp 1.64 trillion at end-1992* 4.4 Based on the above scenario. the KUPEDES portfolio, by end-1992, would exceed total deposits mobilized by the Unit Desas by Rp 300 billion. However, taking into consideration other resources available to the Unit Desa syt-em (para. 3.28) and adjusting for the system's various reserve and working cash requirements, the projected overall resource position of the Unit Desa system shows a net liquidity position (excluding Bank funds under the proposed project) declining from Rp 545 billion at end-1989 to only Rp 45 billion at end-1992. With the inflow of Bank loan funds as projected under the proposed project, the Unit Desas' net liquidity position would amount to Rp 264 billion. Under the proposed project, total Bank funds (including Ln. 2800-IND) as a percentage of total resources available to the Unit Desa system would increase from 11.8 percent at end-1989 to 17.4 percent at end-1992 (see Table 4.1 below). At the same time, total long-term resources, which provide a measure of overall stability to the Unit Desas' resource base, would decline from 32 percent to 26.2 percent of total funds available for KUPEDES lending (due to repayments of Rp 86.2 billion made during this period on outstanding BI liquidity credits and the Exim Bank of Japan loan). Without the proposed Bank loan, long-term funds would comprise only 18.1 percent of-the Unit Desas' resource base. - 25 - Table 4.1s ACTUAL AND PROJECTED TOTAL RESOURCES AVAILABLE TO THE UNIT DESA SYSTEM, END-1989 AND END-1992 Actual end-1989 Proiected end-1992 Rp z Rp z Resource (billion) of total (billion) of total Kredit Mini (equity) grant 66.7 4.8 66.7 3.0 Converted Kredit Midi } BI liquidity credit 1165.4 11.8 89.4 4.0 IBRD Loan 2800-IND 165.7 11.8 165.7 7.5 Exim Bank of Japan 50.7 3.6 40.5 1.8 TABANAS (Unit De8as only) 113.7 8.1 151.3 6.8 SIMPEDES 694.7 49.6 1.247.5 56.1 Deposits and Ciro 145.1 10.3 242.2 10.9 Proposed IBUD loan - - 219.6 9.9 Total 1,402.0 100.0 2,222.9 100.0 KUPEDES loans 845.6 1,937.2 Net system liquidity (without proposed IBRD loan) 545.5 44.9 Net system liquidity (with proposed IBRD loan) 545.5 264.5 However, as summarized in Table 4.2 below, the Unit Desas' resource position as of December 31, 1992, is very sensitive to even modest changes in loan and savings growth assumptions. Either a decrease in the annual savings growth rate of only 5 percent or a 5 percent increase in the annual growth rate of the KUPEDES portfolio would result in significant pet liquidity deficits (of Rp 134.6 billion and Rp 183.6 billion, respectively) without the proposed Bank loan. - 26 - Table 4.2: SENSITIVITY OF PROJECTED TOTAL RESOURCES AVAILABLE TO THE UNIT DESA SYSTEM TO CHANGES IN GROWTH RATES, END-1992 Growth in Growth in annual KUPEDES annual savings SZ portfolio 52 less than expected more than expected Rp S Rp 2 Resource (billion) of total (billion) of total Kredit Mini (equity) grant 66.7 3.3 66.7 3.0 Converted Kredit Midi } BI liquidity credit 89.4 4.4 89.4 4.0 ThBD Loan 2800-IND 165.7 8.2 165.7 7.5 Exim Bank of Japan 40.5 2.0 40.5 1.8 TABARAS (Unit Deass only) 151.3 7.4 151.3 6.8 SINPEDES 1,056.6 52.0 1,247.5 56.1 Deposits and Giro 242.2 11.9 242.2 10.9 Proposed IBRD loan 219.6 10.8 219.6 9.9 Total 2,032.0 100.0 2,222.9 100.0 KuPEDES loans 1,937.2 2,174.0 Net system liquidity (without proposed IBRD loan) (134.6) (183.6) Net system liquidity (with proposed IBRD loan) 85.0 36.0 C. Capital Expenditure and Technical Assistance Components 4.5 The proposed capital expenditure and TA components would provide ongoing support to efforts initiated under the first KUPEDES Project to strengthen the Unit Desa system. (a) Expasion of Unit Desa Training Facilities. The proposed ezpansion will permit BRI to complete the second phase of construction and to consolidate each of its five regional training operations at a single location, thereby eliminating the need ti'. rent outside facilities. Long-term training projections show that these expanded facilities will be fully utilized over the next seven years, while adequately accommodating total Unit Desa training needs. The proposed expansion (Annex 7) provides for an additional nine full classrooms (including the associated dormitory, discussion room and teacher housing facilities for 3S5 students per classroom) and five computer rooms (including computers for training). This expansion will complement the 14 classrooms and ancillary facilities already cbnstructedlunder construction. Estimated total cost of this component is $5.2 - 27 _ milion. Except for Ujung Pandang, no additional land acquisition is required for these expansions. Designs are already completed. Local competitive bidding procedures would be used for awarding the respective construction contractst this is expected to be done during the latter part of 1990/early 1991, with construction completed at all five sites by end-l991. Construction costs are based on specifications used in the first-phase construction and Ministry of Public Works February 1990 unit cost estimates. (b) Technical Assistance. Financing for the long-term advisory team for Unit Desa operation currently provided by USAID will end in early 1991 (para. 3.7). BRI has requested that advisory services continue to be provided, given the limited track record of the program and plans for its expansion. Funds out of the TA component of the proposed project would provide for three full-time (i.e., 36 staff- months each) positions% (i) a Senior Policy Advisory; (ii) a Traiuing Coordinator; and (i.l) an Information and Survey Assistant. These advisors, preferably to be engaged as a team, would continue to report to the President-Director of BRI and coordinate on a day-to- day basis with the Business Unit Desa Department. The terms of reference for these positions (Annex 8) were agreed at negotiations. Funds would also be provided out of this component for 48 person- months of short-term specialists to be engaged, as needed through 1993, for undertaking special activities aimed at improving BRI's Unit Desa and rural banking activities, in particular, for field studies, training development and evaluation, supervision improvement, portfolio management, marketing research, and service and product development. D. Proiect Cost Estimates and Financing Plan 4.6 KUPEDES borrowers and the nature of their credit needs preclude defining total investment costs (including foreign exchange requirements) and preparing a firm financing plan. The size of the proposed project's credit component is based on BRI's projection of total disbursements for BUPEDES loans, assuming no resource constraints, through 1992 (para. 4.3). Total project costs, including contingencies,13/ are estimated at $2,617.6 million and are summarized in Table 4.3 below. The estimated total project cost is exclusive of direct duties and taxes, which are negligible. The foreign 131 Cost estimates are based on February 1990 prices. Physical contingencies of 20 percent have been provided for the expansion of the training centers. Price contingencies, on the capital expenditure and TA components only, have been calculated on the basis of estimated annual Increases in both local and foreign prices of 6 percent during 1990-93; following the usual practice, the credit component does not include any contingencies. -28- exchange' component is estimated at $788.0 million.l4/ Of the project's total -cost, $2,099.6 million would be financed by loan repayments generated by KUPEDES borrowers; the remaining project cost associated with the credit line under the proposed project isiestimated atl$5l0.5 million and represents the incremental growth in the KUPEDES outstanding portfolio. This incremental KUPEDES loan portfolio, and the proposed capital expenditure ($5.2 million) and TA ($2.3 million) components represent that part of estimated total project costs to be financed with the proposed loan. Table 4.3: TOTAL PROJECT COST (S million) Local Foreign Total Estimated Cost Ia Cumulative KUPEDES Credit Component 1,827.1 783.0 2,610.1 Of which: incremental portfolio growth (357.3) (153.2) (510.5) Capital Expenditure Component Unit Desa training centers 1.9 2.0 3.9 Computer equipment 0.1 0.2 0.3 Technical Assistance Component Long-term advisory team (108 staff-months) - 1.2 1.2 Short-term consultants (48 staff-months) - 0.7 0.7 Base Cost 1,829.1 787.1 2,616.2 Physical contingencies 0.4 0.4 0.8 Price contingencies 0.1 ' 0.5 0.6 Total Proiect Cost 1,829.6 788.0 2,617.6 la Exclusive of duties and taxes which are insignificant. lb For th1 period July 1, 1990-September 30, 1992. 4.7 The financing plan for the proposed project is summarized in Table 4.4 below. The credit line under the proposed Bank loan would finance no more than 30 percent of the incremental growth in KUPEDES loans outstanding.7-and would represent slightly less than 5 percent of total KUPEDES loans disbursed 141 Based on previous Bank projects that comprised credit lines, the direct and indirect foreign exchange component of investmeuits financed under these credit lines has been estimated in the range of 50 to 60 percent of total projeci cost. In these projects, a significant part of project costs involved imported equipment anu machinery. Under the - proposed credit line, little if any expenditures are expected to involve direct imports (para. 4.11). Based on indirect foreign exchange demand, the imputed foreign exchange content of KUPEDES investments is estimated at 30 percent. I~~~~~~~~~~~~~~~~~~~~~1 - 29 - during July 1, 1990-September 30, 1992 (comparable figures under the first KUPEDES Project were 46 percent and 9 percent, respectively). The Bank loan would finance 100 percent of the direct foreign exchange costs of $2.3 million required for TA and 52 percent of the estimated foreign exchange costs of $2.7 million for capital expenditure. Table 4.4t FINANCING PLAN ($ million) Local Foreign Total Cumulative KUPEDES Credit Component 1,827.1 783.0 2,610.1 IBRD (for incremental portfolio) - 120.0 120.0 Incremental Unit Desa savings mobi- lization (for incremental portfolio) 263.1 33.2 296.3 Other BRI/Unit Desa system resources (for incremental portfolio) 94.2 - 94.2 Repayments of previous KUPEDES loans 1,469.8 629.8 2,099.6 Capital Expenditure Component 2.5 2.7 5.2 IBRD - 2.7 2.7 BRI 2.5 - 2.5 Technical Assistance Component - 2.3 2.3 IBRD - 2.3 2.3 Total Financing 1,829.6 788.0 2,617.6 E. Features of the Loan Lending ArranRements 4.8 The proposed Bank loan of $125 million would be lent to the Republic of Indonesia for 20 years, including a grace period of five years, at the Bank's standard variable interest rate. These funds would be onlent to BRI (in Rupiah) for the same repayment and grace periods. As a result of recent discussions between the Bank and the GOI regarding the onlending rate in two- step loans, a more transparent mechanism than used in past loans would be adopted under the proposed project for ensuring that the onlending rate for Bank funds reflects the market rate for domestic term funds in Indonesia. The onlending rate to BRI will be at a variable interest rate pegged to Bl's three-month SBI (until the introduction of a six-month certificate in June 1990, this was BI's SBI of longest tenor). This rate would be adjusted on January 1 and July 1 of each year, based on the average of SBI three-month maturity quotations during the preceding six months. While the Government would bear the foreign exchange risk, this formula for establishing the cost of funds from the GOI to BRI includes an implicit premium reflecting market expectations regarding exchange rate changes, since deposit rates in Indonesia are market-determined and capital'-flows are