Report No.1741 -IND IFILE CPY Indonesia Appraisal of a Rural Credit Project June 1, 1978 RuralCredit and Agro-Business Division Projects Department East Asia and Pacific Regional Office FOR OFFICIAL USE ONLY Documentof the World Bank Thisdocument hasa restricteddistribution and may be usedby recipients only in the performance of their official duties. Its contentsmay not otherwisebe disclosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Report No. 1741 -IND IFILE CPY
IndonesiaAppraisal of a Rural Credit Project
June 1, 1978
Rural Credit and Agro-Business DivisionProjects DepartmentEast Asia and Pacific Regional Office
FOR OFFICIAL USE ONLY
Document of the World Bank
This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may nototherwise be disclosed without World Bank authorization.
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
CURRENCY EQUIVALENTS
US$1.00 = Rp 415Rp 1.00 = US$0.0024Rp 1 million = US$2,410
ADB - Asian Development BankASKRINDO - Indonesian Credit Insurance CorporationBI - Bank IndonesiaBIMAS - Mass Guidance (a farm input-credit program)BRI - Bank Rakyat IndonesiaDAN - State Accountancy DirectorateDG - Directorate GeneralGDP - Gross Domestic ProductIDA - International Development AssociationINMAS - Mass Intensification (a farm input program)KIB - General Investment CreditKIK - Small Investment CreditKMKP - Small Permanent Working Capital CreditLPPI - Institution for the Development of Banking in IndonesiaPDD - Program Development Department of BRIPMU - Project Management UnitRCP - Rural Credit ProjectSEDP - Small Enterprise Development Project
FISCAL YEAR
Government - April 1 to March 31Bank Indonesia - April 1 to March 31Bank Rakyat Indonesia - January 1 to December 31
This document has a restricted distribution and may be used by recipients only in the performanceof their offlicial duties. Its contents may not otherwise be disclosed without World Bank authorization.
8. AGREEMENTS AND RECOMMENDATION .............. . . 25
ANNEXES
1. Bank Rakyat Indonesia (BRI)
Tables
1. Summary of Lending Operations, 1973-762. Summary of Short-term Lending Operations, 1973-763. Summary of Term Lending Operations, 1973-764. Summarized Income Statements, 1972-775. Summarized Balance Sheets, 1972-776. Loans Outstanding and Loans in Arrears by
Type of Lending7. Loans Outstanding and Loans in Arrears by Sector8. Loans Outstanding, Loans in Arrears and Dubious
Loans as of December 31, 19769. Loans Outstanding, Loans in Arrears and Dubious Loans as
1. BIMAS Paddy Packages for 1977/782. BIMAS Secondary Crop Packages for 1977/78
-3-
3. BIMAS Lending for Paddy and Secondary Crops4. Area Covered by BIMAS and INMAS Paddy5. BIMAS Paddy Credit Repayment Performance - Total Java6. BIMAS Secondary Crops Credit Repayment Performance - Total Java
4. Project Subloan Categories - Explanation and Models
Tables
la Investment Cost for One Hectare Pepper Planting in Bangkalb Cash Flow Projection for One Hectare Pepper Farm in Bangka2a Investment Cost for One Hectare Pepper Planting in Lampung2b Cash Flow Projection for One Hectare Pepper Farm in Lampung3a Investment Cost for Coffee Deep-pruning (Lampung)3b Cash Flow Projection for One Hectare Coffee Farm (Lampung)4a Investment Cost for Cattle Breeding Packages4b Cash Flow for Cattle Breeding Packages in South Sulawesi4c Cash Flow for Cattle Breeding Packages in Lampung4d Cash Flow for Cattle Breeding Packages in Java4e Cattle Herd Projections5a Investment Cost for One Hectare Brackish Water Fishpond5b Cash Flow for One Hectare Brackish Water Fishpond, Monoculture5c Cash Flow for One Hectare Brackish Water Fishpond, Mixed Culture6a Investment Cost for One Hectare Freshwater Fishpond6b Cash Flow for One Hectare Freshwater Fishpond7a Investment Cost for Boat Motorization7b Cash Flow for Boat Motorization8a Investment Cost for Five-ton Ice Plant8b Cash Flow for Five-ton Ice Plant
5. Economic Analysis of Subloan Categories
Tables
1. Economic Rates of Return for Perennial Crops2. Economic Rates of Return for Cattle Breeding3. Economic Rates of Return for One Hectare Fishponds4. Economic Rate of Return for Fishing Boat Motorization5. Economic Rate of Return for Five-ton Ice Plant
6. Term Lending Consultancy - Draft Terms of Reference
7. Consultancy on Accounting, Management Information andRelated Matters - Terms of Reference
-4-
8. Evaluation Study - Draft Terms of Reference
9. Draft Monitoring and Reporting Requirements
10. Project Cost
Tables
1. Project Cost by Province2. Estimated Project Cost (Commitments) by Year
11. Estimated Quarterly Schedule of Disbursements
12. Action Program for Project Implementation
13. Guidelines for Project Lending
MAPS
13186 South Sumatra and Lampung13187 Java13188 South Sulawesi
INDONESIA
APPRAISAL OF A RURAL CREDIT PROJECT
Summary and Conclusions
i. Until the end of 1973, there was virtually no medium- or long-term
financing available to smallholders in Indonesia. Since then, the Government
and Bank Indonesia (BI), the central bank, have introduced national programs
for medium-term (1-5 years) Small Investment Credits (KIK) and Small PermanentWorking Capital Credits (KMKP) of up to Rp 5 million (US$12,000), and Mini-
credits of Rp 10,000-100,000. Long-term lending has been confined to a few
Bank Group and Asian Development Bank (ADB)-financed projects for a narrowrange of purposes.
ii. Bank Rakyat Indonesia (BRI), the Government-owned commercial bank
responsible for rural development, is the credit channel of the Mini-credit
and Bank Group- and ADB-financed projects, and about 80% of KIK/KMKP lendingfor agriculture. BRI also implements the Mass-Guidance (BIMAS) program of
seasonal production credit, primarily for irrigated rice but also for upland
rice and secondary crops. In order to undertake these various Government
programs, BRI has had to expand very rapidly over the past five years. Thisexpansion exacerbated a number of institutional weaknesses, including a
cumbersome and inconsistent accounting system, the lack of uniformity in the
use of credit procedures, and the shortage of qualified technical staff.Under the guidance of BI, BRI has been taking a number of important steps to
rectify the situation.
iii. The project would expand and improve the supply of term credit to
smallholders through (a) provision of funds to BRI for long-term lending in
selected geographic areas for a range of agricultural activities (chieflyfisheries, cattle breeding and perennial crops) and (b) strengthening of BRI
through a program of technical assistance to enable it to implement properly
both this project and its other term-credit programs, especially KIK/KMKP,which is being supported by an IDA credit under the Small Enterprise Develop-
ment Project. The project would be the first phase of broad Bank-Group
support for some ongoing activities and others which are being developed as
part of a long-term program through BRI. It would be implemented in selectedBRI branches throughout Java and in South Sulawesi, South Sumatra, Lampung
(Sumatra) and such other provinces as may later be agreed. About 42% of projectlending would be in Java, where BRI's capability is highest, and 58% in theother islands, where the scope for long-term credit is greatest. There would
be approximately 40,000 subloans financed over 3 years, with average size of
about US$1,000, for perennial crops (pepper and coffee), cattle breeding, andfisheries (brackish- and fresh-water ponds, fishing boat motorization and iceplants), plus such other categories as BRI, BI and the Association agree upon
during project implementation. The project will also finance about 20 man-years of consultancy at BRI in term-lending, 3 man-years of consultancy
in accounting and management information, training of BRI staff, and anevaluation study of the project's socio-economic impact.
- ii -
iv. Total project cost is estimated at US$60.0 million, of whichforeign exchange costs would be US$9.5 million, or 16% of the total. Capitalassistance costs would be US$57.0 million and technical assistance US$3.0 mil-lion. An IDA credit of US$30.0 million equivalent at the standard rate isproposed, including about US$20.5 million of local-cost financing (34% of totalproject cost), and up to US$300,000 of retroactive financing for technicalassistance. The credit would be made to the Government, which would bear theforeign exchange risk, and would onlend it to BRI at a rate of 3% per annum(p.a.). BRI's spread under the project would be about 5.8% p.a.
v. The IDA credit would cover the direct foreign exchange cost and 50%of the local cost of training, the total cost of consultants, and 68% of theadvances provided to BRI by BI for project subloans (equivalent to 54% ofsubloan amount). Given the small size and wide geographic and temporal spreadof the subloans, bulking for the purpose of carrying out competitive biddingwould not be feasible. Procurement would generally be through regular commer-cial channels, with arrangements for each subloan category worked out separatelyby BRI, and reviewed by the Association.
vi. The project would increase the incomes of some 40,000 small farmersand fishermen, most of whom are expected to be quite poor. In addition, itwould create about 5,000 permanent jobs, and 35,000 manyears of constructionwork. Annual export earnings would be some US$15.1 million, and productionof domestically-traded goods US$9.4 million. The estimated economic rate ofreturn is 27%.
vii. The project would be suitable for an IDA credit of US$30.0 million,on standard terms.
INDONESIA
RURAL CREDIT PROJECT
1. INTRODUCTION
1.01 The Government of Indonesia has requested an IDA credit of
US$30.0 million to finance a Rural Credit Project through Bank RakyatIndonesia (BRI). The IDA credit would meet 50% of total project cost,
including US$20.5 million of local cost.
1.02 The credit would be made to the Government, which would on-lend the
proceeds to BRI under a subsidiary loan agreement. Out of the credit proceeds,its own funds and funds from Bank Indonesia (BI), the central bank, BRI would
provide long-term (beyond five years) subloans, primarily to small farmers andfishermen, for investment in pepper, coffee, cattle breeding, fresh- andbrackish-water fishponds, fishing boat motorization, iceplants, and such other
agricultural subloan categories as BRI, BI and IDA shall later agree upon. Inaddition, the credit would finance consultants at BRI in investment credit,training, agriculture, economics, accounting and management information. Itwould also finance training of BRI staff and an evaluation study of project
lending.
1.03 This would be the sixth Bank Group operation directly involvingBRI. Under the North Sumatra Smallholder Development Project (Credit 358-IND)and the Nucleus Estates and Smallholders I Project (Loan 1499-IND), BRI is
the channel for collecting sub-loan repayments from smallholders, but has nosay in borrower selection and bears no financial risk. Under the Smallholders
and Private Estates Tea (Credit 400-IND) and Fisheries Credit (Credit 480-IND)Projects, BRI, with technical support from the Ministry of Agriculture, hasfull responsibility for making and collecting individual subloans. Theproject would follow this latter approach, but with broader sectoral coverage
and a greater focus on strengthening BRI. Under the Small EnterpriseDevelopment Project (SEDP; Credit 785-IND), BRI handles almost two-thirds of
the lending made to all sectors under BI's Small Investment Credit (KIK)program which provides term-finance to small entrepreneurs in urban and ruralareas. In the supply of credit to the agricultural sector, the project wouldcomplement the SEDP, as the former would provide credit for subloans of morethan five years, and the latter for those of five years or less. Certainlending now done under the KIK program would be transferred to the project,where the latter's long-term finance was required. Furthermore, the project'sstrengthening of BRI's term-lending capability would greatly assist theimplementation of the SEDP as well.
1.04 The project was prepared by BRI, assisted by an IDA preparationreview mission in February 1976, and a pre-appraisal mission in May 1976.
This report is based on the findings of an appraisal mission composed ofMessrs. S. Ettinger, A. Gros (IDA), R. Campbell, P. de Waard, P. Nicholsonand T. Yamamoto (Consultants) which visited Indonesia in October/November1976. Follow-up discussions were held in Indonesia during March and November1977.
- 2-
2. THE ECONOMY AND THE AGRICULTURAL SECTOR
The Economy
2.01 The Indonesian economy, while predominantly agricultural, has abroad resource base including abundant supplies of oil, gas and a variety ofminerals. Since the late 1960s, economic progress has been rapid, with GDPgrowing by an average of about 7.5% p.a. in real terms; employment growth,however, has been much less rapid. The First Five-Year Plan, 1969-74,emphasized rehabilitation of neglected infrastructure and expansion ofproduction; most of the physical objectives were achieved. In the SecondFive-Year Plan, 1974-79, greater attention is being paid to employment andincome distribution. The latest Bank economic report (Report No. 2026-IND ofApril 26, 1978) analyzes recent economic developments, short-term prospectsaad development issues in Indonesia.
The Agricultural Sector
2.02 Agriculture - including forestry, livestock and fisheries - contri-butes about 36% of GDP, generates 82% of non-oil exports and nearly two-thirdsof employment. The structure of the sector is dualistic, consisting of some14.4 million smallholder farmers who cultivate about 14.2 million ha, andabout 1,800 large estates occupying 2.2 million ha. About 70% of all farmshave less than 1 ha. Smallholders dominate production in all subsistence andcash crops, except oil palm and tea. Foodcrops, principally rice, cassava,corn, soybeans, fruits and vegetables, account for about 63% of total agri-cultural output, other annual crops 10%, perennial crops 4%, livestock 7%,forestry 11% and fisheries 4%. The main cash crops are rubber, tea, coconuts,oil palm, sugar, and coffee; with the exception of sugar, these are Indonesia'smajor export crops.
2.03 The primary aim of development policies in this sector has been toincrease food supplies, create productive employment, raise the incomes ofthe rural poor, and improve net foreign exchange earnings by increasingcrop exports and reducing rice imports. In the First Plan, investments weredirected towards rehabilitation of (a) neglected irrigation networks andother essential infrastructure affecting smallholders, and (b) rundown publicsector estates (mostly rubber and oil palm) which were well placed to increaseexports fairly quickly. Agricultural output grew at about 3.5% p.a. duringthe early 1970s. Rice production increased from 12.2 million tons (of paddy)in 1969 to 15.3 million tons in 1974. In the past three years, however, ithas grown very slowly, reaching only 15.9 million tons in 1977, due to avariety of causes including drought, the spread of pests, and difficultieswith the production credit program (BIMAS). As a result, Indonesia is nowthe world's largest rice importer, and imported 2.6 million tons in 1977/78.Production of a number of export crops, particularly rubber, oil palm, teaand coffee, has, however, continued to grow substantially. In the currentPlan greater emphasis is placed on raising the productivity and incomes ofthe smallholders. In pursuit of these objectives, Government has introduceda wide range of assistance programs to the agricultural sector, especiallycredit schemes, extension services and research.
- 3 -
2.04 Perennial Crops. Indonesia is among the world's largest producers
and exporters of rubber, coconuts, palm oil and spices, and grows large
amounts of coffee and tea as well (Annex 2). In the Ministry of Agriculture,
the Directorate General (DG) of Estate Crops is responsible for smallholder
production, and the advisory staff to the Minister of Agriculture for public
sector plantations. The plantations were the main target of Government
investment during the First Plan; since 1974, efforts to assist smallholders
have been increased, especially for rubber and coconuts, the two major crops.
The main efforts involve block planting or replanting, assisted and supervised
by either a public sector plantation ("nucleus estate") or a special unit of
the extension service ("project management unit" or PMU). Government has
been experimenting with different degrees of intensity of assistance/super-
vision, different size blocks, and different mixes of grants and credits to
the smallholders.
2.05 Livestock. Indonesia has about 6.2 million cattle, 2.3 million
buffalo, 95 million chickens and ducks, and 13 million smallstock (sheep,
goats, pigs). The cattle population has dropped by 10% over the past decade,
and the buffalo population by 18%. The cattle are primarily multi-purposeanimals, used for work, manure, meat and sometimes milk. Except for a few
ranches, almost all are owned by smallholders, and integrated into their
farming activities. The DG of Animal Husbandry's main programs for assisting
these farmers are disease control, artificial insemination and the credit
programs through BRI for cattle fattening and breeding. The Livestock Project
(Credit 355-IND), which was originally aimed at producing beef for export, now
emphasizes breeding draft animals, as the high slaughter rate of animals formeat and the growing need for draft power on the outer islands, have created ashortage of draft animals.
2.06 Fisheries. Indonesian fisheries has four main branches: marine,
coastal (or artisanal), fish cultivation (chiefly fishponds) and fresh-water
capture (rivers and lakes). The first is dominated by large commercialenterprises, including many foreign firms and joint ventures. The second
consists of some 850,000 small fishermen, mainly using small sailboats and
traditional gear. Fish cultivation covers about 180,000 ha of brackish-water
ponds, 40,000 ha of freshwater ponds, and 80,000 ha of paddy fields, and
employs some 500,000 people. Brackish-water ponds, which are located
primarily along the north coast of Java and in South Sulawesi, are being
supported under the Fisheries Credit Project. Another 700,000 people are
engaged in inland fish capture, mostly part-time. The DG of Fisheries
supervises fisheries development in Indonesia.
3. AGRICULTURAL CREDIT
3.01 Overview. Until about ten years ago, almost the only source ofcredit for smallholders was from local patrons or moneylenders, with high
explicit or implicit interest rates. Even today, these remain an importantsource of credit, and many farmers are deeply in debt to them. BRI is by far
the largest source of institutional credit for smallholders, and Bank BumiDaya the main source for estates. Other state banks have occasionallyhandled agricultural programs in special situations, and finance some agri-cultural lending under the KIK/KMKP program. Institutional credit forsmallholders is almost always on a somewhat subsidized basis; the interestrate is 12% p.a. for most short-term credit programs (such as BIMAS), and wasrecently reduced from 12% to 10.5% p.a. for KIK and from 15% to 12% p.a. forKMKP./l Short-term production credit for rice and other crops is availableunder BIMAS and certain KMKP mkass ("massal") programs. M4edium-term investmentand working capital in virtually all sectors are financed under the Mini-creditprogram if below Rp 100,000, KIK/KMKP up to Rp 5 million, and the generalinvestment credit (KIB) program above that. Until January, 1978, long-termfinance was available only under a number of Bank Group or ADB-financedprojects for particular commodities; now lending under KIB can be for up toten years.