generally unrestriCted. Based on - 30 - 1990 data, this arrangement would result in an onlending rate to BRI of about 14.3 percent per annum for the period July 1 - December 31, 1990,15/ which is positive in real terms. To protect BRI from possibly excessive volatility in the reference rate, the onlending rate vould not exceed the average of end-of- day quotations of the five SCBs' three-month time deposits during the same preceding six-month period. An understanding was reached at negotiations that on July 1 of each year, comuencing July 1, 1991, at the request of either the Borrower or the Bank, the basis for determining the onlending rate from the 00I to BRI would be reviewed with the objective of either ensuring that the three-month SBI rate appropriately reflects the cost of domestic term funds or agreeing on an alternative that does reflect this cost. The GOI would also charge BRI a commitment fee on the undisbursed balance of the loan equal to the commitment fee payable by the GOI to the Bank. The signing of a subsidiary loan agreement, satisfactory to the Bank, between BRI and the GOI is a condition of effectiveness of the proposed loan. 4.9 End-user Terms. The effective annual interest rate to IUPEDES borrowecs would be about 31.7 percent per annum on loans of Rp 3 million and less; for loans between Rp 3 million and Rp 25 million, the effective annualized interest rate would gradually decline from 31.7 percent per annum to 22.7 percent per annum. Implementation of this revised interest rate structure (which, based on current market conditions, it appropriate-- para. 3.17) was a condition of loan negotiations. These rates enable BRI's Unit Desas to cover their costs of operation, including an adequate provision for loan losses, and provide them a reasonable profit. The appropriateness of KUPEDES interest rates (as well as of the interest rates offered on various savings investments) is reviewed by BRI on an ongoing basis in light of both the Unit Desas' operating and financial performance, and in view of changes in market conditions. Modification of the KUPEDES interest rate structure would be done only with the prior agreement of the Bank. It was confirmed during negotiations, that, as under the first KUPEDES project, at least 50 percent of the margin between the cost to BRI of the Bank loan proceeds and the onlending rate to the Unit Desas would be credited to the Unit Desa Development Fund. Loan Administration 4.10 Procurement. Under the RUPEDES program, subloans are very small; competitive bidding procedures would be impractical. Goods and services procured with subloan proceeds would be acquired through normal commercial channels available to the borrowers. Because of the relatively small size and dispersed nature of civil works and goods involved, construction of the training center expansions and acquisition of computer equipment will be procured through local competitive bidding (LCB) procedures in accordance with Government guidelines, acceptable to the Bank. (Foreign suppliers of computer equipment will be allowed to participate if they wish.) Bidding packages over $1.0 million will be subject to the Bank's prior review of procurement documentation. Consultants to be financed under the proposed loan would be 15/ The current rate being paid by BRI under the first KUPEDES Project is 12.21 percent; this rate is adjusted every six months, equal to the average cost of BEI's customer deposits (excluding noninterest-bearing deposits from the GOI or GO0-owned entities). -31- selected In accordance with the Bank's "Guidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency". Terms of reference and the appoint;nett of all consultants financed by the Bank under the. project would be subject to prior Bank approval. The procurement arrangements are summarized in Table 4.5 below. Table 4.5. PROCUREMENT METHOD ($ million) Project component ICB LCB Other N.A. Total cost 1. Credit - - 2,610.1/a - 2,610.1 of whicht incremental portfolio growth 510,5 510.5 (120.0) - (120.0) 2. Capital expenditure (i) Construction of - 4.9 - - 4.9 training centers (2.5) (2.5) (ii) Computer equiprment - 0.3 - - 0.3 (0.2) (0.2) 3. Technical assistance - - 2.3Lb - 2.3 (2.3) (2.3) Total - 5.2 2, 612.4 _ 2,617.6 (2.7) (122.3) (125.0) la Goods and services procured with subloan proceeds would be acquired through normal channels available to the KaPEDES borrowers. lb Following Bank guidelines for the use of consultants. Notes Figures in parentheses indicate amounts to be financed by the Bank. 4.11 Disbursement. Even with the increase in the maximum subloan size to Rp 25 million, it is expected that the vast majority of loans made under KUPEDES during the next few years will continue to be relatively small. There ,is likely to be little, if any, direct foreign exchange expenditures under the proposed credit line. Therefore, the proposed disbursement formula takes into consideration imputed foreign exchange content and the need to maintain appropriate incentives for BRI and the Unit Desas to sustain their resource mobilization efforts. For the credit component, t#e Bank loan disbursements would be on the basis of 5 percent of new KUPEDES loan approvals (i.e., disbursements) during a quarter, provided that the Unit DesasIBRI finance with their own resources at least 70 percent of the incremental growth in the - 32 - XUPEDES .oan portfolio.161 This arrangement is designed so as to encourage the Unit Desas' resource mobilization efforts; at the same time, it does not penalize them if they are successful and exceed this 70 percent criterion. BRI would submit quarterly requests for reimbursement with Statements of Expenditure (SOEs) consisting of supporting documentation on KUPEDES loan disbursements and repayments during the quarter plus the beginning and ending outstanding balances of the KUPEDE3 loan portfolio. For the capital expenditure component, the proposed Bank loan would be disbursed against approved contracts, and would cover: for civil works, 50 pe-cent of total expenditures; and for equipment, 100 percent of foreign expenditures, 100 percent of local expenditures (ex-factory cost) and 60 percent of other local expenditures. Disbursements under the TA component would be 100 percent of consultant costs against standard documentation, except for contracts valued at less than $100,000 which would oe claimed under SOEs. Based on projected KUPEDES lending operations (paras. 4.3-4.4), the credit component is expected to be disbursed in 27 months. The capital expenditure component is expected to be disbursed over a one year period beginning mid-1991; the TA component, by June 30, 1994. Based on the experience of the first TDPEDES Project (para. 3.7), this implementation schedule is realistic and achievable. Therefore, a disbursement period of four years, as assumed for the proposed project is more appropriate than the five-and-a-half years provided by the standard disbursement profile for IDF projects in the Asia Region (Annex 9). The closing date for the loan would thus be June 30, 1994. 4.12 Environmental Impact. There is no evidence that any significant environmental damage is attributed to current KUPEDES-financed activities. However, with the increase in the KUPEDES' loan ceiling, larger entrepreneurial activities, with greater potential for pollution, can be anticipated. BRI has incorporated in its Unit Desa Policy Statement (Annex 4) its commitment to comply with Government environmental standards and regulations. Future impact studies and surveys of Unit Desa operations would identify changes in the composition of subsector lending as well as any growing proportion of potentially polluting subsectors. Should a shift towards such subsectors be observed, appropriate follow-up measures would then be pursued during the course of project supervision. BRI also intends to produce a series of booklets on appropriate investment technologies for distribution to both Unit Desa staff and KUPEDES borrowers. Initially, four investment activities would be covered: (a) small-scale food processing; (b) small-scale livestock; (c) small-scale clay products; and (d) small-scale textile and yarn. One focus of these booklets would be on production methods that could minimize pollution-contributing outputs. 4.13 Auditing and Reporting. BRI's accounts and SOB documentation would be audited by the Government's Agency for Financial and Development Supervision (BPKP), which is acceptable to the Bank. The report of the 16/ Under the first KUPEDES project, disbursements were based on the higher of eithert (a) 10 percent of disbursements of new KUPEDES loan approvals during a quarter, with a ceiling of 65 percent of the total increment in the RUPEDES loan portfolio outstanding during the first year of the project and 60 percent thereafter; or (b) 50 percent of the increment in the total KUPEDES loan portfolio outstanding. -33- external auditor, in English, would be submitted to the Bank annually and no later than nine months after the end of BRI's fiscal year. Audit submissions under the first KUPEDES Project have been satisfactory, although BRI's audited accounts have been two-to-three months late. To help address this problem, BRI would provide to the Bank, copies of itp unaudited accounts (in English) at the same time they are submitted to BPXP, but no later than six months after the close of its fiscal year. The auditing requirements would encompass three areas: BRIT's annual accounts; the SOEs periodically prepared by BRI for reimbursement under the proposed loan, including the quarter-by-quarter disbursements, repayments, and beginning and ending balances of the outstanding KUPEDES loan portfolio during the period of project implemen- tation; and confirmation that reimbursements claimed by BRI are in respect of Unit Desa operations and are consistent with the terms of agreements included in the Loan Agreement with the Bank. These audit arrangements were confirmed at negotiations. BRI would also be required to submit quarterly progress reports, acceptable to the Bank, covering Unit Desa operations, as well as a Project Completion Report within six months following the loan closing date. F. Proiect Benefits 4nd Risks 4.14 Benefits. BRI's Unit Desa experience to date clearly demonstrates that a nonsubsidized, small credit program, with a strong emphasis on borrovet accessibility and savings mobilization, can be efficiently and profitably implemented. At the same time, BRI has also demonstrated convincingly its intention to compete efficiently and profitably in an increasingly deregulated financial sector. Under the proposed project, Unit Desa operations would be expanded and continued access to credit by eligible borrowers would be ensured. In addition, as has also been demonstrated to date (paras. 3.19-3.26), substantial socioeconomic benefits are expected to be derived from this growing program. 