3.02 BIMAS and INMAS. Under BIMAS, farmers get extension advice, andobtain loans from BRI's village units for inputs (fertilizer, seed and agro-chemicals) and cash subsistence expenses. The BIT4AS program, which concen-trates on rice and some secondary crops, commenced in 1965, and by 1974/75covered almnost 25% (2.2 million ha) of the wet season paddy area and about 5%(0.2 million ha) of the area under dry season secondary crops. The programcovers the main irrigated areas in Java, but has been less successful inspreading to the other islands, which account for only 21% of the wet seasonBIMAS paddy area. The program has recently been experiencing high arrears,due to a variety of factors, including the spread of pests, adverse weather,and changes in the supply and prices of fertilizer. As borrowers two or moreseasons in arrears are generally ineligible for further loans, these arrearshave limited the coverage of BIMAS; the wet season 1976/77 coverage was downto 1.8 million ha, from 2.1 - 2.2 million ha in each of the previous threeyears. Farmers ineligible for BIMAS loans have had access to fertilizer andother inputs through the Mass Intensification (INMAS) program. Until late1977, INMAS did not include credit. Starting with the 1977/78 wet season,however, INMAS provides credit, on the same terms as BIMAS, for incrementalfertilizer purchases. The coverage of INMAS has increased rapidly, and nowexceeds that of BIMAS.
3.03 KMKP "Massal". About 11% of KMKP finance has gone to agriculture,primarily for BIMAS-type mass credit operations, handled mainly (67%) by BRI,for pepper, cloves, poultry, cattle fattening, fisheries, tobacco, cotton andsugar cane (Annex 3). These provide essentially seasonal working capital,usually for 6-18 months. Loans are made to individuals, with individualrepayment responsibility, but the appraisal of borrower creditworthiness islimited, and targets are set jointly by BRI and the respective DGs of theMinistry of Agriculture. The performance of these programs, especially asregards repayment, has been mixed.
/1 By comparison, the inflation rate in 1975-76 averaged 20% p.a., but hastapered off to around 10% p.a. in 1977.
- 5 -
3.04 KIK. About 22% of KIK finance has gone to agriculture, primarilyfor warehouses, drying floors, fishponds, fishing boats, draft animals,poultry, rice mills and water pumps. BRI has done 86% of KIK agriculturallending.
3.05 Mini-Credits. BRI's village units extend mini-credits of Rp 10,000-100,000 for both fixed investment and working capital. As of December 31,1976, cumulative disbursements had totalled Rp 18.2 billion for workingcapital and Rp 3.1 billion for investment, mostly for trade and agriculture.There is substantial unmet demand, but progress has been gradual because ofthe need to rely on budget funds, as well as the limited implementationcapacity of the village units. Studies carried out by the Government and BRIindicate very good collection performance, apparently due in part to effectivecoordination with the traditional village system.
3.06 Long-term Lending. Long-term agricultural credit is provided onlyfor certain commodities in specified areas, under two types of arrangements.Under the Bank Group-financed Smallholder and Private Estates Tea and FisheriesCredit Projects, and the ADB-financed East Java Agricultural Credit Project,BRI appraises, extends and assumes the risk on individual loans: for teafactories and replanting of tea by smallholders and estates, for ice plantsand brackish-water fishponds, and for equipment (power tillers, water pumps,vehicles and storage) for cooperatives, respectively. Under the Bank Group-financed North Sumatra Smallholders Project, and the Nucleus Estates andSmallholders I Project, rubber and oilpalm areas are block-planted, and
then handed over to smallholders who assume the repayment obligation to BRI,which has neither appraised the individual loans, nor assumed the risk ofnon-repayment.
IV. BAKE:K RAKYAT INDONESIA (BRI)
4.01 Overview. BRI is the main institutional source of rural creditin Indonesia, and has the largest staff and branch network of the five state-owned commercial banks. BRI has been increasing its financial support tosmall farmers and fishermen, primarily under Government credit programs.To carry out these activities, BRI expanded its staff by 70% between 1973 and1977. This expansion exacerbated a number of institutional problems, such asthe shortage of high-calibre staff, lack of uniformity in the use of creditprocedures, an excessively complicated accounting system and a poor manageinentinformation and control system. Cognizant of the situation, BRI has beentaking steps to remedy them; the Association, through the project, would besupporting BRI in this task.
Management and Organization
4.02 Management. BRI's Management Board consists of the President-Director and up to four Managing Directors, all appointed by the Government forfive-year (renewable) terms. The current President-Director has, since his
appointment in August 1973, maintained firm control over BRI's day-to-dayoperations, and overseen a number of efforts aimed at improving BRI's opera-tional efficiency. Three of the present four Managing Directors were appointedonly recently, in late 1976 and early 1977. However, like the President-Director, all have risen from the ranks of BRI and are fully familiar with itsdiverse operations. Each Managing Director has general administrative respon-sibility for three or four Bureaus and carries otlt other specific assignmentsfrom time to time.
4.03 Organization. BRI operates on a decentralized branch-banking basis,with a head office in Jakarta, 13 regional offices, 267 branches, 63 sub-branches, 3,270 village units, and 113 mobile units throughout Indonesia.Tce head office (Chart 17849) performs essentially planning and controlfunctions, along with general administration. Regional offices (Chart 17385)act as extensions of the head office in supervising and coordinating branchactivities. Branches (Chart 17387) are BRI's main organizational units; theycarry out most of the lending and are primarily responsible for deposits andsavings mobilization. Village and mobile units operate as appendages tobranches, primarily for the BIMAS and Mini-credit programs.
4.04 Term-Lending. Functional responsibility for BRI's term-lendingoperations rests with the three departments of the Investment Credit Bureau:Appraisal and Supervision (which handles the KIB program), KIK/KMKP, andProject Aid (which implements and monitors lending programs involving externaldonors). Organizational arrangements for handling term-lending in the fieldvary with branch and regional office size. In the typical pattern, a branchwould have one or two officers; handling primarily term lending, and a regionaloffice around three to five, working within larger units. The commitmentauthority of branch managers ranges from Rp 2 million to Rp 5 million perloan.
4.05 Planning. The Planning Bureau's two original departments, OperationsPlanning and Cost Planning, have so far concentrated on budget preparation andimplementation. A new Program Development Department was set up for theproject in January, 1978 (para. 5.11).
Staffing and Training
4.06 Staffing. As of December 31, 1977, BRI had 22,600 employees, ofwhom 70% had senior high school education, and 2% had university degrees. In1976, the average monthly gross salary and benefits of a loan oEficer, thelowest professional level, was US$160, which was below what other state commer-cial banks paid in comparable positions. Because of its low salary scale,BRI was limited to recruiting fresh graduates for low-echelon positions, andfilling middle- and senior-level positions from within. This, plus the factthat promotion was primarily to managerial positions, made it difficult forBRI to obtain adequate technical staff, especially in accounting and dataprocessing. Realizing the need to attract suitably qualified and experiencedpersonnel, BRI initiated, with BI support, a series of studies on its overall
- 7 -
salary and benefit structure. While this exercise is still underway, interimresults have led to a revised pension scheme for all personnel, improvedcompensation for village unit staff, and the introduction of a separate gradesystem for technical personnel, allowing promotion along specialty lines.This last measure, coupled with the increased availability of agriculturalgraduates, will enable BRI to hire the specialist staff required for theproject.
4.07 Training. In addition to sending some of its officers to theInstitution for the Development of Banking in Indonesia (LPPI), a school ofbanking owned by BI and the state banks and formerly assisted by the Inter-national Monetary Fund, BRI conducts training programs in both Jakarta andthe provinces for all levels of staff. Over the last few years, BRI hasdevoted considerable efforts to staff training, primarily to meet the staffingneeds of new branches and village units. Further progress is required ifstaff capabilities are to be commensurate with levels of responsibility,particularly for term-credit. BRI recognizes this need; the project willassist in reviewing and redesigning BRI's training programs, especially asregards term-lending (para. 5.13).
Procedures
4.08 Credit Procedures. Due to its large size and rapid growth, BRI hasfound it difficult to ensure that credit procedures are applied uniformlythroughout its organization. The Banking Study Team, which evaluated BRI'scredit procedures and accounting system, as part of a BI program to upgradethe operating procedures of all the state commercial banks, noted theabsence of detailed manuals as a main reason for inter-branch variations inBRI's credit procedures; they also identified shortcomings in existingappraisal, supervision and accounting practices. The Team's recommendationsare being generally implemented by BRI's management. In particular, taskforces have written detailed procedure manuals for various credit programs,which are being distributed to all BRI branches.
4.09 Term-Lending Procedures. BRI's term-lending operations for smallloans use simplified credit-investigation procedures that rely as much on theborrowers' character and collateral as on project viability. Such an approachis justifiable given the small size of individual loans, the limited educationand training of loan officers, the absence of subsectoral analysis upon whichto base estimates of project viability, and the difficulties in obtaininginformation on clients' operations. However, to remedy some of the inherentdifficulties of smallholder term-financing, BRI is gradually shifting fromgeneral ("umum") lending, where all loans are made on a purely case-by-casebasis, to mass ("massal") lending, for which separate credit programs aredeveloped by type of activity or subsector, before loans are made on eitheran individual or group basis. The "massal" approach allows extensive subsec-toral analysis to be applied, permits advisory and other supporting services tobe provided more efficiently to small borrowers, and reduces BRI's adminis-trative costs (in comparison with equally small loans made on a case-by-casebasis). In addition, to overcome the problem of inadequate loan supervision,
-8 -
BRI is increasing term-lending staff and requiring that more time be spent onsupervision, and has prepared systematic follow-up procedures as part of itsterm-credit manuals.
Lending Operations
4.10 BRI's lending operations (Annex 1, Table 1) grew very rapidlyduring the first half of the 1970s, but leveled off in 1976. Disbursements,which had risen from Rp 131.1 billion in 1971 to Rp 991.0 billion (aboutUS$2.4 billion) in 1975, dropped by 14% in 1976, essentially as a result oftighter BI ceilings on general commercial ("non-program") credit. Lendingunder most government programs ("program lending"), on the other hand, increaseddue to generous credit expansion allowances from BI, but this was offset bythe decline in fertilizer import financing. Program lending, which accountedfor around 60% of BRI's outstanding portfolio at year-end 1973, had grown toover 77% by year-end 1976. Finance for fertilizer import and distributionaccounted for 36% of the outstanding portfolio, followed by short-term agricul-tural lending (27%), short-term lending to industry, trade and services(primarily agro-industries and dealers and traders in farm products) (19%),term-lending (16%) and personaL and other loans (2%). Although short-termlending still accounted for 95% of total disbursements in 1976, medium- andlong-term lending increased from Rp 4.3 billion in 1973, to Rp 45.8 billion in1976. The KIK/KMKP program accounted for 62% of 1976 term-lending disburse-ments, Mini-credits for 26%, K:[B for 8% and long-term lending for 4%.
Financial Performance and Position
4.11 BRI's net income reached a peak of Rp 5.5 billion in 1974, butdropped to Rp 3.3 billion in 1975, Rp 1.0 billion in 1976, and Rp 0.8 billionin 1977. The two main reasons for this trend are (a) BRI's expanded lendingto small borrowers, under programs (e.g. BIMAS, KIK/KMKP) with high administra-tive costs and low interest rates, and the decline of BRI's two large profit-able operations, fertilizer import financing and commercial non-programlending, and (b) the rise in interest expenses as a percentage of total debt,from 3.2% in 1974 to 6.3% in 1977, caused by the increasing proportion oftime and savings deposits, on which BRI pays relatively high interest, inBRI's total debt.
4.12 Financial Position. At year-end 1977, BRI's total assets stood atRp 665 billion (US$1.6 billion). BRI's liquidity position appears sound,as does its present long-term capital structure (long-term debt/equity 1.5:1).BRI's overall capital structure has improved substantially in recent years; itsdebt/equity ratio decreased from 40:1 in 1973 to 13:1 in 1977, primarily as aresult of increased contributions from Government (which totalled Rp 14.7 bil-lion at year-end 1977) and Bank Indonesia (Rp 25.0 billion), which areinterest free and have no fixed repayment schedule.
- 9 -
4.13 Arrears and Provisions for Doubtful Accounts. Despite recentimprovements in the arrears position, overdue accounts remain BRI's mainfinancial problem. The actual arrears situation, however, cannot be estab-lished with certainty, since BRI's internal reporting system (a) does notrecord all loans in arrears, (b) treats program and non-program loans differ-ently, and (c) provides only limited information on the age of arrears. BRI'sarrears problem is largely traceable to the complexities of smallholderfinancing, including the difficulties of taking legal action against defaulters.BRI is currently implementing its first three-year program (1977-1980) toreduce loan arrears; procedures for follow-up and handling of overdue accountsare being instituted, and new guidelines issued to the branches. This programcalls for appropriate measures to be taken (improved collection efforts,restructuring or submission to litigation) on all delinquent accounts (exceptunder BIMAS, rice procurement and fertilizer loans). The objective of theprogram is to bring arrearages on such accounts down to 12% of the outstandingportfolio by year-end 1979. Partial implementation of the program has alreadyreduced the percentage of loan arrears in the categories covered by theprogram from 24% at year-end 1976 to 21% at year-end 1977, primarily due to adrop in arrears on commercial lending from 42% to 23%. Overall, 23% of BRI'sportfolio was in arrears as of December 31, 1977, (compared to 25% a yearearlier), with principal overdue amounting to Rp 105 billion (US$253 million).BRI's financial exposure on these arrears totalled Rp 36.4 billion; theremainder is guaranteed by BI, Government and ASKRINDO. BRI's provisions fordoubtful accounts totalled Rp 11.2 billion /1, which appears adequate.
Accounting and Management Information
4.14 Under the ADB-financed BRI Modernization Project, a series ofchanges were made in the organization, management and operating procedures ofBRI. In particular, a new accounting system built around the use of electro-mechanical accounting machines was introduced in BRI's Java branches. Con-comitantly, to achieve consistency, a new manual accounting system was to bedeveloped and introduced in all nonmechanized branches. Since, the latterpart of the project was not carried out fully, there was considerable confusionand delay in the preparation of BRI's financial reports. BRI then hired twoconsultants from the firm of Price Waterhouse to review its accounting systemand propose corrective action. These consultants have completed the designof a new manual accounting system, and are now testing that system, as well asimproving BRI's management information system, which will, inter alia improveBRI's arrears recording and reporting.
Audit
4.15 Under its charter, BRI's accounts are audited annually by the StateAccountancy Directorate (DAN), whose reports are presently prepared in a formand detail which makes it difficult to reach a judgment on some essential
/1 Government tax regulations allow such provisions to equal no more than 3%of loans outstanding; BRI's provisions are somewhat below this ceiling.
- 10 -
aspects of BRI's financial condition. In particular, the audit report on BRIought to be gradually expanded1 to include a review of BRI's system of internalaudit controls and the auditors' recommendations for the improvement of suchcontrols, an analysis of BRI's loan portfolio and of the adequacy of reservesfor doubtful accounts, and a description of the coverage of the audit workperformed (type of activity, number of branches visited, etc.). Duringnegotiations, it was agreed that an auditing expert would be sent by theAssociation, with terms of reference mutually acceptable to BRI, DAN and theAssociation, to discuss the scope and detail of the general audit report onBRI.
5. THE PROJECT
Objectives
5.01 The project would, over three years, expand and improve the supplyof term credit to smallholders by (a) providing funds through BRI for long-termlending in selected geographic areas for a range of agricultural activities,and (b) strengthening BRI through technical assistance, to enable it toimplement properly the lending both under the project and under its otherterm credit programs, especially KIK/KMKP. It would be the first phase ofbroad Bank-Group support for some ongoing activities and others which arebeing developed as part of a long-term program through BRI.
General Scope
5.02 Project area. The project would be implemented in selected branchesthroughout Java (East, Central and West Java, and Yogyakarta), in SouthSulawesi, South Sumatra, Lampung (Sumatra) and such other provinces as BRI andthe Association later agree upon. These seven provinces have been selected onthe basis of their present need for long-term agricultural credit and BRI'slocal implementation capacity, with due regard for the balance between Java(about 42% of project lending), where BRI's capability is highest, and theother islands (58%), where the scope for long-term credit, especially fortreecrops and livestock, is greatest.
5.03 Components. The project would consist of the following:
(a) about 40,000 long-term subloans (US$41.0 million);
(b) about twenty man-years of consultancy on term-lendingat BRI's head and regional offices (US$1.5 million);
(c) about three man-years of consultancy for BRI's accounting,management informaticin and related systems (US$0.3 million);
(d) training for key BRI term-lending staff (US$0.2 million); and
- 11 -
(e) an evaluation study of the project's socio-economic impact(US$0.5 million).
It is anticipated that the subloans would be made by BRI over a three-yearperiod; although BRI would make most of its disbursements within a year aftersubloan approval, BRI's disbursments on individual perennial crop subloanswould stretch for three to six years. The Association, however, would limitits own disbursement period to six years./1 The consultancy would generallybe for three years, and would be gradually phased out over that period.
Subloan Categories
5.04 General. Seven subloan categories requiring term-finance beyondfive years, have been appraised as economically and financially viable:pepper, coffee, cattle breeding, brackish-water fishponds, freshwater fish-ponds, fishing boat motorization and ice plants. Other categories may bedeveloped by BRI during project implementation, and submitted to BI and theAssociation for approval. In addition, a small miscellaneous category wouldbe included, for subloan categories too small to warrant individual approvalby the Association. BRI would prepare annual lending programs for theapproved categories; for each such category, the Association's agreementwould be required for the aggregate ceiling, the provincial coverage,and the technical support arrangements. The first year's program coveringthe period April 1979-March 1980 would be submitted to the Association byFebruary 1, 1979. BRI would need the Association's agreement to exceed theapproved ceilings for each category by more than 20%. The Government wouldstrengthen the PMUs and extension services of the DGs of Estate Crops, AnimalHusbandry and Fisheries in its Ministry of Agriculture located in the projectarea, to provide adequate extension and other supporting services to projectsubborrowers. The average subproject cost would be about US$1,000 (1977prices). The subloans would usually be from about 5-1/2 to 11 years, with amaximum of 15 years. The subloan ceilings would generally be set at or belowUS$12,000 (the present KIK/KMKP ceiling).
5.05 Perennial crops. Because of their long gestation period, perennialcrops generally require long-term finance for investment. BRI's experiencewith perennial-crop finance has so far been limited to short-term clove andpepper intensification under KMKP "massal." Under the project, BRI wouldbegin financing investment in smallholder pepper and coffee, both high-valuecrops, in limited areas in South Sumatra and Lampung provinces, which bothcome under BRI's Palembang regional office, as follows:
(a) Pepper - new and replanting (posts, mulching, fertilizer, pesticideand fungicide) of an estimated 1,600 ha on Bangka Island (SouthSumatra) for white pepper production, and 1,200 ha in Lampung forblack pepper;
/1 The final two years' subloan disbursements on pepper in Lampung wouldoccur after the closing date, and therefore not be reimbursed underthe project; BRI's disbursements after the closing date would equal onlyabout 2% of the total project cost.
- 12 -
(b) Coffee - fertilizer for about 2,500 ha of coffee in Lampung after"deep pruning" (cutting back the bushes to a height of about 6 in);
The coffee subloans would be approved only after BRI and the DG of Estate Cropswere satisfied that the deep ipruning had been properly done and the farmerswere maintaining their plantings satisfactorily. The PMUs involved withcoffee and pepper in Lampung would need strengthening to carry out their rolein the project.
5.06 Cattle breeding. Cattle breeding is of high priority in view ofthe serious shortage of draft animals in Java and Sumatra./l The DG of AnimalHusbandry and BRI have developed a credit package for cattle breeding in theother islands consisting of credit to smallholders for the purchase of fivecows, plus cattle sheds, veterinary supplies and supplementary feed. Thebasic objectives are to increase the calving rate and reduce the slaughter ofbreeding cows. The project would finance part of this program, involvingpurchase of some 30,000 cows. For South Sulawesi and East Java, the cattlecould probably all be procured locally, whereas for Central Java, Yogyakartaand especially Lampung, some would need to be brought in from other provinces,or imported. The basic credit: package would be for two cows in Java andLampung, and two or five cows in South Sulawesi. The DG of Animal Husbandrywould need to set up one bull unit per 50 cows financed under the project tosupplement the artificial insemination program, and to have at least onefield extension worker per 30C0 subborrowers, working through farmers groupleaders.
5.07 Fisheries. Four fisheries categories are proposed, as follows:
(a) Brackish-water fishponds - improvement of about 22,000 ha ofexisting ponds along the north coast of Java and in South Sulawesi,the main production areas, with finance mainly for construction ofdikes, canals and gates and for incremental working capital (fry,fertilizer, pesticides). This would be a continuation of a com-ponent of the Fisheries Credit Project which is expected to befully committed by early 1979. About 25-30% of the ponds would bemixed milkfish and shrimp culture, and the rest milkfish monoculture.The DG of Fisheries would need to establish about 15 new demonstra-tion ponds for the new project areas;
(b) Freshwater fishponds - pond deepening and improvement of dikes andinlets for some 1,500) ha in West Java, with improved pond design,expanded extension wcork, and increased use of feed and organicfertilizer. So far, credit has been given under the KIK and Mini-investment programs, but without supporting technical services.About 5 demonstration ponds would need to be built, for research andextension, especially on polyculture of bottom-, middle- and surface-feeding fish;
/1 There is about one pair of draft animals per 5 ha agricultural land on Java,and per 50 ha on the other islands. The need cannot be computed exactly,primarily due to variations in land use.
- 13 -
(c) Fishing boat motorization - a pilot program involving inboard motorsfor about 250 existing (but less than 3-years old) "payang" sailingboats of at least 8 meters at selected ports in Java and in SouthSulawesi, where new shore facilities are being constructed. Theprimary benefit would be to enable the boats to go further out,fish on calm days, and spend a larger proportion of their time onthe fishing grounds. As there is little experience with inboardmotors on small fishing boats in Indonesia (some outboard motors,which require only medium-term credit, are being financed underKIK), both the socio-economic impact and the technical suitabilitywould need to be monitored carefully; and
(d) Iceplants - about 10 small (approximately 5-ton/day) iceplants,primarily at these same ports in Java and South Sulawesi, to serveboth the newly-motorized boats and other boats drawn to the portfacilities. Because of the critical need for ice to support bothmarine and fishpond development, an exception to the Rp 5 millionsubloan ceiling would be made in this case. Iceplant subloans wouldbe made after subloans have been made for the 9 small iceplantsto be financed under the Fisheries Credit Project.
5.08 Additional Subloan Categories. The categories identified above areexpected to account for about 80% of project lending. In addition, BRI'sPDD would develop new categories for inclusion in the project, subject to IDAand BI approval, within the agricultural sector (including small processingplants).
5.09 Miscellaneous Category. In addition to new subloan categories ofsignificant size, there will be scattered demand for other long-term agricul-tural loans for which the full process of subloan category clearance throughthe Association would not be justified and would cause inordinate delays.Therefore, after a branch has participated satisfactorily in the project forone year, it would be permitted aggregate lending for a "miscellaneous"category up to 20% of the amount of its aggregate lending for approvedcategories. Possible areas for both additional subloan categories and themiscellaneous category include poultry and other smallstock, fruit trees,cocoa, tea, spices, and processing and storage facilities.
5.10 Summary. The estimated composition of project sublending is shownin the table below. It should be noted that these are indicative amounts,and the actual size of the various categories could be quite different.
- 14 -
PROJECT SUBLOAN CATEGORIES
Average Subproject No. of Total CostCategory Project Size Size Cost ($) Subloans ($ million)
------------------ (1977 prices)-----------
Pepper - Bangka 1,600 ha 0.8 ha 3,260 2,000 6.5Pepper - Lampung 1,200 ha 0.8 ha 1,840 1,500 2.0/aCoffee 2,500 ha 0.8 ha 500 3,125 1.6Cattle - Java 14,000 head 2.4 head 640 5,830 3.7Cattle - Lampung 4,000 head 2.5 head 750 1,600 1.2Cattle - SouthSulawesi 12,000 head 5 head 1,275 2,400 3.1
Brackish ponds -monoculture 16,000 ha 2 ha 980 8,000 7.8
Brackish ponds -mixed culture 6,000 ha 3 ha 1,940 2,000 3.9
Freshwater ponds 1,500 ha 0.3 ha 280 5,000 1.4Fishing boatmotorization 250 boats 1 boat 1,930 250 0.5
Ice plants 10 plants 1 plant 90,360 10 0.9
Subtotal - - 1,025 31,715 32.6
Unspecified - 1,025 8,285 8.4
Total - 1,025 40,000 41.0
/a Total cost would be $2.8 million; however, about $0.8 million of thiswould occur after the closing date, and is therefore not included in theproject cost.
Project Management in BRI
5.11 As regards term lending, the project aims to strengthen the planning,training and monitoring ability of BRI's head office, the supervisory role ofits regional offices, and the implementation capacity of its branches. Atthe head office, the main bureaus involved would be Planning, InvestmentCredit and Education. Within the Planning Bureau, the new Program DevelopmentDepartment (PDD) would, in coordination with the DGs concerned, prepareannual lending programs for alt project subloan categories. The PDD wouldalso have responsibility for developing new categories, and for carrying outthe evaluation study, with technical assistance. The head of the PDD wasappointed January 1, 1978, and was provided with 8 young graduates in agri-culture and economics. Within the Investment Credit Bureau, the existing
- 15 -
Project Aid Department, which supervises BRI's ongoing externally-financedlong-term lending projects, would also handle implementation and monitoringof the project, including writing procedures for each subloan category withinthe general framework of BRI's procedure manuals for term loans. The EducationBureau would assess the need for special training in term lending for BRIstaff at all levels, and, in consultation with LPPI, would provide most of the
additional training needed for implementation of both the project and KIK/KMKP.At the larger participating regional offices, separate term-lending departmentswould be created; in the smaller regional offices, there would be a term-lendingsection in the credit department. The regional offices have recently beensent additional staff to enable them to supervise the branches' term-lendingmuch more actively than at present. At negotiations, BRI reviewed with theAssociation the organization and staffing for term lending of the participatingregional offices, as well as the PDD and the Project Aid Department; theseappear satisfactory.
Branch Participation
5.12 Some 55 branches would make subloans under the project, with about25 participating in the first year, 15 more the second year, and the final15 joining in the third year. One constraint on the rate of entry of newbranches is expected to be the regional offices' ability to supervise themadequately. Preference would be given to branches with ongoing term lendingoperations in categories which would be included in the project (e.g. brackish-water fishponds under the Fisheries Credit Project; cattle breeding underKIK). Special training would be given to at least one loan officer ("mantri")and one supervisor in term lending before entry of a branch into the project.In addition, BRI would take the necessary measures to ensure satisfactoryrepayment of project subloans, giving special attention to branches with aproject collection rate /1 below 70%, and would review these measures andthe results with the Association.
Technical Assistance in Term Lending
5.13 About twenty man-years of technical assistance in term lending would
be financed by the project, to enable BRI to strengthen its overall term-lending capability. The consultancy would consist of an economist, a trainingspecialist, three development bankers, and three agriculturalists, for 1-1/2to 3 years each, plus some short-term visits, as follows:
(a) Program-development economist, who would work in BRI's PlanningBureau, primarily to guide and assist the PDD in the developmentof programs for both this project and other term lending;
/1 Defined as amount collected divided by amount that should have beencollected, which consists of outstanding arrears at the beginning of theyear plus amounts newly falling due.
- 16 -
(b) Training specialist, who would advise and assist BRI's EducationBureau on all aspects of training for term lending, includingidentification of training requirements and development of courses;
(c) Development bankers.. A senior development banker would be attachedto BRI's Investment Credit Bureau, and two other development bankerswould rotate between the six regional offices concerned. The seniordevelopment banker would monitor the progress of the various unitsin BRI engaged in implementation of the project and other termlending, and would help prepare and maintain up-to-date proceduremanuals for these programs. The two other development bankerswould assist and supervise the regional offices and branches inimplementation; and
(d) Agriculturalists. A perennial-crops expert would be stationed inPalembang to assist in the design and implementation of the pepperand coffee categories. A livestock specialist and a fisheriesexpert would be stationed in Jakarta, working in the PlanningBureau on the design of lending programs, and assisting the Invest-ment Credit Bureau with their implementation. The consultantswould need to be experienced in marketing as well as in productionaspects.
At negotiations, agreement was reached that the economist, the trainingspecialist, and at least two development bankers and two agriculturalistswould be appointed by January 1, 1979, and the remaining consultants byApril 1, 1979.
Technical Assistance in Accounting and Management Information
5.14 Two consultants from Price Waterhouse (para. 4.14) who were financedfor a year under the ADB-financed BRI Modernization Project, which closed onApril 30, 1977, would be financed under the project for about three man-years,including up to US$300,000 for retroactive finance on expenditures since May 1,1977. Since that date, the consultants have completed the design andtesting of a unified chart of accounts and a management information systembuilt around it, and are starting to supervise its implementation. Inaddition, they are examining the operations of BRI's Jakarta Special Branch(which handles, inter alia, the financing of fertilizer distribution) and theInterbranch Clearing Office.
Monitoring and Evaluation
5.15 BRI would obtain assistance from a suitable Indonesian researchcenter or university to (a) help develop BRI's own subloan monitoring andevaluation capability, and (b) design and help implement a study to evaluatethe impact on production, income, employment, and marketing of a sample ofproject subloans, including examination of the problems encountered, the loanrepayment performance, and the need and availability of technical supportfrom the Ministry of Agriculture (Annex 8). By April 1, 1979, a two-yearcontract would be signed by BRI, with the agreement of the Association.
- 17 -
After the two years, BRI would itself carry out most of the evaluation study,except probably for some of the data analysis. Overall, an eight-year studyis needed because of the long gestation period of the perennial crop subloans;the project would include the first six years of the study.
Project Cost and Financing
5.16 Total project cost is estimated at US$60 million (Rp 24.9 billion),of which foreign exchange costs would be US$9.5 million, or 16% of the total.Project cost by item is as follows:
ESTIMATED PROJECT COST
Local Foreign Total Local Foreign Total %--- (Rp billion) ---- --- (US$ million) --- FE
Total (current prices) 21.0 3.9 24.9 50.5 9.5 60.0 16
/a Based on local cost increases of 10% p.a. and foreign cost increases of8% p.a.
- 18 -
5.17 Local consultants are expected to be used for the three positionsof agriculturalist and for the evaluation study. Term-lending consultancycosts would average US$6,700 (1977 prices) per man-month for expatriates,of which about 75% would be foreign exchange, and US$3,300 for Indonesians.Accounting consultant costs would be US$9,200 per man-month.
5.18 The IDA credit would finance 50% of total project cost, includingUS$20.5 million of local cost (34% of total project cost). The local costfinancing would enable the Association to provide more support to the Govern-ment's overall development effort, particularly in raising agriculturalproduction. The credit would be made to Government, which would onlend it toBRI at a rate of 3% p.a., with BRI's repayment of the subloan component tiedto the repayment schedules of the subloans, and the technical assistancecomponent to be repaid over 20 years, including 4 years' grace. BRI would putup 20% of the subloan finance, and the remainder would come from BI, also at3% p.a. The proposed financing plan is as follows (in current prices):
PROJECT FINANCING PLAN
Local Foreign Total Local Foreign Total Share--- (Rp billion) ---- --- (US$ million) ---
/a This could be made either in kind, with family labor, or in cash, and couldrange from 0 to 25% for the various subloan categories, in accordancewith BI's rules and regulations for the KIK program.
- 19 -
Subloan Terms and Conditions
5.19 The terms and conditions, policies and procedures governing KIK/KMKPlending would generally be adopted for the project. In particular, interestat 10.5% p.a. would be charged on the investment portion of all subloans, and12% p.a. on any credit for working capital; in addition, penalty interest of3% p.a. would be charged on any amounts more than 90 days in arrears. Theapplicable KIK/KMKP rules and regulations could in the future be modified byBI, provided that, in the opinion of the Association, such modification didnot materially and adversely affect the project's objectives or implementation.BRI would obtain credit insurance with the Indonesian Credit Insurance Agency(ASKRINDO) for. 75% of the amount of each subloan, upon payment of a one-timefee probably ranging from about 3.5% to 6% (depending on subloan maturity),the cost of which would be shared by BRI and BI. Two exceptions from the KIKrules would be that (a) subloans would be for more than 5 years, up to amaximum of 15 years, including an appropriate grace period during whichinterest may be capitalized and (b) subloan amounts and the net worth andnet current assets of subborrowers may exceed the KIK ceilings, where justifiedon a category by category basis.
5.20 Interest Spread for BRI. BRI would have the same interest spreadunder the project (5.8% p.a.) as it receives for KIK lending, so as tomaintain the same financial incentive for BRI to implement the two programs./lThe spread would be reviewed under the SEDP /2 to determine whether it isadequate to cover BRI's administrative costs and the risk of bad debts. Toretain consistency between the programs, any changes made with respect toKIK lending would, in consultation with the Association, be applied to projectsublending as well.
Disbursement
5.21 Withdrawal applications would be submitted by BRI, and disbursementswould be made on the following basis: (a) 100% of foreign exchange expend-itures, and 50% of local expenditures for training; (b) 100% of expenditureson consultants; and (c) 68% of BI advances to BRI for the credit component,supported by certificates of expenditure from BRI, certifying the subloan amountdisbursed. The loan-by-loan documentation for the certificates of expenditurewould be retained by BRI and made available for review by the Association.
/1 BRI would obtain 80% of its funds from BI/IDA at 3% p.a. and 20% fromdeposits etc. at an average cost of 6.4% p.a., for a weighted average of3.7% p.a. In addition, the ASKRINDO fee paid by BRI under KIK is equiva-lent to about 1% p.a., and it is expected that BRI's fee to be negotiatedwith ASKRINDO under the project would also be equivalent to about 1% p.a.With the lending rate 10.5%, the spread would therefore be about 5.8%.The spread would be slightly larger on the working capital portion of thesubloans; however, this would account for only about 8% of project cost.
/2 SEDP Appraisal, Report No. 1614a-IND of March 6, 1978, paras. 5.04,5.05.
- 20 -
Applications for withdrawal of funds in respect of (a) and (b) above would befully documented in accordance with standard IDA requirements. Retroactivefinancing of up to US$300,000 is recommended for advisory services from May 1,1977. Disbursements are expected to be completed by September 1984.
Procurement
5.22 Given the small size and wide geographic and temporal spread of thesubloans, bulking for the purpose of carrying out competitive bidding wouldnot be feasible. Procurement would therefore be through regular commercialchannels, with assistance in some cases from the Ministry of Agriculture.Procurement arrangements for individual subloan categories would be preparedby BRI as part of its annual lending programs, and reviewed by the Association.Except where special arrangements were made for specific categories, BRIwould follow BI's directives for KIK/KMKP, which call for, wherever feasible,(a) borrowers to obtain and submit to the banks three price quotations fromsuppliers/contractors, (b) disbursements to be made directly to the supplier/contractor, and (c) disbursements to be made in tranches, after inspection toensure that projects are being carried out properly. Recruitment of term-lending consultants would take place in accordance with IDA Guidelines,with a short list of international firms requested to make proposals, withpreference given to proposals including Indonesians.
Accounts and Audit
5.23 BRI would keep separate accounts of its approvals, disbursements,collections and arrears under the project. These accounts would be auditedannually by independent auditors acceptable to the Association, and would besent to the Association along with the audit report on those accounts and thegeneral audit report on BRI, with a form and coverage agreed by the Associa-tion, not later than nine months after the end of BRI's financial year(January 1 - December 31).
Monitoring and Reporting Requirements
5.24 The draft project monitoring and reporting requirements are shownin Annex 9. BRI would submit semi-annual and annual progress reports tothe Association. The latter would form the basis of joint annual reviews ofthe project by BRI, BI and IDA, at which, inter alia, the annual lendingprogram for the forthcoming year would be agreed upon. In addition, eachparticipating branch would maintain up-to-date files, maps and financialsummaries of its project subloans, available for review by the Association.
Project Execution Schedule
5.25 Technical assistance expenditures for the consultants on accountinghave been incurred since May 1, 1977. Terms of reference and a short listfor the term-lending consultants have been agreed upon between the Associationand BRI, and BRI is expected to send out the proposals around June 1, 1978.The first term-lending consultants are expected to be in the field by January
- 21 -
1979, and project sublending to begin around April, 1979,/1 after the firstannual lending program has been agreed, special training has been given tothe concerned BRI staff, and provision has been made in the Ministry ofAgricultire budget for the additional technical support required by sub-borrowers. The anticipated IDA credit disbursement schedule is given inAnnex 11, and the action program for project implementation in Annex 12.
6. PRODUCTION AND MARKETING
Production
6.01 The anticipated incremental annual output at full production fromproject subloans, from the identified categories, would be about $15.1 mil-lion of exports and $9.4 million of domestically-traded goods, as follows(1977 prices):
/1 Lending for brackish-water fishponds under the project, as a continuationof similar lending under the Fisheries Credit Project, could beginearlier once the designated funds under the latter were fully committed.
- 22 -
Unit price Total value /aQuantity Rp US$ Rp million US$'000
/b Some of the increase in milkfish production would be at the expense ofother species.
/c Average price would increase from Rp 250/kg to Rp 300/kg, due to produc-tion of higher value fish.
Marketing
6.02 Existing private marketing channels would be adequate to handle theincremental exports of pepper, coffee and shrimp. The cattle would be forlocal use, or shipped (from South Sulawesi) to other islands, primarily asdraft animals. They would be sold at around the age of two, either to otherfarmers or to local traders. The fish would all be consumed locally. Con-siderable improvement in the fish marketing system appears necessary. Threeprograms being undertaken in this regard are an ADB-financed fisheriesmarketing project, a Government program of infrastructure construction at
- 23 -
fishing harbors, and the credit for small ice plants under the FisheriesCredit Project and this project. Ice from ice plants financed under theproject would be sold locally to both fishermen and other consumers.