4.15 Risks. The major risk is that of deterioration in the KUPEDES loan portfolio. This is mitigated by BRI's satisfactory, albeit relatively short, track record to date, and its demonstrated commitment to making the Unit Desa system a profitable and efficient profit center within BRI. Moreover, sustained emphasis on staff training and strong supervision, complemented with appropriate advisory and consulting services, will contribute towards the continued implementation of sound lending and supervision procedures that are associated with the maintenance of a high-quality loan portfolio. V. AGREEMENTS AND UNDERSTANDINGS 5.1 During negotiations, the following agreements and understandings were reached with BRIs (a) BRI's updated Unit Desa Policy Statement and Unit Desa Strategy Statement, as adopted by BRI's Board of Managing Directors, would not be amended vithout prior agreement of the Bank (para. 3.8); (b) the agreement between BI and BRI concerning the repayment by BRI of liquidity credits outstanding as of March 1, 1987, as agreed under _ 34 - the first XUPEDES project, would not be changed without the Bank'O agreement (para. 3.28); (c) in the event that arrears of one day or more should exceed 8 percent of the portfolio over a six-month period, BRI would furnish the Bank, within three months, information relating to actions taken and its action plan to reduce such arrears (para. 3.32); (d) modification of the interest rate structure for i:'PEDES loans to final borrowers would be done only with the prior agreement of the Bank (para. 4.9); (e) SRI would continue to allocate to the Unit Desa Development Fund at least 50 percent of the margin between the cost to Itself of the Bask loan pro*-eeds and the onlending rate to the Unit Desas (para* 4.9); and (f) the formula for disbursement of Bank proceeds for KIPEDES loans (para. 4.11). 5.2 During negotiations, agreement and understanding were reached with the Government on the lending terms to BRI (para. 4.8). 5.3 The condition of loan effectiveness is the signing of a subsidiary loan agreement, satisfactory to the Bank, between the GOI and BRI (para. 4.8). 5.4 Recommendation. Subject to the above agreements, the project would be saitable for a loan of $125.0 million to the Republic of Indonesia for 20 years, including a grace period of five years, at the Bank's standard 'variable Interest rate. 35 -ANNE 1 INDONESIA SECOND BRIIKUPEDES SMALL CREDIT PROJECT Documents Available in the Proiect File A. Bank Rakyat Indonesia (BRI) A.1 BRI Corporate Plan (1989-93), dated June 26, 1989 A.2 Review of BRI's Recently Implemented CP&P Manual, dated November 16, 1989 A.3 BRI Annual Report 1988 (draft English version) B. The BRI Unit Desa System and KUPEDES B.1 Briefing Booklet - KUPEDES Development Impact Study (December 1989) B.2 Briefing Booklet - KUPEDES Development ImPact Study (final - March 1990) B.3 Unit Desa Projections, 1990-92 (Various scenarios), including sensitivity B.4 Plan for Recruitment of Unit Desa Staff - 1990 (dated May 9, 1990) B.5 Overall Training Position - December 31, 1989 B.6 Unit Desa Staffing Position, by Region, as of December 31, 1989 B.7 KUPEDES Loans Outstanding, mid-1987 through end-1988 (by sector and type of loan) B.8 RUPEDES Loans Outstanding, by no., amount and region, December 31, 1878 and February 28, 1990 3.9 Unit Desa Deposits Outstanding, by type, no., amount and region, December 31, 1990, and February 28, 1990 B.10 Reporting Formats (from the Unit Desas to the Branch) B.l1 Reporting Formats (from the Branch to the Region) o.12 Draft circular outlining revised KUPEDES parameters (effective May 1, 1990) 3-13 BRI Internal Memo res Failure Rates of Trainee Candidates - Bandung 1989 B.14 Effective Interest Rate Schedule for KUPEDES Loans. B.15 Collection of all BRI Circulars (in Bahasa) issued in 1989, related to the Unit Desa System B.16 Collection of all SRI Circulars (in Bahasa) issued in 1990, related to the Unit Desa System C. The Proiect's Capital Expenditure and TA Components C.1 Booklet on Padang Unit Desa Training Center C.2 Training Projections (1980-97): by regional center, staff and classroom C.3 Actual Cost Figures for Padumg and Bandung Centers C.4 Summarized Specifications for Expanding Five Training Centers and Estimated Costs C.5 Computer and Printer Specifications D. Other D.1 BI's SBI rates: January - March 1990, by type and date of quotation. -36- ANNEX 2 Page 1 INDONESIA SECOND BRIIKUPEDES SMALL CREDIT PROJECT Bank Rakyat Indonesia - Institutional Aspects 1. This Annex provides a brief summary of the Performance Improvement Program (PIP) that was initiated by Bank Rakyat Indonesia (BRI) with technical assistance provided under Loans 2430-IND and 2800-IND. In addition, it provides an overview of BRI's (i) organizational structure, (ii) loan portfolio, and (iii) financial condition and performance since 1984. BRI's Performance Improvement Program 2. In July 1986, the consulting firm initiated the Performance Improvement Program (PIP) with BRI. A two-phased approach was formulated to achieve the objective of developing BRI into a more cost effective and profitable organization. Phase I (July-November 1986) was a diagnostic review designed to identify all major potential areas for BRI performance improvement, define and set priorities for improvement, and develop an Implementation plan. Phase II (December 1986-April 1989) was devoted to the creation and implementation of specific performance improvements. The second phase was conducted on a best effort basis, with both parties understanding that actual progress achieved would depend to a large extent on BRI's ability to absorb change and its staff's skill and preparation levels. 3. At the end of Phase I, five areas were identified in which substantial improvements were both needed and feasible in a relatively short (one to two year) time period. These were: (a) Organizations Develop an effective senior management structure with clear assignment of accountability for head office divisions and a model regional office; (b) Audits Improve audit results by strengthening audit compliance and tightening audit procedures; (c) Operations: Improve branch efficiency and effectiveness by developing and implementing a new structure, including bookkeeping and teller systems, in a model branch and preparing a roll-out plan to extend the model across the bank; (d) Manpowers Upgrade staff skills and attitude by developing four core personnel systems, strengthening the training infrastructure, implementing these for credit staff, and launching a bank-wide culture change program; and (e) Credit: Improve overall credit management by building a new credit management organizational structure (branch, regional, head office), improving selected credit procedures, and piloting these cmanges in a segment of the organization. -37 - ANNEX 2 Page 2 Although consultant input was originally scheduled to be completed within two years, a further year and a half of support was necessary to cover the actual introduction of the new organizational structure, systems and procedures into BRI. The results of the PIP are discussed in the paragraphs below. Full implementation of the PIP, of course, continues, as institutional reform is a long-term and ongoing undertaking. BRI's 1989 Corporate Plan 4. BRI's PIP has helped prepare the institution for increased competition and, in 1989, led to the adoption of a new Corporate Plan. The Plan sets BRI's strategic direLtion for the next five years by defining its position in the new market place based upon its expected competitive advantages. The Corporate Plan builds on BRI's position as a premier retail bank in Indonesia by emphasizing the provision of financial and related servines primarily to consumers, small businesses and agricultural segments of the domestic market. It also acknowledges that BRI's proven capability to mobilize private domestic funds from this market will provide resources for lending and commercial banking services to a select corporate clientele. 5. BRI's Plan encompasses five business areas and builds on current institutional reforms underway. The Plan identifies BRI's extensive branch and subbranch network as its key asset and incorporates activities and procedures designed to maximize use of this asset. With regard to business opportunities, BRi plans to pursue aggressive growth in its Unit Desa and consumer/small business activities and more selective, focused development of commercial, corporate and agricultural activities. The percentage breakdown of BRI's 1988 average assets by business activity (including treasury operations), and the redistribution of assets expected by 1993 if BRI successfully implements its Plan, are summarized in Table 1 below. Table 1: PERCENTAGE CHANGE IN DISTRIBUTION OF BRI'S ASSETS Z Distribution of Expected X Distribution of 1988 Average Assets Average Assets by 1993 Unit Desa 5.4 8.2 Consumer/Small Business 33.4 44.5 Commercial 23.8 22.2 Agricultural 15.4 14.0 Corporate 7.5 4.7 Treasury Operations 14.5 6.4 TOTAL 100.0 100.0 6. The significant expansion for Unit Desa and consumer/small business activities implied in the Plan reflects the strong competitive position of BRi in these areas. Based on analysis included in the Corporate Plan, preliminary -38- ANNEX 2 Page 3 data for 1988 indicate that BRI has captured 55 percent of the village-level market for credit (the remainder being provided by pawnshops, paddy banks and village banks) and 99 percent of the market for deposits. BRI is also a forerunner in consumerlsmall business credit with a market share of 40 percent. By comparison, BRI is a very small participant in the commercial and corporate markets with 1988 market shares of 10 percent and 4 percent, respectively. The profitability of these operations has also been minimal. Recognizing these factors, BRI expects that its exposure in comuercial lending will not significantly change over the next five years and that it will probably lose some corporate customers to stronger competitors in the market. Due to its previously mandated exposure to agricultural sector lending, BRI's market share of agricultural credit is commanding (42 percent); the performance of this portfolio, however, in general has been poor due to the very large number of relatively small loans at low net interest margins. In particular, 'channeling' loans (those loans for which BRI acts as administrator for government-funded but noninterest-bearing credit programs), which account for only 14 percent of BRI's total agricultural credits, contribute to 54 percent of overhead expenses for the agricultural portfolio and have a negative return on assets of nearly 25 percent; the remainder of the agricultural portfolio has a return on assets of 1.6 percent. As a result of this performance record, BRI intends to emphasize a consolidation of its existing agricultural portfolio and will place future lending efforts on developing its agribusiness portfolio. Management, Or anization and Staffing 7. ManaRement. BRI's five member Board of Managing Directors is responsible for implementing the regulatory policies set by the Ministry of Finance (MOF) and BI; each director, with the exception of the President- Director, also has a distinct supervisory function for certain activities of the bank. The organization chart for BRI's Head Office is presented in Attachment 1. Each board member is appointed by the President of Indonesia for a five-year renewable term. The three members of the Board of Supervisors are also appointed by the Government for a three-year term; this Board is responsible for ensuring BRI compliance with established banking policies and regulations. As the government role in funding priority programs and allocating credit has diminished with the liberalization of the financial sector, the autonomy of BRI's management in establishing credit policies and procedures has increased. A significant outcome of BRT's PIP was the adoption by BRI's Board in 1988 of a new Credit Policy and new Credit Processes and Procedures (CP&P). The CP&P explicitly recognize the role of BRI's Board of Directors in establishing appropriate policy guidelines rather than focusing on individual lending decisions. The new policy establishes the Credit Policy Committee, which includes the Board of Directors, the four managers of the various business departments, the managers of the Credit Administration and Planning and Research Departments, as well as BRI's Chief Auditor, Treasurer and Legal Counselor. The Committee meets as necessary to discuss changes in credit policy to be proposed to the Board, but regular meetings of the Committee are anticipated in the future. 