7. BENEFITS AND RISKS
Benefits
7.01 The project would directly increase the incomes of some 40,000small farmers and fishermen, most of whom are expected to be quite poor.BRI, with assistance from the Ministry of Agriculture, would make specialeforts to ensure that the coverage of poorer farmers increases over time.The estimated incremental income to subborrowers for different subloancategories is shown in the cash flows in Annex 4.
7.02 Permanent incremental employment resulting from the project (identi-fied categories only) would be about 5,000 jobs; some 60-70% of these wouldprobably be for family labor, and the rest hired. About 35,000 man-yearsconstruction work would be required, primarily for the fishponds; hired laborwould generally be used.
7.03 The perennial crop categories (pepper, coffee) are important chieflyfor foreign exchange earnings.
7.04 The cattle breeding category is important for reducing Indonesia'sgrowing shortage of draft animals. The program would:
(a) expand the market for breeding cows, which is presently limitedby the shortage of funds, and thereby reduce the (illegal) slaughterof these animals;
(b) increase the calving rate from 35-40% to 50% by (i) moving thecattle away from overstocked areas, (ii) providing funds for propercattle sheds, veterinary supplies and supplementary feed, and (iii)ensuring that bull units as well as artificial insemination areavailable in the project areas; and
(c) move some of the cattle to areas where they are needed for draftand manure in integrated rice farming operations.
7.05 The fisheries categories are important primarily for increasing thedomestic supply of fish, Indonesia's chief source of animal protein. Totalannual fisheries production/consumption is only about 11 kg/capita, comparedwith the long-term target, on nutritional grounds, of 30 kg/capita (the levelin the Philippines and Malaysia). Improvement of existing fishponds is ingeneral a much more cost-effective means of increasing production thanconstruction of new ponds. Pond deepening and dike and gate constructionwould be important sources of employment. Boat motorization would enable
- 24 -
the fishermen to tap the fish resources farther out than is reachable bysailboat. In addition, motorized boats could operate about 200 days/year,compared to 150 days/year for sailboats which need favorable winds. Moreworking days and larger catches would increase the incomes of the boat crews,comprising largely of poor, landless people. The ice is important forreducing spoilage of fish, and for enabling more to be sold fresh, at higherprices than dried or salted fish.
7.06 As described earlier, the project would strengthen BRI's term-lending capability at the head, regional and branch office levels, in bothplanning and implementation, and would, in particular, improve BRI's abilityto carry out the KIK/KMKP program efficaciously. It would also furtherimprove BRI's accounting and management information systems.
7.07 The projected financial and economic returns on the various subloancategories are as follows:
The calculations, financial and economic, are explained in Annexes 4 and 5,respectively.
Risks
7.08 The main risk is that BRI might not be able to implement theproject properly, in view of BRI's staffing constraints, lack of consistencyin credit procedure, and inadequate internal controls, coupled with the widerange of its other programs, and hence, the possibility that BRI would thus befurther overloaded and weakened. To reduce the likelihood and potentialimpact of this risk, the project stresses the institutional development ofBRI, through consultancy, staff recruitment, training, and the establishment
- 25 -
of special term-lending units. As an additional protection, branches' collec-tions performance under the project would be closely monitored. The stepsBRI has taken in a number of areas over the past year also provide groundsfor optimism.
7.09 An additional risk is that some of the Ministry of Agriculture'slocal units would not be capable of providing adequate technical support tosubborrowers, yet would pressure BRI to approve subloans. This has alreadyhappened with some KIK/KMKP "massal" programs, resulting among other things,in poor collections. BRI's management would therefore have to review veryclosely the technical support available to each activity when drawing upits annual lending programs under the project, and hence close coordinationbetween BRI and the Ministry of Agriculture would be essential. BI mightplay a significant role here in assisting BRI. Should either BRI or theMinistry of Agriculture prove unable to handle adequately the projectedrate of lending, the rate of project lending would be adjusted downwards,and the commitment period for project subloans increased accordingly.
Environmental Effects
7.10 The overall environmental impact of the project would be limited,because in most cases land use would not be changed. Some limited waterpollution would result from the use of fertilizer, insecticide and fungicidefor the perennial crops. The fertilizer that got washed away would, onbalance, probably be environmentally beneficial, as it would stimulate marinelife. The insecticides and fungicides, while quite toxic, would not causeserious problems as they would be sprayed directly on the trees, in limitedquantities. On the positive side, both the fresh- and brackish-water fishpondswould be excellent for recycling organic waste, either as fertilizer to helpalgae grow (as food for the fish), or as direct fish food.
8. AGREEMENTS AND RECOMMENDATION
8.01 During negotiations, the organization and staffing of the ProgramDevelopment Department of the Planning Bureau, the Project Aid Department ofthe Investment Credit Bureau, and the term-lending units of the participatingregional offices of BRI were reviewed and agreed upon (para. 5.11).
8.02 During negotiations, BRI and the Association agreed that projectsublending would be subject to the rules and regulations of the KIK program,except for maturity and grace periods, and the possibility of subloansexceeding the KIK ceiling for specified subloan categories; the KIK rules andregulations could in the future be modified by BI, provided that, in theopinion of the Association, such modification did not materially and adverselyaffect the project's objectives or implementation (para. 5.19).
- 26 -
8.03 During negotiations, BRI agreed to:
(a) appoint at least six of the term-lending consultants byJanuary 1, 1979, with the agreement of the Association, andthe remaining consultants by April 1, 1979 (para. 5.13);
(b) contract out the two-year first phase of the evaluation studyby April 1, 1979, with the agreement of the Association(para. 5.15);
(c) retain loan-by-loan documentation, available for review byIDA missions, for its certificates of expenditure against whichIDA disbursements would be made (para. 5.21);
(d) submit to the Association its audited project accounts, togetherwith the audit report on those accounts, and its general auditreport, with a form and coverage agreed with the Association,within nine months of the end of BRI's financial year, (para.5.23); and
(e) submit its first annual lending program, covering the periodApril 1979 - March 1980, to the Association by February 1, 1979;the aggregate ceiling, provincial coverage and technical supportarrangements would be subject to the Association's approval(para 5.04).
8.04 During negotiations, Government and BRI agreed that an auditingexpert would be sent by the Association, with terms of reference mutuallyacceptable to BRI, DAN and the Association, to discuss the scope and detail ofthe general audit of BRI (para 4.15).
8.05 During negotiations, Government gave assurances that:
(a) it would strengthen the PMUs and extension services of the Direc-torates General of Estate Crops, Animal Husbandry and Fisheries inits Ministry of Agriculture located in the project area to provideadequate extension and other supporting services to projectsubborrowers (para. 5.04); and
(b) any changes made in the financial arrangements for KIK would, inconsultation with the Association, be applied to project sublendingas well (para. 5.20).
8.06 Subject to the above, the project would be suitable for an IDAcredit of US$30.0 million on standard terms.
- 27 -
ANNEX 1Page 1
INDONESIA
RURAL CREDIT PROJECT
Bank Rakyat Indonesia
Background
1. Bank Rakyat Indonesia (BRI), the main institutional source of ruralcredit in Indonesia, has undergone numerous changes since its establishment in1896. In 1965, the Central Bank and all state-owned commercial and savingsbanks were merged into one institution, Bank Negara Indonesia (BNI), and BRIwas integrated into BNI Unit II. This experiment in conglomerate bankinglasted only three years, however, and in 1968 BNI was divided into theCentral Bank (Bank Indonesia - BI) and seven state banks: five commercialbanks, a savings bank and a development bank. BNI Unit II was split intoBRI, with concentration on credit for agriculture, fisheries, cooperativesand rural development, and Bank Ekspor-Impor Indonesia, specializing in loansfor the production, processing and marketing of export products. The threeother commercial banks formed were Bank Bumi Daya, specializing in estateagriculture and forestry, Bank Negara Indonesia 1946, specializing in industry,and Bank Dagang Negara, specializing in commerce and mining. This specializa-tion by sector, however, is not binding and a certain degree of competitiontakes place among the state commercial banks. BRI in its present form wascreated by Republic of Indonesia Law No. 21 of December 18, 1968.
Main Functions
2. BRI's main functions are to:
(a) perform general commercial banking operations, including short- andmedium-term lending, primarily for the benefit of farmers, fishermen,small-scale industries, traders and other entrepreneurs;
(b) assist the Government in implementing its agricultural policiesand conducting rural development programs, primarily by administeringcredit and subsidy funds provided by the Government for designatedrural development purposes; and
(c) supervise secondary rural banks in accordance with BI directives.
Management
3. BRI's Management Board consists of the President-Director and up tofour Managing Directors, all appointed by the Government for five-year(renewable) terms. The Management Board, operating by consensus, establishesbank policy and makes decisions on all important operational and administra-tive matters. Control over the Management Board is the responsibility of a
- 28 -
ANNEX 1Page 2
Government-appointed Board of Supervisors, presently composed of two seniorofficials from the National Planning Agency (BAPPENAS) and one from theMinistry of Finance. BI, through its Banking Supervision Department, alsomonitors BRI's operations and its observance of banking regulations.
4. The current President-Director has, since his appointment in August1973, maintained firm control over BRI's day-to-day operations, and overseena number of efforts at improving BRI's operational efficiency. Three of thepresent four Managing Directors were appointed only recently, in late 1976and early 1977. However, like the President-Director, all have risen fromthe ranks of BRI and are fully familiar with its diverse operations. ThePresident-Director heads the Board and coordinates the work of its members.Each Managing Director has general administrative responsibility for three orfour Bureaus and carries out other specific assignments from time to time.
Organization
5. BRI operates on a decentralized branch-banking basis with a headoffice in Jakarta, 13 regional offices, 267 branches, 63 sub-branches, 3,270village units, and 113 mobile units scattered throughout Indonesia. The headoffice performs essentially planning and control functions, along withgeneral administration, limiting its direct operational involvement toevaluation of loans which exceed the commitment authority of regionaloffices (usually Rp 10 million). Regional offices act as extensions of thehead office in supervising and coordinating branch activities. Branches areBRI's main organizational units; they carry out most of the lending and areprimarily responsible for deposits and savings mobilization. Village andmobile units operate as appendages to branches, primarily for the BIMASprogram.
6. To keep pace with the rapid expansion of its operations, BRI has hadto increase its branch and subunit network as follows:
BRI's Branch Network - Recent Growth
Date Branches Sub-branches Village units Mobile units
BRI is near its objectives of having at least one branch office in each ofIndonesia's 270 districts ("kabupatens"), except in West Irian.
- 29 -
ANNEX 1Page 3
7. Concomitant with the expansion of its field organization, BRI in1973 reorganized its head office following the recommendations of consultantshired under the ADB-financed BRI Modernization Project. The basic objectiveof this reorganization was to (i) expedite information collection and analysis,(ii) delegate and decentralize decision-making authority, and (iii) achieve aclearer delineation of responsibilities among various organizational units.Specifically, the reorganization led to the establishment of:
(a) four main Divisions to supervise the activities of 11 of the headoffice's 13 Bureaus. This was to relieve the Managing Directorsof their direct supervisory responsibility over these Bureaus,hopefully allowing them to concentrate on broad policy issuesrather than day-to-day operational matters;
(b) three new Bureaus, under the Administration and OrganizationDivision, to improve operational procedures, planning and control.The Organization and Methods Bureau was to streamline proceduresand issue clear operational instructions; the Management ControlBureau, to provide the Board with regular and timely reports onoperations and costs; and the Planning Bureau, to take charge ofoperational and cost planning, budget preparation and varianceanalysis;
(c) a separate internal auditing organization under the SupervisionDivision reporting directly to the Board, with field officesindependent from BRI's regional offices;
(d) a special branch reporting directly to the Board, to take overthe branch operations performed at head office; and
(e) positions of planning and/or systems and procedures officers inmost of the Bureaus.
8. BRI's new head office organizational structure (chart 17849) becameeffective in January 1974. While a move in the right direction, it provedonly moderately successful in decentralizing management authority. The thenthree Managing Directors continued to supervise very closely the Bureauswhich had been their responsibility prior to the reorganization, thus deprivingthe newly established Divisions of much of their raison d'etre. This was recog-nized by BRI, and in early 1977, when supervisory duties were reallocatedamong Managing Directors, the Divisional tier was eliminated.
9. Regional offices (chart 17385) are typically composed of fourdepartments: (a) the Credit Department, itself often subdivided into short-and medium-term lending sections, which supervises loans approved by thebranches, approves loans within the commitment authority of the regionaloffice, and comments on loans being forwarded to the head office for approval;(b) the Finance Department, which manages the allocation and transfer of
- 30 -
ANNEX IPage 4
funds between branches and head office; (c) the Accounting Department, incharge of bookkeeping and internal reporting; and (d) the General/PersonnelDepartment, which takes care of administration and personnel. With theestablishment of separate District Audit offices, the internal audit functionof the regional offices is gradually disappearing.
10. Branch offices also have been reorganized in recent years, withequal emphasis being given to their credit and general banking activities(Chart 17387). Credit evaluation and supervision along with secondarybanks control are the responsibility of a credit officer; deposits, savings,funds management, bookkeeping, reporting, and general administration, thatof an operations officer. Sub-branches are essentially branch tellers per-forming cashier functions at a fixed location different from that of thebranch itself. Village units ("unit desa") extend certain branch activities -savings mobilization, short-term BIMAS and non-BIMAS lending, mini-investmentfinancing - to the village level. Presently operating as subunits of branches,village units are gradually evolving into village banks, providing an increas-ingly wide range of banking services to rural communities.
Organization for Term-Lending
11. Functional responsibility for BRI's term-lending operations restswith the three departments of the Investment Credit Bureau. The Appraisaland Supervision Department evaluates and supervises loans granted under theKIB program. This is the only section carrying out appraisal work, sincemost loan aplications for KIB exceed the Rp 10 million authorization limit ofregional offices. The KIK/KMKP Department supervises and monitors branch andregional offices lending under the KIK/KMKP program. The third department,Project Aid, implements and monitors lending programs involving bilateral ormultilateral aid organizations.
12. Organizational arranagements for handling term-lending in the fieldvary with branch and regional office size. In the typical pattern a branchwould have one or two officers handling primarily term lending, and aregional office, around 3-5, iworking within larger units. The commitmentauthority of branch managers ranges from Rp 2 million to Rp 5 million perloan.
Staffing and Training
13. Staffing. As of December 31, 1977, BRI had 22,600 employees, ofwhom approximately 11,400 were in village units. Not including the Jakartaspecial branch, the head office had around 1,000 employees. Over 70% of thestaff had senior high school education, and 2% had university degrees. In1976, the average monthly gross salary and benefits of a loan officer (thebottom professional level) was Rp 67,000 (US$160), which was higher than theaverage income of a medium-ranking civil servant, but less than what otherstate commercial banks paid for staff in comparable positions. This explainsin part the difficulties BRI had in recruiting suitably qualified personnelfor the branches and village tnits it was opening so rapidly in 1973-76.Over this period, BRI's staff increased by 70%, despite a 200 person reductionin head office personnel due to reorganization.
- 31 -
ANNEX 1Page 5
14. Because of its low salary scale, BRI, until 1977, had been limitedto recruiting fresh graduates for low-echelon positions, which placed a heavyburden on its training programs. Middle and senior-level positions weregenerally filled by promotion from within. This, plus the fact that promotionwas primarily to managerial positions, made it difficult for BRI to obtainadequate technical staff (especially in accounting and computer processing).Realizing the need to review and modify its staff compensation and promotionpolicies, to attract suitably qualified and experienced personnel, BRIinitiated, along with other state-owned commercial banks, studies of itsoverall salary and benefit structure. While these studies are still underway,interim results have led to a revised pension scheme for all personnel,improved compensation arrangements for village unit staff, and a separategrade system for technical personnel allowing promotion along specialtylines. This last measure enables BRI to hire from the outside any seniorspecialist staff it may require.
15. Training. In addition to sending some of its more promising officersto the Institution for the Development of Banking in Indonesia (LPPI), a schoolof banking owned by BI and the state banks and formerly assisted by the IMF,BRI has its own banking school and conducts training programs in both Jakartaand the provinces for all levels of staff. Over the last few years, BRI hasdevoted considerable efforts to staff training, primarily to meet the staffingneeds of new branches and village units. Further progress is required ifstaff capabilities are to be commensurate with levels of responsibility,particularly for term-credit. BRI recognizes this need and has asked theAssociation for assistance in reviewing and redesigning its training programs,especially as regards term-lending.
Policies and Procedures
16. Operating Policies. With the exception of its Charter, whichprovides broad policy directions and stipulates certain limits (such as thesize of the capital and general reserves), BRI, until 1975, had no detailedPolicy Statement to guide its operations. As a result, it undertook someactivities (such as the financing of hotel construction) somewhat outsidethe scope of its regular operations. At BI's initiative, the Government andBRI reviewed the nature of BRI's operations and decided that it shouldconcentrate on the financing of agriculture and rural development. This wasreflected, along with other operational and financial guidelines, in thePolicy Statement adopted by BRI's Board in April 1975. The guidelinesestablished therein are, from time to time, augmented by specific Boardresolutions which establish precedents when individual projects or particularlending programs are approved.
17. Credit Procedures. Due to its large size and rapid growth, BRI hasfound it difficult to ensure that credit procedures are applied uniformlythroughout its organization. This point was highlighted by the Banking StudyTeam, which carried out an in-depth evaluation of BRI's credit procedures and
- 32 -
ANNEX 1Page 6
accounting system, as part of a BI program to upgrade the operating proceduresof all the state commercial banks. Reports prepared by this team stressedthe absence of detailed procedures manuals as a main reason for inter-branchvariations in BRI's credit procedures; they also identified shortcomings inappraisal, supervision and accounting practices. The Team's recommendationsare being generally implemented by BRI's management. In particular, taskforces have written detailed procedures manuals for various credit programs,which are being distributed to all BRI branches.