8. Organization. BRI's current organization comprises its Head Office, 15 regional offices, 315 branches and about 2,850 Unit Desas. A key feature of BRI's PIP was the reorganization of head office and regional activities. It was recognized that BRI's former organization largely reflected its ANNEX 2 Page 4 functions as an agent of the government. The organization of BRI's operations was chiefly according to available credit lines and staff initiative was limited to directing applicants to the appropriate lending mechanism; accountability for lending decisions was diffuse. Important outcomes of the organizational recommendations of the PIP were tot (i) give BRI's organization a "business' focus; (ii) establish greater control over regional operations; and (iii) strengthen the internal audit function. 9. In o-der to strengthen BRI's commercial orientation, it was recognized that staff attitudes needed to change from reactive transaction management according to existing credit lines to proactive customer relationship management. As a first step towards making this significant change, BRI in 1988 reorganized its head office and regional staff along the five business activities discussed in para. 5 above: Unit Desa, small business, commercial, corporate and agriculture. The Unit Desa and small business departments have been placed under the authority of one managing director, while each of the other three managing directors has responsibility for one of the remaining business departments. Moreover, the newly adopted CP&P (para. 3.8) include a number of measures to help staff make better lending decisions (the most important of which is basing lending on cash flow analysis rather than collateral coverage) and to hold staff accountable for their decisions. 10. Prior to the 1988 reorganization, the 15 regional managers reported directly to the President Director. Now, three regional groups have been established under the supervision of the managing directors and new line management positions of Regional Business Managers have been created in the Read Office to help monitor regional operations. The organization of regional operations mirrors that of the Head Office. 11. In the context of the 1988 reorganization, the internal audit function was also strengthened considerably. A separate department, both within the Head Office and the regional offices, was created, headed by the newly appointed Chief Auditor who reports directly to the President-Director. Within the department, a Professional Practices Group focuses on the development of a new Technical Audit Manual to guide the work of all auditors. It must be recognized, however, that auditing standards within the country are still weak and the number of well-qualified auditors is very limited nationwide. The Bank is currently implementing, under Loan 2940-IND, a long- term project with the Government aimed at strengthening the accounting and auditing capacities within Indonesia. BRI accepts the need to better train its own audit staff and has developed three new basic audit training courses that have been delivered already to about 350 staff. 12. Staffing. As of year-end 1989, BRI's staff numbered about 33,000; about 30,000 are permanent personnel and the remainder are monthly/daily wage earners. About 40 percent of BRI's staff is assigned to the Unit Desas. The vast majority of BRI's staff comprises high school graduates. About 1,100 staff members have college degrees and only 14 have masters degrees, although BRI is currently sponsoring another 20 people in their masters degree programs. While BRI accepts that the overall number of staff is sufficient, pockets of over-staffing do exist, particularly at clerical levels, and the quality of current staff may not yet be equal to implementing the significant procedural changes implicit with the retent reorganization and PIP. In -40- ANNEX 2 Page 5 addition, a number of departments are understaffed at the professional level. To deal with these issues, BRI management is considering offering incentives for early retirement for those staff not likely to meet its new institutional requirements (roughly estimated at 1,500). In addition, a significant training program (largely in-house) is underway to upgrade the capabilities of existing staff (para. 14 below). BRI is also actively recruiting staff directly from universities with the objective of bringing on board about 300 new graduates per year for the next ten years. 13. Historically, staff turnover in BRI has been low (in 1987, only 279 employees out of 31,290 left BRI for reasons other than retirement) due largely to strong institutional loyalty and a salary and benefit package competitive with those of the other SCBs. It is unclear, as yet, how increasing competition within the banking sector will effect future turnover, particularly for staff with college and graduate degrees who may be able to coimand better compensation from the private sector. 14. Trainina. Training represents a considerable undertaking for such a large and diverse staff. A substantial in-house training program is administered by BRI's Training Department. As the Department is small (21 authorized positions of which only ten are now filled), it focuses on developing course materials with the support of relevant operational staff and training trainers from within the ranks of BRI staff. Apart from Unit Desa operations (para. 3.11 of the SAR text), training in 1988 was targeted to about 5,600 account and credit officers to help implement the new CP&P; a few crash programs in new operating procedures for auditors, bookkeepers and tellers were also offered. In addition to in-house training, BRI recently concluded a program with Citibank for staff training in retail banking operations and maintains an ongoing relationship with LPPI, the training institution supported by the banking sector in Indonesia, for training related to branch operations and foreign exchange operations. In 1989, about 250 staff benefited from external training courses. BRI's 1989 training budget amounted to about ap 15 billion (about $8.3 million) and will increase to about Rp 25 billion (about $13.9 million) in 1990. Quality of Portfolio 15. As indicated in para. 3.1 of the SAR text, a substantial portion of BRlI's loan portfolio has been extended under the direction and with the financial backing of the Government. For 1989, BRI carried the direct credit risk on only about 40 percent of its loan portfolio; the remainder of the portfolio is 75-100 percent guaranteed by the Government or one of its agencies. Experience to date indicates that the Government has honored its guarantee commitments to BRI. In keeping with banking practice in Indonesia, BRI (as well as the other SCBs) classifies loans with 100 percent guarantees as fully collectible, regardless of current repayment status. For delinquent loans, only those portions of loans not covered by guarantees and those loans for which BRI carries the direct credit risk are adversely classified. As a result, BRI's audit for 1983 shows that 92 percent of its total portfolio is collectible, 4 percent has slight problems, 3 percent represent doubtful accounts, and 1 percent is bad debt. However, for the portion of the portfolio for which BRI bears the credit risk (loans made without guarantees - 41- ANNEX 2 Page 6 plus the unguaranteed portion of directed creditsl/), about 85 percent is classified as collectible. Provisions for possible losses amounted to 3.5 percent of the 1988 loan portfolio. In 1986, BRI experienced a windfall of Rp 118 billion as a result of the September devaluation which was used to charge off doubtful loans and restore the provision for possible loan losses. Collections against previously written-off amounts were healthy in 1987 and 1988 (Rp 19 billion and Rp 14 billion, respectively), and consequently the pressure to write off debt over the last few years has been reduced. 16. Despite the rather encouraging picture that emerges regarding the quality of BRI's portfolio according to local audit criteria, BRI management has recognized the need for a more rigorous portfolio evaluation to help guide future lending activities and launch effective (and financially feasible) collection programs. As a result of the PIP and implementation of new credit procedures, a monthly monitoring system of BRI's total loan portfolio became operational in April 1990. This system is based on account-by-account recording of performance by the responsible account officer starting at the branch level and aggregating through the regional and institution-wide levels. The accuracy of recording is periodically monitored by credit administration and internal audit officers. Accounts are presented according to BRI's five business activities and subdivided by funding source (various liquidity credits, World BanklADB loans, BRI's own resources, etc.). Moreover, objective classification criteria (similar to those employed in the United States) are utilized. Accounts are classified as current or receive one of four adverse classifications: (a) Accounts Requiring Special Mention: There is evidence of weakness in the borrower's financial condition or creditworthiness, although payments of principal and interest are timely. The borrower is subject to an unrealistic repayment program or has inadequate sources of funds. There is lack of adequate collateral, credit information, or documentation to support the loan. If sufficiently severe or advanced, these or other conditions will warrant a worse classification, and therefore early attention, including substantive discussions with borrowers, is required to correct deficiencies. (b) Substandards Normal repayment of principal and interest may be. or has been, jeopardized by severely adverse trends or developments of a financial, managerial, economic or political nature. No loss is foreseen but a protracted work-out is a possibility. Prompt corrective action is therefore required to strengthen BRI's position as a lender, andlor to reduce its exposure, and to assure that adequate remedial measures are taken ',y the borrower. (c) Doubtful: On the basis of information available, full collection of principal appears questionable, and therefore a degree of eventual loss is possible, although the amount or timing of loss is not yet determinable. Full repayment through normal sources appears questionable and positive and vigorous action by BRI officers is required to avert or minimize the loss. 1/ For the purpose of this calculation, the 60 percent of the outstanding portfolio which carries 75-100 percent guarantees has been conservatively estimated to be guaranteed at only 75 percent. -42- AN 2 ! ~~~~~Page 7 (d) Loss (Write-Off)s Outstandings are regarded as uncollectible. Any amount so classified by management, auditors or other regulatory authorities should be promptly written off. Responsible units are expected to continue a vigorous collection effort usually for two years (shorter if it Is established that no further repayment or recovery is possible). Accounts which are classified as current are reviewed quarterly, while those adversely classified must be reviewed and updated each month. Given that BRI's portfolio monitoring system has only recently been introduced, system refinements are to be expected ane modifications will be introduced, as necessary, in light of operating experience. As an outcome of the portfolio monitoring system, BRI intends to establish a unit to be responsible for problem projects. Financial Condition and Performance 17. Financial Condition. BRI's audited financial position for 1984-88 and provisional data for 1989 are summarized in Attachment 2. During 1984-89, BRI's assets grew at an average annual rate of a'out 23 percent, reaching Rp 14.7 trillion by year-end 1989. A significart portion of BRI's increase in assets, particularly over 1987-89, is attribute le to its successful resource mobilization efforts. Demand, time and savinr deposits have all steadily increased over 1984-89, from Rp 1.6 trillion to Rp 6.9 trillion. The increase in deposits has resulted in excess liquidity for BRI which has largely been reflected in increased SBI holdings. With the recently announced retrenchment of BI liquidity credits, however, it is expected that BRI will increasingly fund its lending operations from its deposit base. Adjusting for BI liquidity funding and Government loans, BRI's loan-to-deposit ratio in 1989 was 85 percent. As of year-end 1989, 78 percent of BRI's assets and 80 percent of its liabilities were short-term, for an asset and liabilitylequity structure which is reasonably well matched, albeit increasingly short-ternm as BRI evolves into a more commercially oriented banking institution. 