18. Term-Lending Procedures. BRI's term-lending operations for smallloans use simplified credit-investigation procedures that rely as much on theborrowers' character and collateral as on project viability. Such an approachto project appraisal is justifiable given the small size of individual loans,the limited education and training of loan officers, the absence of subsectoralanalysis upon which to base estimates of project viability, and the difficultiesin obtaining information on clients' operations. However, to remedy some ofthe inherent difficulties of smallholder term-financing, BRI is graduallyshifting from general ("umum") lending, where all loans are made purely on acase-by-case basis, to special ("khusus") or mass ("massal") lending, forwhich separate credit programs are developed by type of activity or subsectorbefore credits are made on either an individual or group basis. The "massal"approach allows extensive subsectoral analysis to be done prior to commencinglending operations, permits advisory and other supporting services to be pro-vided more efficiently to smal:L borrowers, and reduces BRI's administrativecosts (in comparison with that of equally small loans provided on a case-by-case basis). The establishment of a Program Development Department (PDD)within the Planning Bureau follows naturally from BRI's increasing use ofthis new approach. Under this approach, identification, formulation andimplementation of specific lending programs will be the result of colla-borative efforts between BRI and the Government technical agencies concerned.
19. A major shortcoming in BRI's present term-lending operations isinadequate supervision. While practices vary from branch to branch, loanofficers seldom keep track of their clients on a regular basis; most oftenthey only start to look into client performance when arrears develop. BRI'smanagement has been taking steps to strengthen follow-up. Apart fromincreasing term-lending staff and requiring that more time be spent onsupervision, BRI has incorporated systematic follow-up procedures into itsterm-credit procedures manuals.
20. Procurement and Disbursement. BRI's procedures for procurement anddisbursement under term loans have recently been tightened up. Previously,and in the absence of specific guidelines from head office, branches wereoften left to determine their own policies on these matters. This led towidely varying practices, particularly for credits granted under the "generallending" approach, but also for some "massal" type lending, although controlwas better there, since such credits are often granted on a "package" basis,
- 33 -
ANNEX 1Page 7
with loans made mostly in kind. Presently, BRI's procurement and disbursementprocedures for term-loans follow essentially the KIK/KMKP procedures whichcall for, wherever feasible, (a) borrowers to obtain and submit to thebanks three price quotations from suppliers/contractors, (b) disbursementsto be made directly to the supplier/contractor, and (c) disbursementsto be made in tranches, after inspection to ensure that projects are beingcarried out properly. In addition, a senior development banker to beattached to BRI's Investment Credit Bureau will examine all BRI term-lendingprocurement and disbursement procedures and recommend further improvements asnecessary.
21. Accounting and Management Information. Under the ADB-financedBRI Modernization Project, a new accounting system built around the use ofelectro-mechanical accounting machines, was introduced in BRI's Java branches.Concomitantly, to achieve consistency, a new manual accounting system was tobe developed and introduced in all nonmechanized branches. As the latterpart of the project was not carried out fully, there was considerable confusionand delay in the preparation of financial reports, since BRI was using twodifferent charts of accounts which could not be reconciled satisfactorily.BRI then hired two consultants from the firm of Price Waterhouse to reviewits accounting system and propose corrective action. These consultants havecompleted the design of a new manual accounting system and proposed a redeploy-ment of the accounting machines; they have also redesigned and streamlinedBRI's management information system, and are now overseeing its implementation.
Lending Operations
22. BRI's lending operations (Table 1) grew very rapidly during thefirst half of the 1970s, but leveled off in 1976. Disbursements, which hadrisen from Rp 131.1 billion in 1971 to Rp 991.0 billion (about US$2.4 billion)in 1975, dropped by 14% to Rp 855.7 billion in 1976, essentially as a resultof tighter BI ceilings on general commercial ("non-program") credit. Lendingunder most government programs ("program lending"), on the other hand, increaseddue to generous credit expansion allowances from BI, but this was offset bythe decline in fertilizer import financing. Program lending, which accountedfor around 60% of BRI's outstanding portfolio at year-end 1973, had grown toover 77% by end 1976. Finance for fertilizer import and distribution accountedfor 36% of the outstanding portfolio (Table 2), followed by short-term agricul-tural lending (27%), short-term lending to industry, trade and services(primarily agro-industries and dealers and traders in farm products) (19%),term-lending (16%) and personal and other loans (2%).
23. Term-Lending Operations. Although short-term lending still accountedfor 95% of total disbursements in 1976, medium- and long-term lending has beengradually assuming greater importance (Table 3). Until the end of 1973, BRI'sterm-lending operations had been limited to medium-term (up to five years)general investment (KIB) loans, averaging some Rp 10.6 million each. In early
- 34 -
ANNEX 1Page 8
1974, two new programs - KIK and KMKP - were established to address themedium-term credit needs of small entrepreneurs, with loans of up to Rp 5 mil-lion for both investment and permanent working capital. This was followed,in April 1974, by the mini-credit scheme of Rp 10,000-100.,000 loans made byBRI's village units for investment and working capital. In 1974, BRIalso began long-term lending operations (beyond five years) through theBank Group-financed Fisheries Credit and Smallholder and Private Estate TeaProjects (480-IND and 400-IND), and the ADB-financed East Java AgriculturalCredit Project. Term-lending increased from Rp 4.3 billion in 1973, to Rp45.8 billion (5% of total disbursements) in 1976, and accounted for 17% ofthe total 1976 year-end portfolio. The KIK/KMKP program accounted for 62% of1976 term-lending disbursements, Mini-credits for 26%, KIB for 8% andlong-term lending for 4%.
24. Other Operations. BRI also administers subsidy funds provided bythe Government for specific rural development purposes. For FY76/77, BRI wasentrusted to channel Rp 146 billion under the village public works (INPRES)program. As of December 31, 1976, BRI also had loans of about Rp 2.5 billionoutstanding in various village and paddy banks.
Financial Performance
25. BRI's net income reached a peak of Rp 5.5 billion in 1974, butdropped to Rp 3.3 billion in 1975, Rp 1.0 billion in 1976, and Rp 0.8 billionin 1977 (Table 4). The two main reasons for this trend are (a) BRI's expandedlending under programs (e.g. BIMAS, KIK/KMKP) with high administrative costsand low interest rates, and the decline of BRI's two large profitable opera-tions, fertilizer import financing and commercial non-program lending, and(b) the rise in interest costs as a percentage of total debt, from 3.2% in1974 to 6.3% in 1977, caused by the increasing proportion of time and savingsdeposits in BRI's total debt. Superimposed on this trend is BRI's poor collec-tions performance on loan interest, which is shown by the 12% p.a. yield onaverage loans outstanding in 1977, when the average lending rate was 16%p.a.
Financial Position
26. At year-end 1977, BRI's total assets stood at Rp 665 billion(US$1.6 billion), having doubled in both 1973 and 1974, and subsequentlyincreased by about 15% p.a. in 1975, 1976 and 1977./1 The expansion of BRI'sloan portfolio was financed almost entirely by deposits and by borrowingsfrom BI. The structure of BRI's assets and liabilities is summarized inTable 5. BRI's financial statements depart from generally accepted accountingprinciples in that (a) they use a modified cash rather than an accrual basis,
/1 In real terms, this was an increase of 73% in 1973, 67% in 1974, adecrease of 5% in 1975 and an increase of 1% in 1976 and 1977.
- 35 -
ANNEX 1Page 9
and (b) the provisions for doubtful accounts are set on a statutory basis,and therefore do not necessarily reflect BRI's portfolio condition. Anyjudgement of BRI's financial condition must therefore be qualified. Primafacie, however, this condition appears satisfactory, as does BRI's presentliquidity position and long-term capital structure (long-term debt/equity1.5:1). BRI's overall capital structure has improved substantially in recentyears; its debt/equity ratio decreased from 40:1 in 1973 to 13:1 in 1977,primarily as a result of increased Government advances which totalledRp 14.7 billion at year-end 1977, and BI frozen liquidity credits amountingto Rp 25.0 billion which are interest free and have no fixed repaymentschedule./l BRI's present overall capital structure is therefore satisfactory.
27. Portfolio Quality. Despite BRI's good performance in reducing loanarrears in 1977, overdue accounts remain BRI's main financial problem. Theactual arrears situation, however, cannot be established with certainty,since BRI's internal reporting system (a) does not record all loans inarrears, (b) treats program and nonprogram loans differently, and (c)provides only limited information on age classification of arrears. Fromavailable statistics, it appears that 23% of BRI's total portfolio (includingBIMAS) was in arrears as of December 31, 1977, with principal overdue amount-ing to Rp 105 billion (US$253 million) (Tables 7 and 8). Excluding BIMAS,the highest levels of program lending arrears were on loans to cooperativesunder the rice procurement and KIK programs (24% of the outstanding), and onKIB loans (13.2%). General commercial lending to agriculture, livestock andfisheries had arrears ranging from 14% to 25% of the outstanding portfolio,and to industry, trade and services, around 20%. During 1977, BRI's arrearssituation improved, as the following table indicates:
BRI's Arrears Position as of December 31, 1976 and 1977
1976 1977Commercial Program Total Commercial Program Totalloans loans loans loans loans loans
No. of accounts inarrears as % oftotal no. of accounts 34.8 40.3 40.0 15.7 46.1 44.7
Amount in arrears as% of principaloutstanding 42.1 16.2 25.0 23.4 22.3 22.7
/1 These frozen liquidity credits are actually shown as reserves in BRI'sbalance sheet.
- 36 -
ANNEX 1Page 10
The decrease in overall arrearages was due to the reduction in commercialloan arrears which resulted from BRI's vigorous collections campaign in 1977.During the year, around Rp 12 billion was collected on overdue accounts.
28. BRI's arrears problem is largely structural, traceable to thecomplexities of smallholder financing and the difficulties of operating in anenvironment more favorable to borrowers than creditors. BRI has startedtaking measures to deal with its arrears problem: procedures for follow-upand handling of overdue accounts are being instituted (para. 19), investiga-tions of particular lending programs conducted, and new guidelines issued tothe branches. Furthermore, in 1977, BRI established a three-year program toreduce loan arrears for all lending categories except BIMAS, rice procurementand fertilizer./l The objective is to bring down arrears on such accounts to12% of outstanding loans by year-end 1979, either through improved collections,restructuring of accounts or submission to litigation. As noted in para. 27,BRI has made a good start in implementing this program.
29. Provisions for Doubtful Accounts. As of December 31, 1977, BRI'sreserves and retained earnings totalled Rp 42.0 billion of which Rp 11.2 bil-lion (US$27.0 million) represented provisions for doubtful accounts. BRI'scharter calls for the establishment of a general reserve against bad debts,whose amount is not to exceed the bank's capital (Rp 300 million); inthe absence of any ceiling on the loans-outstanding-to-equity ratio, such aprovision is of limited value. In establishing its provisions for doubtfulaccounts, BRI therefore follows tax regulations which allow the build-up ofprovisions to the equivalent of 3% of outstanding loans. Given that asubstantial portion of its outstanding portfolio is fully guaranteed, such apolicy has enabled BRI to maintain reserves at a level well in line with thatrequired by sound banking practices. At year-end 1977, provisions fordoubtful accounts, at Rp 11.2 billion, represented 6.8% of the portfolio onwhich BRI carried the full financial risk, and actual arrears on this portfoliototalled Rp 36 billion.
30. Audit. Under its charter, BRI's accounts are audited annually bythe State Accountancy Directorate (DAN), whose reports are presentlyprepared in a form and detail which makes it difficult to reach a judgment onsome essential aspects of BRI's financial condition. In particular, theaudit on BRI ought to be gradually expanded to include a review of BRI'ssystem of internal audit controls and the auditors' recommendations for theimprovement of such controls, an analysis of BRI's loan portfolio and of theadequacy of reserves for doubtful accounts, and a description of the coverage
/1 These latter categories are partly or fully guaranteed by the Governmentor BI.
- 37 -
ANNEX 1Page 11
of the audit work performed (type of activity, number of branches visited,etc.). 'Much of the difficulty appears to come from DAN's staff shortage; aunit of only three auditors in the head office handles BRI and Bank Ekspor-Impor Indonesia. The proposed visit to BRI and DAN of an auditing expert toexamine the audit presently carried out should help clarify the nature of theproblem. Discussion of this expert's report between BRI, DAN and the Associa-tion should lead to the development of a program to achieve improvements inBRI's audit.
- 38 -
ANNEX 1Table 1
INDONESIA
RURAL CREDIT PROJECT
Bank Rakyat Indonesia: Summary of Lending Operations, 1973-76(in Rp billion)
1973 1974 1975 1976
Disbursements
Short-term loans /a
Program n.a. n.a. n.a. n.a.Non-program n.a. n.a. n.a. n.a.
Subtotal 381.8 659.4 958.5 809.9
Medium-term loans /b 4.3 21.7 31.8 43.8
Long-term loans /c - 0.3 0.7 2.0
Total disbursements 386.1 681.4 991.0 855.7
Outstanding at year-end
Short-term loans /a
Program 73.4 139.1 222.3 256.8Non-program 56.0 67.8 77.4 96.6
Subtotal 129.4 206.9 299.7 353.4
Medium-term loans /b 10.0 26.6 43.6 69.9
Long-term loans /c - 0.3 1.0 3.0
Total outstanding 139.4 233.8 344.3 426.3
/a Less than 1 year maturity.
/b 1-5 years maturity (KIB, KIK/KMKP and Mini-credit).
/c 5 years and above (IBRD- and ADB-financed projects).
Source: BRI
- 39 -
ANNEX 1Table 2
INDONESIA
RURAL CREDIT PROJECT
Bank Rakyat Indonesia: Summary of Short-Term Lending Operations, 1973-76(in Rp billion)
AAIRITU C ACOUETBRA PLANNING< FUDS IEPERSONNEL LOGISTICS SECRETARY
BUREAU ~ ~ CEDREA COUROAU BUREAU BUREAU CREDIT RAID NO NATIONAL ERDOBUREAU BU REAU BUREAU
B u BUREAU ~~~~~~~~~~ ~ ~~~~~~~~~~~~~~~~~~~~BUREAU EAURA OUREAU BRA
AUDIT APPRAISAL OPERATIONS APPRAIDAL CENTRAL CENTRAL OPERATIGNO ~~~APPRAISAL& r CONTROL rINTER-UDTM
DEPARTMENTMCON TRO DEATEN OEIEPNNDT LANNTEPRIDU NATIONAL &PEDNLPRHSN ERTR
GEPARTMENT DEPARTMENT DEPARTMENT DEPARTMENT DEPARTMENT DEPARTMENT~~~~~~~~~~~~~~~~~~~~~~~EPR T EN
MANAGEMENT EANICINO~~~~~~~~~~~~~~~~~~~~~~~~~~~~CE
EANMO AID ADMINIOTRATIUN TION OFFICE~~~~OF ICE
AUDIT DEPARTMDNT DOPERAIGION DEPARTMENT DOPUOTMENT OGISTICO SECRETARY~~~~~~~~~~~~~~~~~~~~~~~~~~~-Id-1,- I'M
- 47 -
ANNEX 2Page 1
INDONESIA
RURAL CREDIT PROJECT
Project Subsectors
A. Perennial Crops
Pepper
1. Indonesia has long been one of the world's major producers andexporters of pepper. Over 1970-75, production averaged 28,500 tons p.a.,and exports 21,500 tons p.a., or some 17% of world trade. Production hasfluctuated over time due largely to diseases. About 90% of total outputcomes from Bangka Island (South Sumatra), where white pepper is produced, andLampung, which produces black pepper. Both products are obtained from thesame vine, Piper nigrum, but the berries are retted in water to produce whitepepper, and sun-dried without retting for black pepper.
2. On Bangka Island, about 8,000 farmers grow pepper. The averageholding is just under 1 ha. About 5,400 ha is productive, of which halfis ready for replanting, and 2,200 ha is immature. The average annualyield is just under 1 ton/ha dry pepper (5,200 ton in 1974), whereas withpresent planting material more than 3 ton/ha is possible. High producinglocal varieties are grown at a density of 2,000 vines/ha. Dead supports areused for this climbing crop and shade is absent. The gestation period of newgardens is three years. Yellow decline, a serious condition in the past, hasbeen practically conquered. Disease and pest control are practiced, butcareful maintenance, use of mulch, and addition of large quantities ofbalanced fertilizer, while essential for high yields, are not always practiced.The productive life is at present generally less than 8 years, but could be15 years with proper cultivation.
3. Ripe berries are harvested in August/September, retted in water,and dried in the sun. This white (Mentok) pepper is bagged and stored forsale, generally to private traders. Farmers who need money earlier borrowagainst the crop, generally at high interest, from middlemen. Farm-gateprices are set quarterly by the Trade Department at approximately 50% of theC&F Europe price. The farm-gate price as of October 1976 was Rp 620/kg,with no price differentials by grade.
4. There is over 30,000 ha of pepper in North Lampung and 4,000 ha inCentral Lampung, with only 10% of the total area immature. However, some 50%of the area in North Lampung is affected by the very contagious Phytophthoraroot disease which is still difficult to control; the remainder is prone toabrupt infection. Pepper gardens in Central Lampung are much less susceptibleto infection; some 1,500 ha is ready for replanting in this area. Totalproduction for both areas in 1974 was 21,500 ton. High producing localvarieties are grown at a density of 2,000-2,500 vines/ha, under shade,with stems of shade trees up to 6 m high used as climbing supports. The
- 48 -
ANNEX 2Page 2
gestation period is 5-7 years. Many mature gardens show signs of neglect;disease and pest control are rare, and fertilizer use is inadequate. Meanactual yields are approximately 700 kg/ha, but more than 2 ton/ha is possible.The productive life is presently 10-12 years, but could reach 20 years withproper cultivation.
5. Green berries are harvested from July to October, sun-dried andbagged for sale, usually to village middlemen. The farm-gate price inOctober 1976 was set at Rp 424 per kg, equal to some 53% of the C&FEurope price. Average income per hectare is therefore about Rp 300,000 p.a.,only about half that of Bangka, due to less intensive production and pro-cessing practices.
Coffee
6. Over 1970-75, Indonesia's coffee production averaged 174,000 tons p.a.,and exports 104,000 tons p.a., or some 3% of total world trade. Arabica typesare grown in the highlands of Sulawesi, and Robusta varieties elsewhere.Lampung and South Sumatra contain 34% of all smallholders' coffee area. InLampung 1,200 ha immature, 44,000 ha mature and 5,500 ha senescent bushesproduce 30,000 ton/year, while in South Sumatra 4,900 ha, 55,000 ha and7,200 ha, respectively, produce 29,000 ton/year.
7. The Robusta types have good yield potential of over 1,500 kg/ha drycoffee, with disease and pest control, maintenance pruning and heavyfertilization; existing yields average 500-670 kg/ha. Cultivation is underlight shade, with 1,500-2,000 bushes/ha. The gestation period of new orrejuvenated plantings is 3-4 years, with biennial bearing a common characteristic,and the productive life is about 20 years.
8. The crop is harvested once a year, in May to August. Ripe berriesare picked, dried, hulled and sold to middlemen. Farm-gate prices are Rp 1,250per kg (October 1976) with no quality differentials. The farmer receivesapproximately 48% of C&F New York prices. Gross value per ha ranges fromRp 625,000-937,000.
B. Cattle
9. Indonesia contains about 6.2 million cattle and 2.3 million buffalo,virtually all owned by smallholders. The animals are generally integratedinto the crop farming operation, and have four main economic outputs - draftpower, manure, meat, and dairy products. The last two constitute 7.2% oftotal agricultural output.
10. There are two major breeds of cattle in Indonesia. The Ongole(Bos Indicus) is a long-legged, relatively slow maturing, white to greyanimal. It is favored throughout the country as a road transport animaland, in Java especially, for ploughing. The largest concentration of Ongolesis on Java, but Sumba is recognized as the traditional source for purebred
- 49 -
ANNEX 2Page 3
animals. The calving frequency is generally low, and this is exacerbated onJava by the poor condition of the cows (which are generally used for work)and the irregular availability of bulls.
11. The Bali (Bos Sonolaicus) is a small brown animal with whiteescutcheon and white legs. Like the Ongole, it is a slow maturing animal,but unlike the Ongole, it is extremely fertile. However, it is such a poormilk producer that calf mortality is always high under field conditions;survival is much better when the animals are housed.
12. The cattle population has apparently been dropping over the past fewyears, while demand for both beef and draft animals has risen. There appearsto be a shortage of draft animals in Java, where the cattle population hasbeen declining, and a growing need in the transmigration areas of Sumatra.At the same time, the traditional cattle exporting islands of eastern Indonesia(especially Sumba) have run down their own herds and can no longer meet theneeds of Java, Sumatra and Kalimantan.
13. Until recently, the Government's programs were directed mainlytowards increased beef production, for local consumption or export. Thiswas the target of its first large-scale credit program, the SlaughterAnimal Development Program (PUTP), and of the Bank-financed LivestockProject. Now, however, increasing the availability of draft animals hasbecome a prime concern.
C. Fisheries
14. The fisheries subsector accounts for about 4.5% of agriculturaloutput and employs 1.2 million people. Fish are the major source of animalprotein in Indonesia. Total annual fisheries production/consumption is onlyaround 11 kg/capita, compared with the long-term target, on nutritionalgrounds, of 30 kg/capita (which is the level in the Philippines and Malaysia).Production and consumption in Java are far below the national average - con-sumption is 3-4 kg/capita, and production some 3 kg/capita. Marine fisheriesaccount for 72% of output, brackish-water ponds 6%, freshwater ponds 4%, paddyfields 2% and open fresh water 16%. Production is almost all for domesticuse, except shrimp, for which Indonesia is Japan's largest supplier; shrimpexports grew from $31 million (25,000 tons) in 1972 to $120 million (35,000tons) in 1976. While it is estimated that the total sustainable yield ofIndonesian waters would be about 6 million ton, compared to the 1.4 millionton present production, many coastal areas are fully- or even over-exploited,especially along the north coast of Java. The Second Plan projects a 4% p.a.growth rate in output; this rate has been achieved over 1973-76, after agrowth rate of only about 1% p.a. over 1966-73.
- 50 -
ANNEX 2Page 4
Brackish-water Fishponds
15. Indonesia contains about 180,000 ha of brackish-water ponds, chieflyin Java (63%), South Sulawesi (24%), and Sumatra (10%). Production stagnatedfrom 1965-72, but rose from 51,000 tons in 1972 to 86,000 in 1976. Yieldsaverage some 300 kg/ha in Java, and 400-500 kg/ha elsewhere. These yields arequite low compared to other countries, such as Taiwan and the Philippines, dueto the poor cultivation techniques, especially the failure to use fertilizer,of most Indonesian producers. Although most farmers try to grow primarilymilkfish ("chanos chanos"), because of its high prices and potential highyields, it is estimated that only 20-30% of output in Java and 30-40% in SouthSulawesi is milkfish, due to shortage of milkfish fry and the incursion ofother "wild" fish, which eat milkfish fry and compete with milkfish for food,into the ponds from the sea. More recently, interest in shrimp production(especially tiger shrimp and white shrimp) has grown, due to the high exportprice; 2,000-3,000 tons are produced, chiefly in South Sulawesi and East Java.Average pond sizes are about 1 ha in West and Central Java and 5 ha in EastJava and South Sulawesi.
16. A major constraint on milkfish production is the supply of fry.West and Central Java import about 80% of their fry from South Sulawesi andEast Java, but those provinces are having smaller and smaller surpluses, giventheir own rising demand. As no way has yet been found to breed milkfish incaptivity, the two solutions to the fry shortage are to develop fry resourcesin Nusa Tenggara (the islands east of Bali), and to increase the survival rate(from fry to marketable size) from the present 10-15% to about 30%, withimproved facilities and management.
Freshwater Fishponds
17. Indonesia has a total of some 17,000 ha of freshwater fishponds, ofwhich 90% is in West Java. Production has stagnated since 1964. The averagepond size is only about 0.1 ha, but many farmers own a number of ponds. Carp,tawes and nilem are the main fish grown, with gourami, tambakan and tilapianext in importance. Most farmers make ponds near their houses, in shadedplaces that are difficult to use for farming. Farmers utilize their housesewage and livestock manure very efficiently as fertilizer for the ponds. Thefarmers are divided into fry producers, fingerling producers, and growers,although some farmers produce from fry to marketable size in their own ponds.Fry in nursery ponds or paddy fields grow to 3 to 5 cm fingerlings in 30-40days, and 5 to 8 cm fingerlings in another 20-30 days. These fingerlings growin rearing ponds until they reach consumable size, usually 100 gr in 90 days.They grow to 800 gr or 1,000 gr in special cases in another 3 to 5 months.The main markets are Bandung and Jakarta for the large fish; smaller fish aresold locally.
Fishing Boats
18. Marine production was 665,000 tons in 1965, and 1,448,000 tons in1976, a growth rate of 3.7% p.a. Over this period, the number of sailing
- 51 -
ANNEX 2Page 5
vessels increased from 225,000 to 290,000, but then fell back to 230,000,while the number of boats with motors rose steadily from 5,300 to 16,500.The fishinig ground for sailboats is generally within 20 km from the coast, asthe boats make daily trips, leaving in the early morning and returning beforethe evening auction hour. Despite the intensive fishing along this coastalbelt, stocks appear to have been maintained, assisted by the flow of fertilizedwater (from rice fields and fishponds) into the sea.
19. The most important area for small fishermen is the Java Sea, off thenorth coast of Java. In recent years, two major stock assessments of the JavaSea (beyond the coastal belt) have been conducted, one by the FAO/UNDP and theother by the West German and Indonesian Governments. These surveys suggestthat although larger fishing boats (e.g. 100 tons) would not be economicalthere, smaller boats (e.g. 20-30 tons) could be profitable.
Ice
20. Ice is needed for preservation of fish both aboard the fishingvessels and after landing. At present ice production appears to be inadequateoutside of the major cities; therefore, prices to fishermen are high, anduse of ice is limited. As a result, there is high spoilage of fish at sea,and most fish must be sold salted or dried, at prices well below those forfresh fish.
- 52 -
ANNEX 3Page 1
INDONESIA
RURAL CREDIT PROJECT
Existing Agricultural Credit Operations
A. The BIMAS/INMAS Program
Introduction
1. BIMAS (Bimbingan Massal), which literally means "mass guidance," isa national program to increase food crop production and farm income bysupplying credit and cash inputs at subsidized prices. Originally developedby the Bogor Agricultural Institute, BIMAS was initiated in the 1965/66 wetseason, involving a few thousand hectares and a handful of farmers. Itexpanded, with various modifications, until it covered around 40% of the ricearea with an assured water supply and 25% of the total wet-season rice area.BIMAS is currently the most important Government program to raise food cropyields, production and farm income, but farmer participation under BIMAS hasbeen declining in recent years, and INMAS (Intensificasi Massal) now appearsto cover a larger area.
2. The INMAS program was established in 1967/68 to make available sub-sidized inputs for cash to farmers who did not wish, did not need or were noteligible for BIMAS credit. The basic premise behind the creation of INMASwas that after a few years with BIMAS, a farmer's credit requirements woulddecrease, but that he would still need a program to provide inputs at subsi-dized prices. Therefore, under INMAS, no government credit was extended.However, starting with the wet season 1977/78, credit has been made availableunder INMAS on the same terms as BIMAS, for incremental fertilizer purchases.Over the last three years, INMAS has grown rapidly in terms of both areacoverage and number of participants.
The Initial BIMAS Programs
3. The original "Block BIMAS" program (1965/66) provided credit andinputs to groups of farmers through cooperatives or with the village head("lurah") acting as intermediary. It was soon affected by high arrears onloans, due primarily to the inadequate managerial experience of the newlyformed cooperatives, the general absence of collateral and the failure toevaluate farmers' repayment ability. Over 1965-69, credits totallingRp 7.8 billion were extended, of which about half was recovered.
4. A variation of the "Block BIMAS," the BIMAS Gotong Royong (self-help)was introduced in 1969/70. Under this program, credit was supplied as a fixedpackage per hectare to all farmers in selected areas, regardless of whether
- 53 -
ANNEX 3Page 2
they wanted it or could use it efficiently. The village heads received thetotal allocation for their village and distributed it to individual farmers.The input package, provided by contractors, included seeds, fertilizers andpesticides, cost of spraying, transportation and technical assistance. Cashfor living expenses also was available from BRI, as a loan. Many of theproblems of the "Block BIMAS" were experienced again under this program.Collection rates were particularly low because no records were kept at thevillage level. With the adoption on a large scale of the improved BIMASprogram, the BIMAS Gotong Rovong was discontinued in 1970/71.
The Improved BIMAS Program
5. The-improved BIMAS program was introduced in the Yogyakarta areain the wet season of 1969/70. Major changes from previous programs were madein the disbursement of credits and in extension. Rather than being channelledthrough an intermediary, credits became available to the individual farmerdirectly from BRI, and a new geographical unit, the village unit, became thebasis for providing a coordinated package of credit and technical advice.Defined as covering 600-1,000 hectares of well-irrigated paddy fields andserving 3-5 villages, each village unit includes a BRI credit office (fixedor mobile), a farmers' cooperative (BUUD/KUD) or a village kiosk to supplyinputs, and at least one field extension officer. In nonirrigated or uplandareas, no fixed criteria have been established for the size of village units.These may extend to cover a whole subdistrict ("kecamatan"), depending onfarm density and cropping activity.
6. Since its inception, the improved BIMAS program has undergone furtherchanges to suit the needs of a wider range of farmers. Loan procedures have beensimplified and commodity coverage extended. In the 1972/73 wet season, corn,groundnut, and soybean production were added to the program. A year later,coastal and dry land rice was included, along with sorghum and green peas;cassava followed in 1974/75. Separate packages have been developed for each ofthese crops and for the wet and dry season (Tables 1 and 2). Any farmer canapply for assistance under the program, but his creditworthiness must beattested to by the village head before BRI will grant him a loan. Villageheads receive a small incentive for each loan made, with half payment at thetime of loan approval and the other half when the loan is repaid. Farmersare permitted some choice in the selection of package components, and inpractice gain flexibility by exchanging materials with neighbors. Creditvouchers are used to obtain fertilizer and insecticide from the village kioskor the farmers' cooperative, and cash is given for seeds, spraying costs andliving expenses. The loan may be repaid in cash, or deducted from paymentsfor crops delivered to the cooperative.
7. BIMAS credits are granted by BRI at 12% interest p.a. and fullyrefinanced by Bank Indonesia at 3% p.a. Loans fall due 7 months after theirdisbursement, but are not considered overdue until 14 months after. This allowsthe farmer to take best advantage of seasonal crop price fluctuations. Nointerest or penalties are charged on overdue loans, and a farmer's eligibilityto borrow continues as long as he is not overdue for two seasons' loans.Loans may be rescheduled in times of crop failure or natural disasters,but this has not been done so far. Credit risk on BIMAS loans is sharedbetween Government (50%), BI (25%) and BRI (25%).
- 54 -
ANNEX 3Page 3
Recent Performance
8. Although its importance has been declining recently, BIMAS has beenan important factor in the increase in rice production since 1970. From1.0 million ha and 1.3 million participating farmers in the 1970/71 wetseason, the program grew to involve 2.2 million ha and 2.6 million farmers in:974/75, before decreasing to 1.8 million ha and 2.1 million farmers in1976/77. The BIMAS program for secondary crops has been less important,iLvolving at its peak (1975 dry season) only 220,000 ha and 254,000 farmers.As in the case of BIMAS paddy, the area covered by BIMAS secondary crops hasdeclined recently (Table 3).
9. In contrast to the BIMAS programs, the INMAS program continues togrow in terms of both area and number of participants. During the past threewet seasons (1974/75 - 1976/77), the area under INMAS paddy more than doubled,to 1.7 million ha. Area gains were registered in all regions, with the increasein Java being the most significant in both relative and absolute terms (Table 4).
10. Taken together, the BIMAS and INMAS paddy area increased from 2.8 to3.5 million ha during the past three wet seasons, while the area in secondarycrops rose from 228,000 to 775,000 ha. In 1976/77, INMAS accounted for 49% ofthe rice area under intensification and 80% in the case of secondary crops.Significantly, during the 1976/77 wet season, the combined INMAS area underpaddy and secondary crops exceeded for the first time the area under the BIMASprograms. While BIMAS and INMAS' are well developed in Java, farmer participa-tion in the outer islands is much lower.
BIMAS Credit Repayment
ii. Repayment rates for BIMAS paddy (Table 5) and secondary crops(Table 6) loans granted during 1970/71-1973/74 were very good; collectionswithin one year of due date exceeding most often 90% of amounts disbursed.These good results appear to have been due in part to BRI's vigorous collec-tions efforts, which included police and court action whenever appropriate,and to generally good harvests. However, repayment performance began todeteriorate with the dry season of 1974 and further decreased since then.By April 1976, 86% of the 1974/75 paddy credit had been repaid, whereas oneyear later, only 62% of the 1975/76 credit had been recovered. A similartrend has affected BIMAS credits for secondary crops. As of May 31, 1977,total arrears (amounts not repaid more than 14 months after disbursement) onBIMAS paddy credits had accumulated to Rp 28.6 billion, or 36% of the outstand-ing portfolio. Of this amount, Rp 25.6 billion (90%) was accounted for bycredits granted in 1974/75, 1975i and 1975/76. Arrears on BIMAS credits forsecondary crops as of May 31, 1977, totalled Rp 3.4 billion or 29% of theoutstanding portfolio.
- 55 -
ANNEX 3Page 4
12. Among the reasons suggested for the deterioration in BIMAS repaymentsare crop damage from drought, flood and pests, dissatisfaction with cumbersomecredit-approval procedures, and the reduced appeal of the input package dueto lower fertilizer prices and readily available supplies outside of theprogram. However, probably another important reason is weak collectionsefforts by BRI, coupled with insufficient incentives for borrowers to repay./lLosing access to BIMAS credit no longer seems to effectively deter borrowers'from defaulting, especially now that INMAS includes credit as well.
B. KMKP "Massal"
13. Under KMKP, BRI has financed a number of programs for specificcommodities, known as mass ("massal") or special ("khusus") KMKPs. Althoughconforming to the general rules of KMKP (e.g. concerning interest rate,maximum maturity, BI rediscounting terms), these programs are actuallymore similar to BIMAS than to general KMKP in that they: (a) cover specificcommodities; (b) meet essentially short-term production costs; (c) aredeveloped in close collaboration with the Ministry of Agriculture; (d) involvegenerally fixed input packages; (e) have lending targets in each districtinvolved; and (f) involve only limited checking of individual borrowercreditworthiness and individual subproject viability.
14. The agricultural KMKP "massals" BRI has handled are cloves, pepper,cattle fattening, fisheries, tobacco, cotton, sugarcane and poultry. Theperformance of these different programs has varied widely. In addition, thereis a KMKP fisheries that is more like a general KMKP approach, in that it isjust an amount of money set aside for fisheries lending (both inland andmarine), with no specific loan packages, and only limited technical support.
Pepper KMKP
15. Following demonstrations during 1971-73 of a good response to highfertilizer application by mature pepper vines, the pepper KMKP program wasstarted in Lampung in 1974/75 and Bangka in 1975/76. The credits aregranted for 12 months (October to October). The package for Lampung has beenabout Rp 150,000/ha, consisting of 400 kg of fertilizer (increased to 600 kgin 1976/77), insecticides, fungicides, spray equipment and Rp 50,000 forsubsistence (payment for the opportunity cost of the farmer's labor). Allexcept the last are paid in kind.
16. Technical responsibility is borne by a Project Management Unit(PMU). Cooperation between BRI and the PMU has been satisfactory. Villageheads select initial candidates. Ten PMU officers, briefly trained, visit
/1 At 12% p.a., the interest rate on BIMAS loans is barely positive in realterms. Furthermore, neither regular nor penalty interest is charged onamounts in arrears.
- 56 -
ANNEX 3Page 5
candidate gardens jointly with BRI staff, for final selection. The rejectionrate is 10-15%. Appraisal criteria include condition of farm (disease free,less than 20% failures, good maintenance, good yield potential), provenfarming ability, motivation and character of applicants. Land titles aslegal collateral value are rare. Standards for selection are subjectivelyapplied. The successful applicant obtains 1 month training and receivesmaterial inputs in October annually from commercial sources, through thevillage headman. Control on supply and application is exercised by PMUofficers. The farmers' obligations include maintenance, preparation ofcatchment pits, shade tree pruning, removal of lower branches, application offertilizers, insecticides and fungicides. Repayment is a precondition forobtaining further production credits. Marketing is through traditionalprivate channels, but may eventually be handled by cooperatives. Farmersreceive fixed farmgate prices.
17. For Lampung in 1974/75, the target of 500 ha was reached, involving408 farmers. In 1975/76, only 365 ha (300 farmers) were covered, compared tothe target of 700 ha, and as of October 1976, only 210 farmers had asked forloans, compared to the 1976/77 target of 750 ha. This declining interestresults from the failure of the program to achieve satisfactory results. In1974/75, yields averaged 375 kg/ha for non-borrowers and 525 kg/ha for bor-rowers. The incremental 150 kg/ha was worth Rp 60,000 (Rp 400/kg farmgate),far below the cost of the loan package. For 1975/76, yields averaged 450 kg/hawithout the loan, and 650 kg/ha with. At a farmgate price of Rp 340/kg, theincremental income was still only Rp 68,000. The poor response (especiallycompared to the 2,000 kg/ha ac'hievable by healthy gardens using 1,200-2,000 kg/ha of fertilizer) was apparently due to (a) the low response potential ofold gardens that had been poorly established and maintained, (b) inadequateusage of fertilizer, (c) late arrival of inputs, (d) disease in several cases,and (e) the poor technical knowledge of the PMU staff. Should the 1976/77credit, with a higher fertilizer dosage (600 kg/ha vs. 400 kg/ha) and, hope-fully, better selection of gardens and supervision of borrower not producesatisfactory results, termination of the program is likely.