18. As shown in Table 2 below, loans account for about 75 percent of BRI's 1989 total assets. Like the other SCBs, BRI's capitalization level is very low with paid-in capital of only Rp 300 million (authorized in the Law of Establishment of BRI); as of year-end 1989, paid-in capital and reserves amounted to Rp 167.9 billion and retained earnings were Rp 121.3 billion (excluding loan loss provisions of Rp 414.5 billion). BRI has been unable to build up its capital base through profit accumulation as the Government appropriates 45 percent of annual net after tax profits. Given its status as a fully government-owned bank, this low level of capitalization has not been a cause for great concern. However, with the increasing deregulation of the financial sectoF and BRI's attempts at greater commercialization, steps will need to be considered to establish BRI's financial independence so that it can compete on equal terms with other banks. Reforms relating to capital adequacy of the state banking sector as a whole, including policies on the write-down of substandard assets and establishing dividends, are currently under discussion with the GOl (para. 1.6 of the SAR text). -43- ANNEX 2 Page 8 Table 2: SUMM OP I LENDING AND oBR ONG OPERATIONS, 1984-89 (Rp billion) As of December 81 1984 1986 1986 1987 1988 1989 Tote) Asset. 6.182.1 6.8?8.1 SJ42.8 ?390.6 0,419.4 14J2.1 Total Loan Portfolio / 8 952 4 228.0 4 625.8 848.6 7 496.5 10 564.4 5R which: Short-term 21,9W.- J,218 3,581.4 4,4277 C,008W4 7:VM:7 Total Ltsbl I ttles $,i 5 .8 6.607.6 7.4B1.4 10M222.9 14.487.9 0?whichi BS short-term liquidity 2,084.8 1,988.8 1,966.7 2,176.0 2,816.0 8,081.8 eS long-term liquidity 962.7 9n77. 961.8 972.4 1,298.6 1,588.8 EI long-term loans 81.4 88.4 40.8 47.9 51.5 79.6 Subtotal UI 8018.9 2.949.4 2.957.8 8.195., 8.9e1.0 4.699.? Customr deposits (up to ono-yer maturity) 1,559.6 1,876.6 2,664.6 8,871.1 4,888.8 0,644.6 Cust4mer deposit. (of mor than one-year maturity) 10.9 89.6 180.8 148.2 884.0 881.4 Subtotal deposits 1.570.6 1.916.1 2.794.8 8.619.8 4.767.3 0.876.0 Government loans 106.1 104.8 188.9 16.6 812.6 544.6 /a Net of provision for bad debts. 19. Financial Performance. BRI's income statements for the period 1984-89 are summarized in Attachment 3. An overview of BRI's financial performance is presented in Table 3 below. Net profit as a percentage of average total assets has not surpassed the 0.8 percent achieved in 1984, but has steadily improved from 0.5 percent in 1985/86 to 0.7 percent in 1989. The Unit Desas havy significantly increased their contribution to BRI's income, accounting for about one-third of earnings before taxes in 1988 and 1989 (para. 3.31 of the SAR text). BRI's spread on lending has also steadily increased from 5.9 percent in 1984 to 8.2 percent in 1989. -44 ANNEX 2 Page 9 Tnbl8 as ZDICATORS OF 9R1'S FIANCIAL PERFORMANCE, 1984-89 1084 1986 1086 108? 1t88 1080 Averae. Total Asset. (Rp billion) 4,084.7 6,429.1 6,210.0 7,161.7 9,000.0 12,578.8 Avos Loen Portfolio (Rp billion) 8,217.4 4,204.0 4,661.1 6,405.8 6,900.9 9,878.5 Averse. Borrowlngs (Ep billIon) 8,899.0 6,111.8 5,452.7 6,408.9 7,905.0 10,560.6 a X #of Aver. Assets _ Incoi fiiTlondltng 10.0 9.9 10.1 11.5 12.9 12.9 b Othr mnoes 1.2 1.2 2.9 1.8 1.1 1.8 Groes Inco" 11.2 11.2 18.1 12.7 14.0 14.0 Financial oxpense 5.8 5.6 6.8 7.1 8.1 7.6 Gross spread (c-d) 6.9 5.7 8.7 5.8 5.9 6.5 Slary a personnel *xpense 2.6 2.6 2.4 2.8 2.1 1.9 Administrative *xpense 1.2 1.4 1.2 1.2 1.4 1.9 Provision for bad debit 0.7 0.8 2.8 1.2 1.8 1.9 Prolt before tax 1.2 0.8 0.8 1.0 1.1 1.0 ) Not profIt 0.8 0.6 0.5 0.6 0.7 n/a Landl119-ai (k) IiinoIifrim lending as X of Average Loan Portfolio 12.6 12.8 18.6 16.2 16.9 17.1 (1) Financial expenses as X of Average Dorrowing 8 6 6.9 7.2 8.0 9.2 9.0 (m) Spread on Lending (h-§) 5.9 7.0 6.6 7.8 7.7 8.2 ProVIl1on for Dad Debts asX Of Dutnetndine Loan Portfollo 2.7 2.8 8.2 8.1 8.5 8.8 -IDONESUA S#COND BRI/KUPEDES SMALL CREDIT PROJECT Or,aniational Struoturo of BIW Headquarters (As of December 31, 1989) *- I HH H s F r H ~~~~~~~~~~~~- EUH s1 E s E E a -E. F F~~~~~~~~~~~~~~~~I -46- _ INDOISSIA M5300W allzmKUNDBS SMALL CUDST PROJECT Bank Rekvat Indonesia Audited Balance Sheets 1984-89 and Provilioga'.. 1909 As of December 31 1984 1985 1986 1987 1988 1989 ASSETS Current Assets Cash on hand 97.9 155.1 194.4 217.7 213.9 251.6 Due from Bank Indonesia 399.6 442.5 321.2 665.5 1,047.8 974.5 Due from other banks 83.4 43.6 352.0 152.6 179.7 299.1 Notes 29.0 53.4 170.8 42.2 45.2 83.8 Short-term loans 3,062.3 3,304.2 3,688.6 4,569.1 5,207.7 7.834.5 Less. Reserves for bad debts 77.7 87.9 107.2 141.4 199.3 325.8 Net Short-Term Loans 2.984.6 3.216.3 3.581.4 4A427.7 5.008.4 7.508.7 Assets in foreign currency 292.2 362.9 652.4 388.4 849.8 1.735.7 Other current assets 259.4 318.4 340.1 180.8 471.5 669.2 Total Current Assets 4.146.1 4,592.2 3,613.1 6,074.9 2.816.) 11.522.6 Long-Term Assets Long-term loans 1,002.0 1,041.1 1.088.3 1,464.6 2,560.3 3,144.4 Lesst Reserve for bad debts 33.7 34.4 43.9 48.5 69.2 88.7 Net Long-Term Loans 968.3 1,006.7 10944.4 1,41U6.1 2,491.1 3.055.7 Equity participation 3.0 3.2 3.4 3.7 4.0 4.0 Total Long-Term Portfolio 971.3 1.009.9 1.047.8 1.419.8 2.4195.1 3.059.' Net fixed assets 64.7 74.0 81.9 85.8 108.0 144.7 Total Long-Term Assets l.036.0 1,083.9 a.129.7 l.505.6 2,603.1 3.204.4 TOTAL ASSETS 5.182.1 5,676.1 6.742;8 7,580.S 10.419.4 14.727.0 LIA81LITIES AND EqMITY LCurrent Lailities Demand deposits 1.006.4 942.4 i.114.2 1,233.1 1,62016 2,882.0 Tims deposits 364.7 667.6 1,131.6 1,599.5 2,023.4 2.489,9 Savings deposits 188.5 265.5 418.7 538.5 739.3 X,P72.7 Accounts payable 121.9 148.1 142.6 153.7 164.8 255.7 Liquldity credits from St 2,034.8 1,938.3 1,965.7 2,175.0 2,616.0 3,031.8 Due to other banks 33.3 21.5 103.1 27.3 182.2 275.5 Poreign currency liabilities 39.3 80.6 131.1 164.1 573.5 1,504.6 Other currant lliabilities 206.8 557.8 294.1 215.1 261.6 281.8 Total Current 1.iabilities 3.995.7 4.621.8 5,301.3 6,106.3 0,181.4 11,694.0 Long-Term Liabilities B1 liquidity credits 952.7 977.7 951.3 972.1 1,293.5 1,588.3 Loans from 81 31.4 33.1 40.8 47.9 51.5 79.6 Government loasm 106.1 104.3 183.9 156.6 312.5 544.6 Time deposits 10.9 39.6 130.3 148.2 384.0 331.4 Total Long-Term Liabilities 1.101.1 1.155.0 1.306.3 1,32S.1 2.041.5 2.543.9 Paid-up and reserves 54.7 72.0 76.7 105.5 134.0 167.9 Retained earnings la 30.6 27.3 58.5 43.6 62.5 121.3 Total Esuity 85.3 99.3 135.2 149.1 196.5 289.2 TOTAL L!A8ILITIES AND 30gJTY 5,182.1 5,676.1 6.742.8 7,580.5 10.419.4 14.727.1 !a Each year. net profits are appropriated to various reserves and the Government; i.e., retained earnings are not accumulated. . - 47 ~ AN=EX 2 Attacbment 3 INDONESI SECOND BRIIKUPEDES 8& CREDIT PROJECT Bank Rakyat Indonesia Audited Income Statements, 1984-88 and Provisional 1989 (R.p billion) 1984 1985 1986 1987 1988 1989 Income Interest 381.7 507.0 600.0 780.1 1,109.2 1,528.1 Comissions and fees 20.7 32.6 27.9 42.2 S5.5 76.' Foreign exchange transactions 21.0 37.8 38.4 26.4 26.5 63.5 Other operating income 28.0 27.4 25.8 58.4 56.1 71.' Profits from operations outside the above Subtotal operating income 451.4 604.8 809.9 907.1 1,247.3 1.740.: Nonoperating income 0.5 2.0 0.5 5.6 16.8 23.4 Total Income 451.9 606.8 810.4 912.7 1,264.1 1.764.t Exgenses interest charges on borrowings 212.5 299.2 39b.0 509.5 730.6 947.1 Salaries and other personnel expenses 112.0 143.2 149.1 161.2 !189.6 234.1 other operating and miscellaneous expenses 44.0 69.5 61.4 71.0 106.1 2144 Depreciation 5.4 6.0 11.3 12.9 17.6 22.t Provision for bad debts 29.2 43.1 145.1 87.4 119.1 222.; Nonoperating expenses 0.6 1.3 0.1 0.5 0.9 0.O Total Expenses 403.7 562.3 760.0 842.5 1.163.9 1.642. Net income Before Taxes 48.2 44.5 50.4 70.2 100.2 121.! Less: Provision for taxes 17.6 17.2 19.1 24.1 38.8 ha Net Income 30.6 27.3 31.3 46.1 61.4 na -48- -um= .~ ~ ~~~~~~gJ * IMJIO M9mn C Id 1AI Wortd Dank Ocul*AsLian |Develoummt Dnk Fwd to 33 1972-36 Lcon/Credit No./ Year Amont of Outstando a of Proj*ect Ttl- Appro1sad Lean/grant Purpose O ecombe * SS8 C(USS mlillion) (Rp billion) The World Dank Gr-ou IDA (International Dovolooment Association Cr.855-Rmp, Bee Cettl- Dvelipmst 1 8.10 To introduce moden raning tUchnol- 1,1 increase, beed/pattle Produc- Cr.400-Z1D, Snnliholdor end Prtva t 1675 7.60 To robhbi I ltth and develop trn 2,817 Estae TSa Project iadutry In West Jave Cr.480-NDO, Fisheries Credit Project S14 6.60 To accelerate 8orre,rO progts to 2,241 lcreas productlon fro te fttshr- lee resources for both domesticon- -umtion end export to provide Increasd employme portunitico and lneome cr.827-MN, Rural Credit Projet 197 8 0.00 To epend end lmproe suply of Ion 45,24 term credit to emllbolders In , 6- Culture, livestock, fishri related eubsectors Cr.9JS4-D, Smailhelder Rubbwr 10 16.O0 (a) To r,le In... of eaioldor 7,049 Development Projet fatliso (b) To lner_ee tIdomnase tofoln _exthow _ rninb tne rubber (o) To build l teonl fraeork and date bte for the naiSOl rubber pror Subtotal IDA BAN; 1330 tlnternatlonel Bank for soo>n tuloa n h l_ Ln.1858-IER, *h. Urban Development S.76 "a. To provid, basic servicoe aimed at 10,7 Project Improving the bealth and eavirooms e I condition of los-lncom neigh- borhoods Ln.1S9#-IND, Smellbolder Coconut 1260 10.25 To provide cendit to wsellboldere for lO,II? Dev"lopment Project nonferm coconut develoPMI Ln.2702-SKD, toP I Ms6 17.20 To provide credit for fIaenoine 19,0s expert-orlSeted Investments Ln.2778-DO, FtPP 1Y7 3.27 To provide credit for PT DalI for 1,48C I buildng suppoting station (cold storage) In busmere Ln.2800-DND, Kupedr Smell Crdtit 101.30 (a) To support BR efforts to 171, develop tUh Unit Dea" t(ub- branch) systMe (b) To aenurag 33l to lmprov Its resorces obilisation efforts (c) To reduce RI'o rellance on I liquidity credits for the KUPEIlES progra Cd) To lmprov the overall Indtltu- tierFl capablittis of IRI -49- Loan/Credit No./ Year Amount Of Dutetetdii as of Project Tltle Apprnle Loon/ rnt Purpose _eamber n, 198S (USt million) (Rp bilioln) Ln.2979-VND, EPt 11998 80.00 To provide credit for fin nlaing 17,501 export-oriented investments Ln.08 DI, IVP 1939 26.00 To provide credit for finna:ci o Indust rial rosrueUtrirg Ioatnvf In the textl l, engineering, pulp and paper aectore Ln.8041-M, SNIEP 199 20.00 To provide credit for financing small 0 and medium Industrlal Inveetente Subtotl I238 221 E4SU