18. Not surprisingly, repayment performance has been very poor inLampung. Total collections of principal and interest have been less than 10%of the amount due, for both the 1974/75 and the 1975/76 loans. The poorcollections performance reflects both the unprofitability of the investmentsand the poor synchronization of BRI's collections efforts with availabilityof cash from sales by farmers. Since farmers in default are not eligible fora second credit, there have been virtually no repeat borrowers.
19. Bankga. In contrast with Lampung, the program has been highlysuccessful in Bangka. The 1975/76 package was Rp 165,000/ha, consisting ofRp 60,000 for 400 kg NPK fertilizer, Rp 24,000 for 200 kg urea, Rp 32,000for 10 litres insecticide and Rp 50,000 for cost of living; mulching isexpected to be done by farmers, as is soil cultivation, weeding, fertilizerapplication, and insect control. Coverage was 470 ha (compared to the
- 57 -
ANNEX 3Page 6
500 ha target) and 618 farmers. Borrowers' gardens obtained yields of 1,500-2,000 kg/ha, compared to 1,000 kg/ha for untreated gardens. Some 80% ofthis response should be attributed to combined fertilizer and mulch treatment;maximum response is achieved in gardens with both treatments together. Whilestill well below the potential yields of 3,000-4,000 kg/ha in gardens of highproduction potential that receive fertilizer dressings of 2,000-3,000 kg/ha,the incremental yield of 500-1,000 kg/ha was worth Rp 320,000-Rp 640,000 (atRp 620/kg for white pepper), well above the input cost. Repayments have alsobeen good - some 70% of principal was repaid by the end of October 1976.Demand for the 1976/77 program was strong, with 513 existing borrowers and1,242 new borrowers having applied, covering 1,282 ha (the target is 1,500 ha).The new credite package was set at Rp 118,000/ha, consisting of Rp 48,000 for600 kg PK, Rp 24,000 for 300 kg urea, Rp 21,000 for 10 litres insecticide, andRp 25,000 for subsistence. Inputs arrived well in time.
Cattle Fattening KMKP
20. The cattle-fattening KMKP, officially known as the Slaughter AnimalDevelopment Program ("Panca Usaha Ternak Potong", or PUTP) is the largest ofBRI's KMKP massal programs. Each loan covers six fattening periods of sixmonths each - a total of three years - with one-sixth of the loan to berepaid at the end of each period. Each package consists of 1 animal and eachfarmer may take up to 3 packages. The loan is for Rp 80,000 as follows:purchase animal - Rp 70,000; improvement of stable - Rp 5,000; fodder -Rp 4,000; and veterinary expenses - Rp 1,000.
21. The program began in 1975, and during its first year, 22,088 farmersborrowed for 27,851 animals (the target was 28,000) with total lendingUS$4.88 million. Coverage was limited to 18 districts ("kabupatens") in EastJava, Central Java and Yogyakarta. The 1976/77 program aims at financing anadditional 23,850 animals, in both Java and other islands. Overall repaymentdata are not available; initial collections were apparently good in mostareas, but poor in some (e.g. near Yogyakarta) where farmers used the creditto meet their urgent need for draft animals, and hence had no income fromsales of fattened animals after six months.
22. Procurement and marketing arrangements vary by location. In CentralJava, the regular markets have generally been used, with supervision by theprovincial extension staff. In East Java, cooperatives, with loans from BRI,have bought the cattle from the farmers, and held them in cooperative fieldlots until sold to slaughter houses. In Yogyakarta, extension staff havepurchased groups of unfattened animals from traders, and then distributedthem to borrowers, who can select cattle from the group; few farmers exercisedthe option of buying outside directly.
mist blowers. The last three! have been for cooperatives and have been prac-tically discontinued, due to changes in government policy and poor repaymentperformance. The first three are closely related to project sub-loan cate-gories.
Cattle Breeding KIK
24. The cattle-breeding KIK was introduced around the end of 1976,following the generally successful experience of the first year cattlefattening KMKP, and the recognition that breeding of draft animals was ofprime importance. The loans are for five years, for a package consisting offive pregnant cows (Rp 300,000 in North and South Sulawesi, and West NusaTenggara; Rp 375,000 in Aceh; Rp 450,000 in Lampung and South Kalimantan),stable improvement (Rp 50,000), fodder (Rp 36,000), veterinary expenses(Rp 14,000) and artificial insemination (Rp 10,000). Total cost is Rp 410,000 -Rp 560,000. The initial year's target in the 6 provinces totalled 1,226packages (6,130 cows) costing Rp 551 million (US$1.33 million).
Fishpond Development KIK
25. Under KIK, BRI has been financing fishpond improvement in areas notcovered by the IDA-financed Fisheries Credit Project, and constructionof new fishponds in all areas. These have tended to be scattered loans,and only limited data are available. It is unlikely that the owners of newfishponds will be able to repay their loans within 5 years out of their pondearnings.
Fishing Boat Construction and Motorization KIK
26. BRI has financed construction of motorized boats in various loca-tions, and the installation of inboard motors into existing boats. Both havebeen scattered developments, using funds reserved for fisheries, but nototherwise different from general KIK.
Package A Package B Package C Average package Package A Package B Package C Average package
Amount Rp Amount Rp Amount Rp Amount Rp Amount Rp Amount Rp Amount Rp Amount Rp
Urea 200 kg 14,000 100 kg 7,000 250 kg 17,500 183.3 kg 12,831 200 kg 14,000 100 kg 7,000 250 kg 17,500 183.3 kg 12,831TSP 50 kg 3,500 35 kg 2,450 75 kg 5,250 53.3 kg 3,731 50 kg 3,500 35 kg 2,450 75 kg 5,250 53.3 kg 3,731
% Repayment within one yearof due date 91.3 88.3 77.1 79.6 70.0 -
% Repayment within two yearsof due date 96.1 90.6 90.9 - - -
la Information presented is derived from BRI records as of December 31, 1974-76.Information for the 1976/77 planting season is not available.
/b Credit repayments are due after 7 months and considered in arrears after14 months.
/c As of December 31, 1976.
Source: BRI.
- 66 -
ANNEX 4Page 1
INDONESIA
RURAL CREDIT PROJECT
Project Subloan Categories - Explanations and Models
A. Perennial Crops
1. The perennial crop lending would all be in South Sumatra andLampung, under'the supervision of BRI's Palembang Regional Office. Technicalsupport from the Directorate General (DG) of Estate Crops would be providedprimarily through Project Management Units (PMUs) operating under theprovincial extension services. Each PMU would be providing assistance to agroup of farmers growing a particular perennial crop in a given area.Project subborrowers would generally be in the group covered by the PMU;however, not all farmers in that group would necessarily be selected by BRIas subborrowers. Before commencing lending for the perennial crop categories,BRI would have to satisfy itself that the PMU involved was capable ofproviding the necessary support. In some cases, additional provision in thedevelopment budget for the PMJs would be needed to bring them up to therequired strength.
2. A project manager heads each PMU, and is responsible to theproject officer, who is the head of the Provincial Smallholders ExtensionService of the DG. The manager has two or more assistants, several fieldagents and other staff in accordance with the size of the project. Eachagent maintains contact with some 25-50 farmers; in large projects, contactfarmers are elected by the farmers to serve as intermediaries for thetransmission of technical information and advice from the field agents.
Pepper - Bangka Island
3. Bangka Island is weLl suited for pepper replanting because ofproper climatic conditions, concentrated and easily accessible pepperareas, experienced and motivated smallholders, a well-run PMU, sufficientnumbers of aging and senescent gardens, and the successful implementation ofthe Pepper KMKP (Annex 3). However, the chemical soil conditions areextremely poor; application of 3 ton/ha complete fertilizer, combined withheavy mulching, good maintenance and pest and disease control are necessaryto achieve high yields. In particular, low or unbalanced fertilizer levelsand neglect of mulching would reduce yields by some 50%, and permit fatalyellow decline to develop. Even one year's neglect would be extremelyharmful.
4. PMU support is needed for (a) selecting healthy, good qualitycuttings for planting, (b) advising BRI on which gardens are suitable forreplanting, (c) ensuring that commercial channels provide adequate andtimely supplies of fertilizer and other inputs, and (d) checking that thegardens remain healthy.
- 67 -
ANNEX 4Page 2
5. The credit package would generally be for a maximum of one ha perfarmer, as this is the area a farmer could adequately handle with hisfamily. Credit would be needed for the three-year gestation period, plusthe next year, when the yield is low. The total maturity period would beabout eight years. About 1,600 ha appear suitable, phased approximately400 ha in 1979/80, 550 in 1980/81 and 650 in 1981/82. The areas of Namang,Jelutung, Sungka and Petaling would be most suitable in the first year,expanding to Mentok, Toboali and Koba thereafter.
6. The package would cover hardwood posts, fertilizers, insecticides,fungicides, mulch, spray equipment, the land title certificate and labor. Theposts would be wholly or partially excluded for replanting where satisfactoryposts exist. The total investment is shown in Table la, and the cashflow in Table lb.
Pepper - Lampung
7. Lampung is also climatically well suited for pepper, and has muchbetter soils than Bangka. However, the general quality and maintenance ofthe existing plantings is poorer than in Bangka, so greater efforts atfarmer training will be necessary. In addition, as phytopthera disease isrampant in parts of Lampung, special care will be needed in the selection ofareas for the credits. The PMU will need to be strengthened to performthese functions adequately. In view of the poor performance of the PepperKMKP in Lampung during its first two years, it is advisable to move slowlyin the implementation of the planting/replanting scheme until after it hasbeen tried out for a year in Bangka.
8. The maximum area to be covered would generally be one ha. Creditwould be needed for the five-year gestation period, plus the next year oflow yield. (The gestation period is longer than in Bangka because the vinesare grown in shade, on live supports which are planted one year before thevines; pilot efforts of using dead supports may also be tried out on alimited basis.) The total maturity period would be about 11 years. About1,200 ha appears suitable, phased approximately 450 ha in 1980/81 and 750 hain 1981/82. Lending would be limited to South Lampung. Sukaduna and Jeparaappear suitable initially, followed by Djabung and Labuhan Meringgai.
9. The investment cost is lower than for Bangka because no posts wouldbe needed (live trees are used); the fertilizer need would be 2 ton/ha, ratherthan 3 ton/ha (due to better soils); no mulch would be used, and less laborwould be required. Partially offsetting this would be greater use of fungicideand insecticide. The investment cost is shown in Table 2a, and the cash flowin Table 2b.
Coffee - Lampung
10. About 2,500 ha of coffee in South Lampung would be rejuvenated bydeep pruning (also called stumping), with approximately the following phasing:1979/80, 450 ha; 1980/81, 800 ha; 1981/82, 1,250 ha. The first area covered
- 68 -
ANNEX 4Page 3
would be Tabang Pandang, and then the nearby Pulau Bangun/Kedongdong. Demon-strations by PMUs have shown excellent results when deep pruning is combinedwith adequate fertilization. There has recently been considerable spontaneousdeep pruning by smallholders, based upon advice from the PMUs, but usuallywithout concomitant fertilization.
11. The credit package would include fertilizer, insecticides, fungicides,a sprayer and the land title certificate, plus income to substitute in part forthe output foregone during the investment period. To produce a stable incomefor the farmers, only one fourth of the area would be stumped every two years.(Since the cycle after stumping consists of two years without production,two years of low yield and four years of high yield, after which the plantsshould be stumped again, at any given time one fourth of the garden would bein gestation, one-fourth having low yields, and half having high yields. Inany case, shade requirements preclude stumping more than half the rows inany year.)
B. Cattle Breeding
12. The DG of Animal Husbandry (DGAH) has now developed a creditpackage for cattle breeding in the outer islands, consisting of credit tosmallholders for the purchase of five cows, plus housing for the cattle,veterinary supplies, and supplementary feed. Artificial insemination (AI)would be available for some cows under the program. In November 1977, BRIbegan to give five-year subloans for this cattle breeding, under the KIKprogram.
13. The project would finance this program in 1979/80 in South Sulawesi,Lampung and possibly East Java, and then spread the program to Central Javaand Yogyakarta the following year. The main modifications would be:
(a) extending the loan period from five years to eight years, so thatfarmers would be able to repay while maintaining the herd sizesthey had established;
(b) requiring that bull units be provided, with or without the AI, toincrease the calving rate; suitable bulls could be provided byP.T. Bina Mulya Ternak ranches (financed under the LivestockProject) in Sumba and South Sulawesi, as well as from othersources, using pure Ongoles, pure Brahmans, Ongole/Brahman andOngole/Charbray crosses; the average cost would be Rp 150,000 fora bull, Rp 50,000 fcir the shed and yard, and Rp 10,000 for veteri-nary expenses; the farmers entrusted with the bulls would care forthem free of charge for five years, after which the bulls wouldbecome their property; cows would be serviced for a nominal fee;there should be two bulls per 100 cows within a radius of 1.5 km;
- 69 -
ANNEX 4Page 4
(c) providing packages including two cows per subloan in Java andLampung, and two or five cows in South Sulawesi;
(d) in Java and Lampung, giving the subloans, as much as possible,to farmers who would need the cows for draft and fertilizer, aswell as breeding.
14. The estimated number of cows involved would be as follows:
/a DGAH breeding program for 1976/77, for which financing began inNovember 1976.
The limiting factor on project size would vary between islands: in Lampungit would be supply of cattle, in Java primarily availability of feed, and inSouth Sulawesi the implementation capacity of DGAH and BRI. The cattle usedwould be Ongoles, except for Lampung where Ongole-Bali crosses might beused. East Java would supply most of the cows for Central Java and Yogyakarta,in addition to its own needs, and South Sulawesi would supply most ofLampung as well as itself. Movement of cattle would generally be handled byprivate traders, except for interisland shipments to Lampung, which the DGmight have to arrange.
15. Field Extension Workers (PPLs), under the guidance of LivestockExtension Specialists (PPSs) would work through farmers' group leaders toassist the farmers. About 35 PPLs and 5-7 PPSs would be needed for projectsubborrowers (one PPL per 300 farmers). The DG Animal Husbandry staff wouldhave to (a) approve the quality of and pregnancy test the cows to be purchased,(b) vaccinate the cows as needed, (c) advise the farmers on animal health andbreeding, and on keeping proper records, and (d) assist the farmers withmarketing, if needed. It should be noted that the program would be aimed atfarmers who are interested in and capable of operating a small breeding herd.Farmers wanting only a single draft animal can obtain finance of up toRp 100,000 from BRI's village units under the Mini-credit scheme.
- 70 -
ANNEX 4Page 5
C. Fisheries
Brackish-Water Fishponds
16. The finance for brackish-water fishponds would be a follow-up tothe Fisheries Credit Project. The essential elements for improving yieldsare: (a) constructing separate nursery and transition ponds within thefishponds to protect the fry and fingerlings from predators; (b) deepeningthe ponds and canals, and adding and improving sluice gates to permit bettercontrol of water levels and salinity; (c) enlarging the dikes, improvingscreens and applying pesticide to control predators; and (d) applying fertil-izer to stimulate growth of blue-green algae as food.
17. These improvements to the ponds should make it possible and worth-while for the farmers to concentrate on milkfish monoculture or milkfish/shrimp mixed culture. The latter is most suitable for South Sulawesi,where the greater tidal differences permit better water control, and wherethe ponds are generally larger and the management better.
18. Subloan disbursement would be in three tranches. The firsttranche would be for about ha:lf of the fixed investment; the second, for theremainder of the fixed investment, after inspection by BRI that the work wasproceeding satisfactorily; the third, for the fry, fertilizer and otherworking capital, upon completion of the pond improvement.
I9. Yields presently average about 100 kg/ha of milkfish and 200 kg/haof other fish. Monoculture ponds are expected to reach 600 kg/ha of milkfish,and mixed culture ponds to yield 250 kg/ha of milkfish and 120 kg/ha ofshrimp.
20. Under the Fisheries Credit Project, 7,200 ha has been financedover 18 months, so far. Under the RCP, about 22,000 ha would be financedover 3 years, divided approximately as follows:
Monoculture Mixed culture Total
West Java 3,500 500 4,000Central Java 4,000 1,000 5,000East Java 4,500 1,000 5,500South Sulawesi 4,000 3,500 7,500
Total 16,000 6,000 22.000
21. About 15 additional demonstration ponds would be constructed andoperated by the DG of Fisheries, at least one in each district not included
- 71 -
ANNEX 4Page 6
in the Fisheries Credit Project. The average construction cost of the
demonstration ponds would be Rp 670,000 for a 2.5 ha pond for monoculture,and Rp 840,000 for mixed culture.
Freshwater Fishponds
22. The project would improve to about 1,500 ha of freshwater fishpondsin West Java, covering Garut, Takismalaya, Bandung, Cianjur and Sukabumidistricts. The DG of Fisheries would set up about five demonstrationponds, one in each district, to do research and extension, especially on useof different agricultural wastes and by-products of agricultural processingas fish food.
23. The subloans would increase yields by 40% from 2,000 kg/ha to2,800 kg/ha, while producing higher priced fish so that the average salesprices rise from about Rp 250/kg to Rp 300/kg. The keys to higher yields aredeepening the ponds, improving the inlet and outlet to ensure proper flow,and providing adequate feed and fertilizer. These improvements would allowthe farmers to switch from monoculture to polyculture with bottom-, middle-and surface-feeding fish inhabiting the same ponds but not competing witheach other for feed.
Fishing Boat Motorization
24. Under the project, about 250 boats along the north coast of Java andin South Sulawesi would be provided with inboard motors, in a pilot program totest the appropriateness of this technology. Only a handful of fishing boatsin South Sulawesi have inboard motors, and there has been no monitoringof the results. The main questions are: (a) performance of outboard vs.inboard motors in the Java Sea; (b) actual increases in fishing days andcatch from the boats; (c) whether the boats develop new fishing groundsfurther from the coast, or merely compete directly with the sailboats; and(d) the social effect of boat motorization, including the attitude of tradi-tional fishermen, and possible effects on employment.