Subtotal World Bank Group 284.26 $04 aDS (Asoin Deloamet Prolect) Ln.444-IND South Kalimantan 1979 15.00 To lncrease Oh numbr of cattl-/ 12,981 Livestock 6elomept Project goea In Soth Kalimantan Province; to supply breding and draft animals to transaigranta and emeiholdere Ln.474-IND, Sumartr Fiherlo 1#O8 4.50 To assist the rural poor, In particu- 2,064 Development Project lar the arteanol fishermen nd fleh farmere Ln.57-10,, Sumatra Livestock 1981 2.80 (a) To Improve the income end nutri- 1,626 Deelomesnut Project tional level of the poorer people in the projeKct area (b) To prowmot herd expansion and improve_nt i.m6a6-IND Second Irian J.ya 1982 0."7 To devwlop coae tl fishermen 0 Fisheries 6 _lopnt Project Ln.577-DID Second Agricultural 1S82 20.55 (a) To str ntrhen and expand the 36 Credit Project operation of KW* to serve farmer (b) To promote participatlon of rural poople In the alnstrem of development, Increeing their income (c) To dletribute bneits ot' deel- opment to a wider se_ment of the rural population Ln.B9S-ND, Brackiewater Aquniulture 1982 2.30 (a) To Increas productbon of shrimp 0 enveopment Project and *itkflih from brackieuemter aquaculture (b) To Improve eooocot_mitc condi- tion ef ema l-scal fatrmre by lnocer ing their lcome" (c) To enerate foreign exchange -arningp from shrimp e"port Ln.697-10 Ebnt Java Agricultural 1988 2.70 To achieve two objectives, via. 17 Credit Project increasing ice and eubeidlery food crop production nd developing BUUDs and KU1Du Lan.706-1ND, Seond KCllasntan 1984 61.80 To procure livestock 15,284 Liveetock Devlopen"t Project Ln.742-ND, FiUP 1988 16.25 To provid, credit for ftishrles In 23,296 Indonesia Subtotal AD3 - 122.47 Total World Bank OroumIADS 406.73 -50 ANN- 4 INDONESIA SECOND 8RIIKUPEDES SMALL CREDIT PROJECT Bank Rakyat Indonesia Unit Desa Policy Statement (Adopted by BRI's Board of Managing Directors on June 8, 1990) BRI regards the provision of a broad range of banking services as essential to promote economic development. BRI's basic objective for the Unit Desas is that they become true financial intermediaries that are able to meet the needs of both rural and urban people for a wide variety of banking services--not only credit, but also savings and other financial services-- while remaining financially viable, able to operate without government or any other subsidy. BRI's management of the Unit Desas will be guided by the following principles: (a) Credit should be available to any creditworthy person or enterprise throughout the country. This credit should not be targeted to particular activities chosen by someone other than the loan applicants. The final decision on loan applications should be made by the bank based on sound banking considerations. Loans made by Unit Desas for purposes other than directly productive activities would not exceed 10 percent of the total KUPEDES portfolio. (b) Interest rates on credit must be sufficient to cover all costs, including the cost of unsubsidized funds operating costs and loan losses, and also provide a profit margin in order that the BRI Unit Desas will remain financially sound and be able to develop their activities. (c) To encourage savings mabilization, the BRI Unit Desas should offer a broad range of savings instruments on which they pay positive real rates of interest structured according to the ease of withdrawal under each instrument. (d) The BR! Unit Desas should introduce other banking services as these are needed by their customers, but should calculate carefully whether their costs in providing these services can be covered. (e) BRI should provide Unit Desa services as close to the bank clients as is financially feasible. This reduces the transaction costs to borrowers and savers and thereby provides them with genuine access to banking services. (f) The BRI Unit Desas will abide by all relevant regulations of the Government concerning environmental impact. In assessing the creditworthiness of a borrower, the Unit Desa staff should consider the environmental impact of his enterprise. Loans should not be given to support enterprises which are destructive of the environment, particularly those which release dangerous chemicals or other polluting waste products to streams and rivers, or those which migh* cause destruction of protected forests. -51- AN 5 Page 1 INDONESIA SECOND BRI/KUPEDES SMALL CREDIT PROJECT Bank Rakyat Indonesia Uhit Desa Strategy Statement (Adopted by BRI's Board of Managing Directors on June 8, 1990) 1. The strategy of BRI In the operation of the Unit Desas focuses on the provision of access to credit, savings, and other banking services at con- venient locations in the villages, towns and cities throughout the country. This access is valuable to the people only if it is long-term, not dependent on uncertain budget allocations for loanable fundq or subsidies. The basic requirement for expanding long term access is that the Unit Desa system as a whole must remain financially viable. Each of the elements of expansion and Improvement of access with financial viability is discussed below. Credit 2. At present the Unit Desas have a single credit instrument, XUPEDE8 (General Rural Credit), which is available for any creditworthy individual or enterprise. RUPEDES is demand driven rather than targeted. The loan appli- cant decides the use for which he needs credit, whether this is for investment or for working capital. Very little effort has been made to urge people to borrow, or even to advertise widely the availability of KUPEDES. 3. BRI Unit Desas will continue to expand credlt as long as there is a demand for credit from applicants who are considered creditworthy, loan repay- ment remains satisfactory, and adequate staff to evaluate and supervise the credit are recruited and trained. In the future, there will be somewhat more emphasis on informing potential borrowers of the availability of KUPEDES and the terms and conditions for borrowing. 4. Special effort will be made to contact two types of entrepreneurs who appear to have high potential as borrowerss village-based suppliers and agents of entrepreneurs who are long- term, reliable BRI Cabang (branch) customers; and owners of small industries located in "industrial center, villages where the Ministry of Industry has concentrated technical assistance, who need investment credit to upgrade productivity and product quality. Punds Mobilization 5. BRI Unit Desas now offer five types of savings instrumentst GIRO (demand deposits), DEPOSITO BERJANZA (time deposits), TABANAS (passbook sav- ings) SIMPEDES (Village Savings Program), and SIMASXOT (Urban Savings Program). The bulk of savings at the Unit Desas are in SIMPEDES which pro- vides positive interest rates, unlimited withdrawals, and a semi-annual - 52 - > ANNEX 5 Page 2, lottery. SIMASKOT is a never savings instrument similar to SIMPEDES which is being offered in Unit Desas and Cabangs in cities and towns. 6. At present, the Unit Desa system as a whole, though not all indivi- dual Units Desas, has mobilized moze savings than is required for lending in KUPEDES. Savings in excess of lending requirements in a particular Unit Desa are kept with the supervising Cabang. In the rural Cabangs as a whole, sav- ings are less than credit. 7. For BRI, a large number of relatively small savings accounts provides a stable source of loanable capital. BRI Units will continue to offer liquid savings instruments at convenient locations throughout the country for mobi- lizing savings from households and small businesses. Location 8. The location of Unit Desas and Pos Pelayana Desas (PPDs--cash offices operating under a Unit Desa and staffed by a two-person team for one to six days a week) is under constant review by the PINCAs (heads of branches). They have authority to open new PPDs or Unit Desas, to close a PPD, or to downgrade a Unit Desa to a PPD. If a PINCA is convinced that it is financially feasible to open a new PPD or Unit, he either reassigns staff or asks the Wilayah (regional office) to recruit additional staff. 9. Because of the origin of the Unit Desas as facilities for handling BI3AS agricultural production credit, areas with large areas of irrigated rice had fairly dense coverage with Unit Desas, whil, areas with very little irri- gated rice were not covered at all. This distribution of facilities did not fit well with the concept of Unit Desas which make KUPEDES loans for all types of productive activity. During the period 1984 through 1986/87, staff and facilities were reallocated to locations closer to the present clientele and Unit Desas with low potential were closed or downgraded to PPD status. This type of reallocation has essentially been completed. 10. Prom 1987 to the present, BRI has been expanding Unit Desa and PPD facilities. This expansion follows two different paths, depending on the previous density of coverage of the area: (a) In the rice growing areas where there was previously reasonably dense coverage, a new PPD under an existing Unit Desa is established at a location more convenient to a significant number of existing borrowers and savers or in a location at which the PINCA believes that there are a sufficient number of potential new borrowfrs or savers. If the business activities of the PPD increase rapidly and approach the size necessary to support a four-person Unit Desa staff, the PPD is upgraded to a Unit Desa. As existing Unit Desas reach an upper limit of 11 employees, including staff for PPDs, they are nor- mally split into two Units to move closer to borrowers and savers, as well as to speed up service by increasing the number of decision- taking managers; and -53- ANNEX S Page 3 (b) In areas where there were previously no Unit Desas, such as tree crop areas or in towns and cities, PINCAs can establish new Unit Debas directly vith the agreement of the PINWIL (head of the regional office). Thus the extension of Unit Desas in terms of total number of locations is an ongoing process based on local conditions, analyzed by the PINCA and his staff. The key problem in expansion is recruitment of adequate staff. Recruitment 11. From 1984 through 1986, as the Unit Desas retrenched, very few new staff were recruited. By the end of 1986, the financial viability of the Unit Desas was clear and the Unit Desa system began to expand. However, it has proved difficult for the recruitment system to meet staff requirements for this expansion. By the end of 1989, there were more vacancies in existing Unit Desas than at the beginning of the year. No staff has been recruited for the authorized 5 percent reserve at Cabang to fill temporary vacancies while Unit Desa staff are sick, on leave, or in training. 12. There are two parts to the problem. First, recruitment in the past has started only after a position has become vacant. This would possibly produce a replacement in about one year. Second, the eligibility require- ments, which were set when there was a surplus rather than a shortage of Unit Desa staff, reject too high a percentage of applicants. 13. For 1990, all PINCAs have estimated requirement of additional staff based on the present number of vacancies, including those for the 5 percent reserve, the estimated increase in business in present Unit Desas, plans for new Unit Desas and PPDs, and an assumed rate of attrition. These estimates will serve as the target for recruitment of Unit Desa staff by the Wilayah during 1990. This system of estimation will be repeated at the beginning of each year, and the budgets of the Cabangs and Unit Desas will be based on the assumption that the recruitment targets will be reached. 14. Some of the eligibility requirements have been revised so that a larger percentage of the applicants will ultimately be recruited. For instance, psychological tests will not be required for entry level jobs of cashier and bookkeeper, but will be retained for promotion to management posi- tions of Mantri (loan officer) and Kaudes (Unit Desa manager). Training 15. Five training centers for Unit Desa staff are in operation, with 780 people in training at any one time. Most of the classes and housing accommo- dation is currently in rented space. The first phase of construction at each of the centers will be completed during 1990 and will provide 14 classrooms with corresponding dormitory and other facilities. A second phase of con- structiQn, to provide an additioital 9 classrooms, 5 computer laboratories and dormitory and other facilities, is planned for 1991. - 54- ANNEX S Page 4 16. Over the next three years, all staff will have had an initial train- ing course of four to seven weeks. Thereafter, new entrants and those promoted to new jobs within the Unit Desa system will take the initial course for their new job, and all staff will have refresher courses at least every two years. Incentives 17. The success of the Unit Desas is dependent of the quality of judge- ment of the staff and the diligence with which they perform their duties. To encourage good performance, the level of salary and other compensation of Unit Desa staff was equalized with that of the Cabang staff in June 1989. In addi- tion, a special incentive system based on profits has been provided since the first year of KUPEDES lending; 10 percent of a Unit Desa's profits are avail- able to be paid as staff incentives (proportional to the basic employee salary). Also, special contests are announced from time to time promoting the mobilization of savings and other operational activities which the senior management of BRI wishes to emphasize. Special awards are given to Unit Desas that win these contests. 18. As a general incentive to the Unit Desas to mobilize savings, BRI has set the internal transfer price, the interest rate charge by the Cabangs for liquidity provided to the Unit Desas, at a level higher than the rate paid for savings. This practice will continue in the future. Monitoring 19. Monitoring and evaluation of Unit Desa performance is extremely important in order to ensure smooth operation and achievement of objectives. This monitoring and evaluation includest (a) A management information system designed to provide contise, critical information on lending, savings, arrears, profitability, numbers of borrowers and savers, and other critical measures affecting the operations of the BRI Unit Desas; (b) A first line of monitoring authority at the branch which is specifi- cally charged in supervising the Unit Desas and correcting any pro- blems found in their operations. In addition, the Cabangs have officers who analyze the reports received from the Unit Desas, check all records at the Unit Desas and spot check records and procedures with clients; (c) A second line of monitoring authority at the regional office which has the basic task of ensuring that the Cabangs have understood and are carrying out their monitoring and supervision responsibilities correctly; and (d) The highest level of monitoring authority at the Head Office, where there is a special Urusan (department) charged with responsibility for consolidating and analyzing reports on Unit Desa activities and keeping the Board of Directors informed of the current situation. This Urusan arranges special surveys when reports indicate problems - 55 ANNEX 5 Page 5 may have arisen which require further field study in order to be more clearly understood and subsequently corrected. Improvement in Efficiency 20. BRI has tested changes in operating systems at the Unit Desas to introduce a teller system and achieve a better balance of workload between the teller and the deskman/bookkeeper, while strengthening the internal cross- checking and security. These changes will be applied in all Unit Desas by September 1990, and will be monitored carefully to see if a change in the standards of cash transaction per employee is warranted. 21. BRI is also paying attention to improving systems of handling receipt of property tax, electricity, and telephone payments and of paying salaries for military, teachers, and owners. A pilot project on tax payments with the Directorate of Property Taxation has resulted in major changes in the tax collection procedures. Similar changes in procedures are under negotiation with the electricity company. 22. BRI now uses a system of internal fees for each office which collects or makes payments from outside agencies. Under this system, the Unit Desas will continue to receive a fee from BRI adequate to cover the cost of provid- ing the service. 23. As investment funds become available, BRI will continue to purchase and install micro-computers at the Unit Desas. The computers are useful both in improving service to customers, improving accuracy, and speeding up the work of bookkeeping. So far it is not clear whether use of the computers will allow a change in the ratio of staff to average transactions and thus cut operating costs. Auditing and Supervision 24. BRI will continue to improve the supervision and auditing of the Unit Desas. The most important improvement in supervision will come with further training of Cabang staff. First priority is training in analysis of the reports which come from the Unit Desa and the actions which are indicated to solve problems found in the analysis. 25. At present, the audit of the Unit Desas by staff from the Inspector- ate, outside the Cabang, occurs at longer intervals than is desirable. The staff of the Inspectorate will be increased gradually over the next three years as they can be recruited and trained. Portfolio Standards 26. BRI's management would implement such policies and procedures as are conducive to the Unit Desas' maintaining a sound quality portfolio. However, when arrears of three months or more past final installment due date reach 6 percent of the total loan portfolio, this would be considered unsatisfactory performance and BRI's management would then evaluate the overall program and organization of the Unit Desas with a view to redesigning ongoing programs, organization, and procedures to ensure the continued financial viability of the Unit Desa system on an autonomous basis. -56- ANNEX 6 Table 1 INDONESIA SECOND BRI/KUPEDES SMALL CREDIT PROJECT BR1 Unit Desa System Sunmary of Actual KUPEDES Lending Operations, 1984-89 1984 1985 1986 1987 1988 1989 By Amount (in RD billion) Outstanding at begin- ning of period - 111.0 229.3 334.2 429.2 538.7 Plus: Disbursements 164.5 335.1 481.9 597.9 707.7 1,072.7 Less: Repayments 53.5 217.1 376.7 497.5 585.8 745.6 Lesss Write-offs - - - 5.5 12.4 20.2 Outstanding at end of period 111.0 229.0 334.3 429.2 538.7 , 845,6 By Number (in '000 loans) 639.4 991.9 1,150.1 1,136.7 1,137.3 1,379.4 . ~~- 57 - -Em~~~~~~~~~~~~~~~~~ mmas QMNDts A. CEDIT PRMmECT SRI Unit aS As o Det caO r U 1064 10t5 1086 l067 1t 1n h ln 171nt 0 m 2 1,621 4,100 7,647 18,26 cub to Cdgwq retneh) 47,6s 02,=8 9,na "08,04 269,018 488,684 Lrwgur a IId tt1,0s8 229,029 88,402 429,088 u58,20 64,618 Kredit sldl 16,000 7,0s 4,791 45 - - lredit ala t10,410 7,76 S,04 14 Other - 1,600 1,66 1, 1,127 1,101 Subtetal les outstanding )34 45,4n2 I40.$lE 4eao i.@ 0 4 S6.7 Least Prowvllos for loe"_ 9,16 10,524 20,'eS 21,80b 84,280 8,6S6 not Los". outataadio JV 284.040 M. M- 40aflh SCIN 907,11 MM . OR20 620 01e 10 1,0 1,650 Exera so 99 as Mt stT 41S Subtotel other receivables 679 M 1.014 1 as Lt m i24 666 480 8,68 14,02 vehIlels 408 2,500 1,70 1,6 2,62 achiner, forneture ed other 110 141 106 4,209 S8o8 Subtotal #ixed _s l-j, LI 2.208 23 t90 O _he assets G6 640 66U 1,248 2,475 6,010 MrAL ASSh 18E 80.471 42s.960 j1J2 IO 78801 aE.14E tXTXE8 AND E@qTY ev.uawm..U 2,00 18,680 10,080 12,468 16,66 26,08l TAINAIS 88,64 08,604 78,10 70,6 s0,62S 1U,62 Sra nm - S,t S2,es u12,68 8f41,054 6S0,011 Ti_- depsis 60o 2,01 8,68 12,704 44,448 117.406 cortitimuateeofdepet 04 184 24 1 1 1,052 Other 7w 168 1S8 165 8 - as Subtow sei 40,ns2gZ1 1s04I 275,073 470lLI an.$e fwRfIM S2k5881 21,104 16,275 16,140 15,742 24,056 64,161 Working capitel 61,06 126,17 10,707 100,27 102,0n 184,86 Subtotal lI.n, 14f,454 l5.$47 12 3L0 129.784 1El9A managd fnds - 1,60 1,88 1,6" 1t,227 - 1,0s 10,u" U1,0f 80842 TA8A8S Interst 8,e61 6,6u 12,884 0 26 "4 Tim deposit lntst 2 8s2 12 0 1,184 Other - - 721 5n 1,0 2,902 suktel .a Lie Sg" utsdA7 ALE0 9433 AL4 Otheu liabilltl. - 2M 127 76 65 2,168 Total Liabililtl*es MII TAI* .2L0 M"A5! MASS LIsO.Off A".iigrat 7,75 86,601 48.04o 489,414 2,685 57,877 Cotribtiose for fis s 7,m 7,084 7,611 7,242 7,229 7,114 Retland earnings f (25,01n (090) 0,646 22,470 80,640 8s,s17 T Slt Ey 53 'LE9 4fLo1e 7a.us 90.7211 EI.M TOTAL U TI=ES AO 660 11? #n7 800.471 427.200 ilj8i2 !E.M 1.M.2341 ,' neld eanl ro pproprIated by 061 at the end eah r. n I1Sivie 1 eval ael...... li prvlesin during 107 mec.t Critsoff of ro1 estely lbp 7,000 aIItoon for Erdits MItditll portfoi to. -58 Tool SFCOMD BRIiWES SWAIL aMEDT PRQOACr BRI Unit 0em Swae lnee. S t. 1984-89 Ibp UIII1003 Per the year ending December 81 1984 10S 108 1987 108 1t8 deposlted In Cebnn - 7,089 8,840 11,675 18,316 41,445 RUPDDES - Inveateet 1,973 8,034 4,004 5,184) 2 KUIPEES - Working capital 59,458 108,411 150,439 108,048) Kredit Vidi 22,045 7t8 2S9 92 - - Kredit Mini 841 162 se Other 1,102 98 sO - - Subttl credit Interest 22.045 63.627 11.085 19U.227 02. M.M raw and commleiona 1l 91 70 67 87 S1 IPTW terfelted n.c. n.a. n.a. 9,204 15,204 19,52 Cclletion of prwleou write-off. n.*. n.a. n.n. n.*. n.*. 5,U4 Other orating nomm 1,827 80i 5,45 1,188 2,645 1,983 11eoperating lncom 8,052 407 2t2 59 84 219 Totel Rvenue. 26.go, 72tes 120.932 177.078 229.018 8.0 Iri _ I Expomm 561 18,761 24,008 25,970 21,670 28,184 alro accosmtA 11 82 170 120 171 28 TADMANS 8,548 5,508 10,377 20,212 j8 90 11,842 SVAMB NO~~~~~~~~~~~~~~1,8 47,532 Tim depoesits 1 216 484 1,880 4,446 18,420 other 195 51 26 24 2,50S - Subtotal f cial exp n1ee 4.876 1.S708 35.108 4.994 1. 9b2 1V7 r ervee 8,074 18,971 26,082 08,865 48,605 66,484 lnarane premlum 18 86 44 72 1 2,249 Adainatrtlve a l omanae salary and wage. 26,170 26,661 80,928 38,165 44,769 Al lme.*ow. 80,484 4,867 4,726 6,170 6,794 11,280 Payente In kind 2,588 2,404 2,427 8,427 4,217 Subtotal pereonnel 30.484 83.120 38.71 89.629 48.S88 eE2e Reat 361 406 aS8 898 822 2,614 V hicl1" ) 1,710 1,605 1,276 1,257 1,6l 1,400 Bul Iding ' 284 s 62 1,882 2t,06 Subtotal 0&8 1.710 1.889 j.912 1.019 2.9 4.20B Depreciatlen 5569 52 1,019 081 1,894 8,S55 Provisions for bad debts 8,1 2,361 12,027 16,715 26,669 24,465 TOAN 115 219 174 138 170 240 U m asupp e *nd a teral.l 021 1,038 1,884 1,909 2,61 8,766 Su wu aso- 50 4,446 5,2 7,627 11,5165 Training 1 - - - - - 7,762 8E4a_. - - 677 1,061 1,370 1,662 Otmer 670 166 - 253 728 0,188 Subtotal other oeprating xpnrea 1.691 1.26 6.457 LEI . 12.S90 811.0e Nnoneprting *xpena 82 10 19 85 4 2S7 Total _I 5.601 78.501 117.986 155.804 iSo,S. 208.5ns MrNE T t256.121 (n8 9.846 n2.479 0. 36.917 La Ueglnang In 1980, *al unit D training expene. are diretly axpe_ again th Unit be" syat. tn previous yeres, It wa covered under BRI'* genral inatitutionl training. IMMMIA~~~~~~~~~~~~~~~~~~~~ - _ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ M- S-cDm IRItKlQWES SQALL aEIT PRWECT - ' o unit Sbe Anaheim of KPDSLoan Portfolio. 1984489 z _ ~~~~~~~~~~~~~~~(p bl |lion) 1904 1905 i988 1987 1980 1989 : loaned _164.6 409.0 M81.S 1,579.4 2,287.1 S,369.0 PortfoIW States Totl loans outstand- lng 1107 - 2g9.0 aa4.4 429.0 580.8 046. Total principal In arrarS 0.5 4.8 15.0 24.0 40.2 45.7 4 ' 19 X ofAM As X-of is X of A ofN 19 Aging of principal utsanding outstoaning outstang outstandng outstnding outStnding arrare ko oortfollo Mt. oortfohlo Do. Itar,lt "t. norttolio 1 At. Uortfollo Amt. ,orttollo Tota1 4 0.5 0.6 4.8 2.1 1l.0 4.5 24.0 5.7 40.2 7.5 45.7 6.4 Overdue to"s thAwA 8 months beyond final due datn.. 0.9 0.4 1.9 0.0 4.6 1.0 7.0 1.4 7.6 0.9 beyond fialdue date n.n. n.n. 0.3 0.1 4.0 1.2 5.8 1.4 9.8 1.7 18.2 1.6 Any pymnt overdlue by one ds or more.' l ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~ W 6 Pm*lated 189 L,.dina mrIen10-6 ProIecttl Ptr 28th Ptr? U8rwIV TA t @8. it? ¶I8.In Qtr IV q r 8.?@rU? Prw IV .1 ,9 1990 1990 199e 1990 1990 1991 1l9 1 1991 1992 1992 lo2" 199 192 0ua.dlne *t bg;int.@ of pe.lrad s8.7 848.6 018.8 1,018.4 1,02.?7 4.8 1,192.0 1,26.1 1,886.0 1,468.8 1,192.0 1,84.6 1,858.7 1,758.8 1,837.9 1,564.6 LI: DtAbreowm8 1,02.1' 947.6 888.9 398.5 442.6 1,69.8 4n.7 0.1 810.7 86.8 2,0.8 89.9 68.8 $804: 691,0 2,868.1 Lm:- "Payminu -748.6 2n.6 278.90 80.2 888.9 1,190.9 86.9 89.5 428.6 48.6 1,648.6 486.8 16.9 540.1 876.2 2,128.5 3: writ-Of. 20.2 8.0 8.1 8.0 8.1 82.2 1.7 11.7 11.8 11.9 47.1 18.8 18.8 15.8 18.8 52.0 Oudlnuo at e4 of perod 08.6 918.8 1,013.4 1,062.7 1,192.0 1,12.0 1,. 0 1,86.0 1,488.8 1,864.6 1,6.6 1,688.7 1,756.6 1,687.9 1.987.2 1,987.2 I -61- ,IA Aabuat ~ ~ ~ (o uls &1M16 1/9981/90 11 1/1990il" 1V/1990 2/91 119111191IWlO 21 11/1992 Il/I Vlt /" Usnimwm 13/1I2g Pan" KorndiO Niel grmt 66.7~ 66.7 66.7 66.7 66.7 86.7 66.7 66.7 66.7 66.7 66.7 66.7 66.7 Mt.dit Midi 48.0 43.0 43.0 43.0 43.0 48.0 43.0 43.0 4810 48.0 48.0 43.0 45.0 el S14iaid* oredit £80.0 122.4 115.9 110.6 101.? 94.0 67.0 811.0 74.1 67.2 60.8 63.4 40.4 gm to". gm-VD "1687 165i M7 165.7 168.7 16 S.? 168.7 165 .? 168.7 18 .7 31.7 16. 1*6.7 16.7 Erne eash @6 ..pan, 8.7 50.7 80.7 80.7 80.7 80.7 60.7 60.7 47.3 47.8 48.9 43.0 40.8 *04O EL mu A"I dOJ SA" MA taMA azL& mL Na =A mum 786286 118.7 96.4 98.0 101.5 312.0 106.0 104.6 111.7 137.5 116.6 135.0 am., I1s1.4 PWW/SDNWT 694.7 72.4 76.9 804.2 04".# 666.6 990.9 977.8 1.M6.3 1.0,7.6 a.m*.# 1,18.1 1,18.8 afrto 96.8 9.2 9.0 212.8 29.0 10.0 9.7 31.1 81.8 10.8 10.5 88.6 8.8. ram, d.omsi9 a"d ebb. 149.3 186.0 W3.$ 140.0 160.8 1860.1 16.4 170.6 176.4 M186.2 1493.8 126.9 M.4 1796 80.1 35.6 80.1 21.8 113.8 95.7 17.7 29.3 81.0 882 88.2 85.6 W87 SUbip oes ,.w 1.4 5.0 0.6 12.6 1.9 8.6 9.6 14.1 2.8 8.4 10.7 18.6 2.6 Erm.rve An, bad ".to 36.7 64.8 60.0 65.6 71.8 77.2 66.2 07.9 66.9 99.8 188.5 110.3 118.2 S9" mt poi9 86.9 12.1 26.0 37.5 80.0 13.81 17.8 41.2 88.0 18. 80.2 46.4 60.8 u.emuIutim ~~~~ ~~~~~8.6 1.0 2.0 3.0 4.0 1.2 2.4 8.6 4.8 1.5 - .0 4.8 6.0 TA"l Sources LUL LIA LXJ 1.U IUL 74IZS 1 31.1761 01.18 11- La" LMJ hm~~~til"a Ut 11ti*l,-Lhv0s_ A RAVmIIII low ctt.iI.5. 0 186 8.8 1,018.4 1.891.7 1.192.0 1,296.1 1,8661.0 1,46.8. 1.1144.6 i4.6111.7 1.7.80. 1,666.0 1.9672 mRnyt of Ere_it Offal and fit uiuIldstl credit 217.61 8.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 8.9 6.9 317e6tlo Enieba of Jmprni,Of490 - - - - - - - 8.4 - 8.4 - 8.4 - Vorbiag Omb 18.7 19.2 20.1 21.5 21.0 28.2 24.2 25.8 27.5 27.8 29.0 W0.9 62.8 wwhiag ownt. £ 89.6 91.3 98.0 .107. 117.8 211.7 k2S.4 188.7 146.1 147.4 j80.6 -165.7 16.8 bam ncS..mi.rnmrnAs 19.1 19.2 98.1 S1.8 1 2.9 218.2 21.2 80.5 17.8 27.0 29.0 86.9 111.6 Tobal ~I EA 131-2iSAIM SAWA1 E I 121 ELI2. 1,75.8 1,0SA M i Amulated diabu iwamt and" proposed NW to" Is. .? U.2 .8 69 86.3 186.1 1861.4 164.6 196.0 119.6 12niasANA A".1 MSA a" a.o 4si. Ana 4a. 13Mu1 a".1 4. il. 1.0 IIoleted so oomt of the kib eot ty lou di.bre.t ia bh amspur plus to il.u.t of 01rS depoCits. I peiwe att U.SN we 4 .4n- of 6*1/862630? ernima deposits. WPM1280 disurmtm are general ly on" during the fir" pO. of 4?. mot. *.St r.prsnmtra 4S.eo V"i Aorntas thu ImutNalf.I Sb on rmme pool 4t8 m.t to be rnrntsimed bw m4. In rndtiom to eorin 4'4. is h* limt Oe. ANNEX 7 nDONESIA SECOND BSIIEDPEDES SMALL CREDIT PROJECT Estimated Cost of Capital Expenditure COmDOnent /a *7' (in Rp million) BRI Unit Desa Training Center - v Ujuag Total Estimated Padang Bandung Yogyakarta Surabaya Pandang Cost No. of Full Classrooms/ Io. of Computer Rooms 211 211 211 2J1 111 9g5 E2penditure Category I. Land -already available-no additional land required- /b n.a. II. Land preparation 100.0 100.0 100.0 350.0 100.0 750.0 III. Buildings . 936.8 933.9 828.1 921.2 440.1 4,060.1 IV. Installation 328.4 328.4 328.4 328.4 328.4 1,642.0 V. Other 127.0 126.2 124.5 127.0 124.5 629.2 Total I-V 1,492.2 1,488.5 1,381.0 1,726.6 993.0 7,081.3 Plus 201 Physical contingency (Item II-V) 298.4 297.8 276.2 345.3 198.6 1,416.3 Plus 6S Price contingency Lc (Item II-IV) 89.5 89.3 82.9 103.6 59.6 424.9 Total ExPansion Expenditures 1,880.1 1,875.6 1,740.1 2,175.5 1,251.2 8,922.5 Computers/Printers Id 114.6 114.6 114.6 114.6 114.6 573.0 Estimated Total Cost 1,994.7 1,990.2 1,854.7 2,290.1 1,365.8 9,495.5 La Land preparation based on BRI actual expenses; remaining expenditures based on training facility specifications as per the first phase construction (draings for the first phase construction also provided for an expansion of training facilities as being proposed) while per unit cost estimates for the various expenditures are as per Ministry of Public Works February 1990 data. lb eing negotiated. - Construction will be done in 1991. dj Each center will have 30 PCs, 7 mibnual ledger card printers and 7 office printers. -63- ANNEX 8 Page 1 INDONESIA SECOND BRIIRUPEDES SMALL CREDIT PROJECT Terms of Reference for Long-Term Advisory Positions 1. Technical assistance will be undertaken by a combination of advisory services totaling 108 person months for three resident advisory posts. It is preferred that this technical assistance be provided on a coordinated team basis. 2. Terms of reference for these advisory positions are as follows: A. Senior Policy Advisor Academic Qualifications: Minimuni of a master's degree in economics or other relevant field. Experiences A minimum of ten years experience in rural credit, banking, and development of financial systems. Indoiesian experience and working level proficiency in Bahasa Indonesia is required. Responsibilities: The Senior Policy Advisor will have primary responsibility for policy analysis and recommendations regarding Unit Desa and related rural banking operations. The advisor will report to the President-Director of BRI, providing general direction for the project and maintaining appropriate rela- tions in the policy area with BRI staff and, as appropriate, with Indonesian government entities, including Sank Indonesia and the Ministry of Finance. 3. The specific activities of the senior advisor will be developed mutually by him/her and BRI management, in a manner that is responsive to policy and program requirements that develop during the assignment. Illustra- tive activities could include the followingt - Develop new services and instruments for use in the Unit Desas and related rural banking activities. - Review the pricing and marketing of credit and savings instru- ments and other financial services. - Review and advise on organizational issues, including the relationships between all levels of BRI - Headquarters, Regioa, Branch, Uhit Desa, and Payment Point. - Advise and-gssist in the revision and development of appropriate financial and accounting policies and practices for improving the viibility of the Unit Desas and related rural banking activities, including those related to bad debt reserves, -64- ANNEX 8 Page 2 chargeoffs, surveillance of loan quality, treatment of substandard loans, and capital and funding adequacy. - Review and revise personnel policies and practices, including: procedures for ensuring adequate recruitment to fill Unit Desas and related rural banking requirements; personnel salaries and benefits; and incentive structures and appropriate promotion paths. B. Training Coordinator Experiencet Minimum of five years experience in the development and operation of training programs in financial inst1tutions, including responsibility for organization, content and administration. Also, a minimum of five years experience in rural banking and credit systems. Fluency in Bahasa Indonesia and Indonesian experience are required. Responsibilitiess Under the direction of the Senior Policy Advisor, this person will develop and coordinate training for the Unit Desa and related rural banking activities. He/she will work closely with BRI's Education and Training Division. Specific activities would include, but not be limited to: - Review and revise training materials, manuals, curricula and tests. - Assist in the design of new training courses to meet emerging needs. - Monitor activities of the five regional training centers and work closely with the training center staff on program develop- ment snd administration. - Advise and assist in the development of training budgets and administrative procedures for coordinating and reviewing training activities. - Report to BRI management on the progress of Unit Desa and related rural banking training programs. C. Information and Survey Assistant Qualifications: Minimum equivalent of a master's degree in economics or other relevant discipline with a strong background in quantitative analytical tech- niques and computer skills- Experiences No specific work experience requirements. Working level proficiency in Bahasa Indonesia or commitment to achieve such proficiency within six months is required. - 65 - - ANNEX 8 Page 3 Rosgonsibilitiess This person will report to th'e Senior Policy Advisor and vill be responsible for the development and productlon of regular and special reports for BRI management. HRilher responsibilities will include assistance in the following areass - Develop and improve the management information system covering BRI's rural banking activities. - Help develop and refine BRI's data bases, and gather and analyze data on ongoing lending, savings and other service programs. - Participate in the design and execution of surveys and research activities related to Unit Desa and rural banking activities. - Work closely with the information and research sections vithin the Division responsible for Unit Desa activities. -66- ANNEX9 INONESIA SECOND BRIIKUPEDES SMALL CREDIT PROJECT Estimated Disbursement Schedule (US$ million) Disbursement Standard profile Bank Capital for Asia Region PY Semester Credit Expenditure TA Cumulative Percent for IDF projects (percent) l1991 : 7.2 - - 7.2 5.8 - I - 25.0 - 0.1 32.3 25.8 6.0 I 26.9 1.3 0.2 60.7 48.6 18.0 II 30.9 1.4 0.4 93.4 74.7 34.0 1993 I 30.0 - 0.4 123.8 99.0 50.0 II - - 0.4 124.2 99.4 66.0 1994 I - - 0.4 / 124.6 99.7 78.0 --I - - 0.4 125.0 100.0 86.0 1995 I _ _ - 125.0 100.0 94.0 II - 125.0 100.0 99.0 1996 I - 125.0 100.0 100.0 INDONESIA SECOND BRI/KUPEDES SMALL CREDIT PROJECT Organbatonal Sbucture of SRI's Business Unt Dows Deparmnt CustomerAwM PI dw NW | C Dt Auloman A| =tft managL r- Dwno Unt S -pp | L and MIR Loan Seeonb pitoe ro ramin Administration Setoyn sco Adeti Tetg and -- _Sating Sectin and Promotin Ime a MIR Section Sectin ,Secton | PdU Un:t Techcl Secton IW8alon o'4 MMR 20514 tt >TNM.LAND 7 1tbV '/ ' 1W1tt '1 ,'Wf ~f =~_'>"'t' --7 iPi ib9 Z >tR25 . 13 ~' - =i-~' MALYSIAt S out a China Sea . BR3EI, I E MA )LAYSIA (e z _;s / < t>e_t F-_ - ''s v '~~~~~~~~~~~~~~~~~~~~~~~~I 0 ) = N E S .. , 12j , a K.4, 'X i, ;**--.. tNQ- NESdI; ~~'~~~12 .N~~~~~KŽ> ~~~MA~LAYSIA / 17'Ct0P~w1~dtI 19~~~~~~~~~ SALMATHERA UTRA-' 61X- -<>x- - ;eBn e__ 14~~~~ kALIATA ANRA AN ' -: ..- 16~ ~ ~~~~~~~~NAOE KAIATNEAA t & zW t7 O | -g FR . ,.. 3 14B'1 21 Kj9 s9 c SLWS9ELTN ' 1 ,~Y_t;r_ 90 9 II g-'. '~.., - 1~~~~~~~~~~~5 1/TMRIU ' I >__w / el~_=W_Ww_wB1 - {