Ice Plants
25. Ten ice plants are projected, with two in West Java (Indramayu andSukabumi), three in Central Java (Pemalang, Demak and Rembang), two inEast Java (Lamongan and Situbondo), and three in South Sulawesi (Takalar,Bone and Singai). All of these would be at ports where DG of Fisheries isproviding other basic infrastucture including wharfs, auction places, storageand access roads. The ice plants would be operated by fishermen's coopera-tives where capable and interested cooperatives existed, and by privateentrepreneurs elsewhere. As most fishermen are not used to ice, the plantsmight initially sell in large part to other customers.
26. Procurement of nine ice plants under the Fisheries Credit Projectis now under way. Detailed arrangements for the plants under the RCP willbe based on the experience of these first nine plants. While the averagecapacity of the plants under the RCP is expected to be about 5 ton/day, thismay vary depending on local needs.
- 72 -
ANNEX 4Table la
INDONESIA
RURAL CREDIT PROJECT
Investment Cost for One Hectare Pepper Planting in Bangka(Rp '000)
/a Assumes 1/4 ha deep-pruned in year 1, 1/4 ha in year 3, 1/4 ha in year 5.
/b 100 kg/1/4 ha in year 1, declining by 10 kg/l/4 ha per year.
/c Long-lance, knapsack sprayer.
/d For each 1/4 ha, 80 kg in year of pruning, 100 kg following year,170 kg the third year, and 200 kg thereafter; Rp 80/kg.
/e Lannate 25% W.P. for each 1/4 ha, 150 gm in year of pruning,300 gm following year, and 600 gm thereafter; Rp 16,000 kg.
/f Dithane M45; for each 1/4 ha, 1 kg in year of pruning, 1.5 kg followingyear, 2 kg thereafter; Rp 2,275/kg.
/g Incremental labor required based on 10 man-days/ha for stumping,10 man-days/ha for fertilizing, 20 man-days/ha incremental maintenance,and 1 man-day/40 kg harvesting; Rp 380/man-day.
/h First yield 3 years after pruning is 100 kg/l/4 ha, and 150 kg/l/4 hafollowing year; Rp 400/kg.
/i Labor plus part of net output foregone; equivalent to 51% of totalinvestment cost.
- 77 -
ANNEX 4Table 3b
INDONESIA
RURAL CREDIT PROJECT
Cash Flow Proiection for One Hectare Coffee Farm (Lampunz) - Rejuvenation of Existing Plantation(Rp '000)
/a For comparative purposes, shown for package of two cows; however,the existing KIK package of five cows may be retained in SouthSulawesi.
/b If Bali cows purchased, the cost is Rp 110,000.
/c In Java all animals are housed and fed by "cut and carry"method. In Sulawesi it is all open grazing and animals are
yarded at night. In Lampung it is mixed.
/d Strictly supplementary feeding only. Could cover working period,calving period or end of dry season. Calculation 0.2 kg ricebran per breeder per day for 60 days per year. Rp 30 per kilo(Rp 20 in South Sulawesi). First three years only.
/e This insurance is taken out with P.T. Askrindo. Covers repaymentof debt only. Does not cover the life of the animal.
/f Twenty-five man-days in Java, 20 man-days in Lampung, 10 man-days
in South Sulawesi; at Rp 380/man-days (see note lb for explanationof differences.
/g Ten percent of investment.
- 79 -
ANNEX 4Table 4b
INDONESIA
RURAL CREDIT PROJECT
Cash Flow for Cattle Breeding Package in South Sulawesi /a(Rp '000)
ResidualYear value of
1 2 3 4 5 6 7 8 herd
I. Cash InflowSale of cattle/b - - - 55 75 75 55 75 250Sale or use of manure 3 7 9 10 10 10 10 10 -Hiring or use ofdraft animal 5 15 15 15 15 15 15 15 -
/a 400 cu m for monoculture, 480 cu m for mixed culture; Rp 250/cu m for labor./b 12 months' supply of fry; 6 months' of other inputs./c 5-7,000 fry, at Rp 5-7 @./d 1,000 fingerlings, at Rp 20 @./e 9,000 fry, at Rp 6 @./f Rp 15/kg.la Rp 70/kg./h Rp 20/kg./i Rp 10,000/kg.11 Rp 400/man-day.
- 84 - ANNEX 4
Table Sb
INDONESIA
RURAL CREDIT PROJECT
Cash Flow for One Hectare Brackish Water Fishpond Monoculture(Rp '000)
Before Yearproject 1 2 3 4 5 6 7 8 9-15
I. Cash Inflow /aSale of milkfish 40 85 170 200 240 240 240 240 240 240Sale of other fish 60 30 - - - - - - - -Loan - Fixed investment /b - 153 - - - - - - - -
1. For all subloan categories, the economic analysis is generallysimilar to the financial analysis. The primary changes involved are adjust-ments from financial prices to economic prices, specifically:
(a) the opportunity cost (shadow price) of US$1.00 of foreign exchangeis estimated at Rp 520 or 25% above the official exchange rate;
(b) the opportunity cost: (shadow price) of unskilled labor is estimatedto range by location from Rp 150-200 per man-day, or 50% of thegoing wage,/l and of skilled labor to be 75% of the going wage;
(c) the economic prices for rice and balanced NPK fertilizer is theprojected import-parity price of Rp 100/kg, compared to thepresent Indonesia price of Rp 80/kg.
It should be noted that these figures are only approximations, and the actualeconomic prices under (b) and (c) will vary between geographic areas. Theother economic prices equal the financial prices, and are based on currentIndonesian prices, except for coffee, where the projected export-parity priceis used. The net effect of these adjustments is to change the rates ofreturn for most categories only marginally.
2. The boat motorization category would be a pilot effort, aimedlargely at determining the extent to which the motorized boats would developnew fishing grounds, make fuller use of existing but under-exploited fishinggrounds, or compete with sailboats in fully-exploited areas, and thus partiallydisplace the latter. In the economic rate of return calculation, it isassured that 10% of the catch would be at the expense of other fishermen, andthus not an economic benefit.
3. For cattle breeding, the financial analysis provides a basis forthe economic analysis insofar as the purchase price of cows is a good reflec-tion of their economic value (i.e., their opportunity cost in nonprojectuses). Were the necessary data available, this assumption should be probedby examining carefully the "without" situation - e.g., what would be theslaughter rate, breeding rate, draft and manure output, etc., of the cows ifthey were not purchased for the project. However, adequate data for thisare not available.
4. The estimated overall economic rate of return for the project is27% (see text, para. 7.07).
/1 Based on analyses done in the appraisal of the Indonesia IrrigationProject VII (Report No. 1035b-IND, April 28, 1976, Annex 12).
nDONESIA
RURAL CREDIT PROJECT
Economic Rates of Return for Perennial Crops(Rp0oo)
/a Adjusted to reflect the opportunity cost of unskilled labor nd the import-parity price of fertilizer.
1k Adjusted to reflect the opportunity cost of foreign exchange (US$1.00 - Rp 520) on the foreign exchange portion of the investment cost, the shadowprice of labor and the import-parity price of fertilizer.
/c Export-parity price of coffee, US$0.77/lb.
- 94 -
ANNEX 5Table 2
INDONESIA
RURAL CREDIT PROJECT
Economic Rates of Return for Cattle Breeding(Rp'00)
/a Opportunity cost of labor: 50% of amounts shown for labor in Tables 5b, 5cand 5d of Annex 4.
- 95 -
ANNEX 5Table 3
INDONESIA
RURAL CREDIT PROJECT
Economic Rates of Return for One Hectare Fishponds(Rp'OOO)
Year1 2 3 4 5-15
Brackish water - monocultureIncremental benefits 15 70 100 140 140
Incremental costs /a 45 45 45 45 45
Investment cost /b 171 - - - -
Net economic benefits (201) 25 55 95 95
Economic rate of return - 34%
Brackish water - mixed culture
Incremental benefits 40 140 185 240 240
Incremental costs /b 92 92 92 92 92
Investment cost /c 191 - - - -
Net economic benefits (243) 48 93 148 148
Economic rate of return - 43%
Fresh waterIncremental benefits - 200 250 300 340
Incremental costs /b 52 52 52 52 52
Investment cost /c 350 - - - -
Net economic benefits (402) 148 198 248 288
Economic rate of return - 53%
/a Adjusted for opportunity cost of labor.
/b Adjusted for both opportunity cost of labor and of foreign exchange.
- 96 -
ANNEX 5Table 4
INDONESIA
RURAL CREDIT PROJECT
Economic Rates of Return - Fishing Boat Motorization(Rp'000)
Year1 2-10
Case A: No competition with existingfishing boatsIncremental benefits 272 545Incremental costs /a 146 289Investment cost /b 942 -
Net economic benefits (816) 256
Economic rate of return - 28%
Case B: 10% of the catch taken awayfrom existing fishing boatsIncremental benefits /c 181 426Incremental costs /b 146 289Investment cost /c 942 -
Net economic benefits (907) 137
Economic rate of return - 7%
/a Shadow cost for labor: 75% of crew's wage rate.
/b Foreign exchange component of total investment cost: 70%, to which theopportunity cost of foreign exchange was applied (US$1.00 = Rp 520).
/c Incremental benefits reduced by 10% of fish catch value.
- 97 -
ANNEX 5Table 5
INDONESIA
RURAL CREDIT PROJECT
Economic Rates of Return - Five-ton Ice Plant(Rp million)
Year1 2-10
Incremental benefits - 12.0
Incremental costs /a - 2.7
Investment costs /b 44.6 -
Net economic benefit (44.6) 9.3
Economic rate of return - 20X
La Shadow price for skilled labor: 75% of going wage rate; andfor unskilled labor: 50%.
/b Foreign exchange component of total investment cost is 68%,to which the opportunity cost of foreign exchange was applied(US$1.00 - Rp 520).
- 98 -
ANNEX 6Page 1
INDONESIA
RUTRAL CREDIT PROJECT
Term Lending Consultancy - Draft Terms of Reference
General
1. It is estimated that about eight resident consultants, plus severalshort-term assignments, would be required to strengthen BRI's term-lendingoperations and assist in implementation of both the Rural Credit Project(RCP) and other medium- and long-term lending programs. The consultants inBRI's regional offices would work exclusively within the project area of theRCP (East, Central and West Java, Yogyakarta, South Sulawesi, South Sumatraand Lampung). The consultants in BRI's head office would give priority tolending in the project areas, but would also assist BRI in broader aspects ofits term-lending program. Of the eight consultants there would be one economist,one training specialist, three development bankers and three agriculturalexperts. BRI would give strong preference to proposals that included atleast three qualified individual Indonesian consultants, especially for theagricultural positions. One of the consultants would be designated teamleader, and would handle administrative matters with BRI concerning theconsultancy. The team leader would meet with BRI's President Director andBoard of Directors on a regular basis. The position of senior developmentbanker in BRI's Investment Credit Bureau would be the most suitable one forteam leader. However, on all operational matters, the individual consultantswould be responsible to BRI through their respective bureau heads or regionalmanagers. Each consultant would work closely with one or more counterpartsat the department-head level, as well as with more junior staff, and shouldgive high priority to the traLning of those people. All the consultantsshould be willing and able to travel extensively in Indonesia. The trainingspecialist and the consultants to be stationed in BRI's regional officeswould be expected to have or to acquire a working knowledge of spokenIndonesian before commencement of, or early in, their assignments, and theother consultants to obtain such knowledge within their first year. BRIwould help arrange for intensive language training in Jakarta as required,but the training would be at the consulting firm's expense. In addition,the consulting firm might be called upon to provide short-term consultancy toBRI on more specialized matters; however, the amount and cost of this wouldnot be specified in the original contract, but would be agreed from time totime as required.
2. The estimated consuLtancy need is as follows:
- 99 -
Annex 6Page 2
Position Location Duration
1. Program Development Economist Planning Bureau 2 years
2. Training Specialist Education Bureau 1-1/2 years
3. Senior Development Banker Investment Credit Bureau 2-1/2 years
4. Development Banker Regional Offices, SouthSumatra/Lampung andWest Java 2 years
5. Development Banker Regional Offices, SouthSulawesi, Central andEast Java and Yogyakarta 2 years
6. Perennial-Crops Specialist Regional Office, SouthSumatra/Lampung, andPlanning Bureau 2 years
7. Fisheries Specialist Planning Bureau 2 years
8. Livestock Specialist Planning Bureau 2 years
16 years
3. At BRI's head office, the units most involved in the RCP would bethe Project Aid Department of the Investment Credit Bureau which wouldsupervise implementation of the lending program, the Education Bureau whichwould handle the training, and the newly-created Program Development Department(PDD) of the Planning Bureau. The PDD would be staffed primarily with econ-omists and experts in the various subsectors for which programs exist orwould be developed under the RCP or other term-lending programs (fisheries,livestock, perennial crops, annual crops, small industry, marketing, agricul-tural processing). The PDD's major functions would be:
(a) preparation of annual lending programs for all RCP and otherterm-lending subloan categories; these programs would specify,inter alia, the amount of lending proposed by province, which BRIbranches would be participating, and what technical support wouldbe available from the Ministry of Agriculture;
(b) identification, preparation and appraisal of new subloan categoriesfor lending under the RCP, or other term-lending programs, in closecooperation with BI;
- 100 -
Annex 6Page 3
(c) preparation of teclnical and financial guidelines on these variouscategories, to be incorporated as supplements to BRI's proceduresmanual for small term-lending; and
(d) conduct or contracting out (after consultation with BI) ofevaluation studies of BRI term-lending operations.
In preparation of the various programs, the PDD would work closely withBI and the Directorates General of the Ministry of Agriculture. All newcategories and all annual lending programs would be submitted to the BIhead office for comments and approval.
Program Development Economist
4. The program development economist would serve as an advisor tothe Planning Bureau head, and would have as his main counterpart the headof the Program Development Department (PDD) to be established in that Bureau.His main function would be to guide the PDD in the development of lendingprograms both for long-term RCP-financed categories, and for other term-lending operations. He would also advise and assist the Planning Bureauhead in developing the operating procedures of the PDD and in trainingPDD staff, and would, as required, assist the Education Bureau in providingeconomic training for BRI term-lending staff. The consultant should have aPh.D, M.A. or equivalent degree in economics or agricultural economics. Heshould have more than five years' experience in program development, projectappraisal and credit operations, with much of this in developing countries.Training or experience in agricultural economics would be essential, as thisis the sector for which BRI has the major responsibility.
Training Specialist
5. The training specialist would advise and assist BRI's EducationBureau head on all aspects of training for term lending. His major functionswould be to:
(a) complete the identification of the training requirements for allterm-lending staff at BRI's head office, and regional and branchoffices, particularly those participating in either the SEDPor the RCP;
(b) advise on the design of new courses, the modification of existingcourses and the selection of outside training for BRI's term-lending staff;
(c) prepare teaching material for the above BRI courses: and
(d) train teachers for the above BRI courses.
- 101 -
Annex 6Page 4
All staff handling term-lending would be considered for participation, butthe main emphasis would be on BRI staff handling RCP lending at the branchoffices, who would be at three levels:
(a) loan officers ("mantris") who make the field investigations ofindividual loans, recommend loan approval and terms, andsupervise project implementation;
(b) credit section heads, who supervise the loan officers and reviewtheir recommendations; and
(c) branch managers, who have the authority to approve loans (up tocertain limits) or recommend them to the regional managers forapproval.
Separate training programs would be needed for staff at each of these threelevels. In developing these programs, the training specialist would workclosely with two consultants who have been recruited under the SEDP forLPPI. The LPPI consultants would be responsible for designing courses whichLPPI, BRI and the other term-lending handling banks would give to the branches'term-lending staff. However, these courses would only deal with matterscommon to all the handling banks. BRI's own training consultant wouldtherefore pay particular attention to developing courses that would meetneeds specific to BRI, especially in agricultural credit and the implemen-tation of BRI's own procedures manual for small term-lending.
6. The training specialist should have considerable exprience inplanning and undertaking the training of bank staff in developing countries,preferably where agricultural term-lending was involved. He should befamiliar with both the main subject matter to be taught (procedures for theappraisal and supervision of term loans to agricultural and other smallenterprises) and with educational methodology.
Development Bankers
7. The three development bankers would advise and assist BRI withmedium- and long-term lending including implementation of the RCP. Thesenior development banker would serve as an advisor to the Investment CreditBureau head in Jakarta. He would have three main counterparts: the head ofthe Investment Credit Bureau, the head of the Project Aid Department (for theRCP) and the head of the KIK/KMKP Department. In Jakarta, his major respon-sibilities would be to:
(a) monitor the progress of the various units of BRI engaged in theimplementation of the RCP and other term-lending programs (regardingdeveloping annual programs, recruiting and training staff, obtainingtechnical support from the Ministry of Agriculture, preparing
- 102 -
Annex 6Page 5
appendices to the procedures manual, allocating funds, etc.) andadvise BRI management of any bottlenecks or delays;
(b) in cooperation with the PDD, assist in preparing appendices tothe procedures manual for small term-lending for each RCP subloancategory or other term-lending activity, spelling out the specificprocedures to be fo.Llowed for that category, within the generalguidelines of the manual;
(c) based on experience with the RCP and other term-lending programs,recomblend modifications in the procedures manual, and check thatthe manual is being kept current; in proposing modifications inBRI's small term-lending procedures manual, the consultant wouldcoordinate closely with the KIK/KMKP procedures expert who would beassigned for that purpose by BI under the SEDP, and the two develop-ment banker consultants in BRI's regional offices;
(d) assist in implementation of the monitoring and reporting systemsof the RCP, including data on loan collections performance; and
(e) assist the Investment Credit Bureau in supervising the BRI regionaloffices with regard to term-lending programs, especially the RCP.
In addition to his activities in Jakarta, the consultant may be requiredto spend periods in regional offices, assisting these with implementation ofthe RCP and other term-lending activities.
8. The other two development bankers would work primarily at the BRIregional offices, after spending an initial one to three months in the Invest-ment Credit Bureau in Jakarta, assisting the consultant there with his work,while becoming familiar with BRI's organization, credit operations andprocedures (and taking language training if necessary). One of the consultantswould probably alternate between the regional offices in South Sumatra/Lampung(Palembang) and West Java (Bandung), and the other between those in SouthSulawesi (Ujung Pandang), Central Java (Semarang), East Java (Surabaya) andYogyakarta. They would travel extensively, supervising the BRI branches intheir provinces. The consultants would advise and assist the regionalmanagers in implementation of the RCP and other term-lending programs. Anyinvolvement in the KIK/KMKP program in Central and East Java would be subjectto coordination with the SEDP as agreed from time to time between BRI and BI.Their chief counterparts would be the heads of the Credit Departments of theregional offices (or the term 'Lending departments, if and when these werecreated). The consultants' main functions would be to:
(a) together with regional-office staff, visit the branches lendingunder the RCP or other term-lending programs, and review adherenceto the BRI rules and regulations governing these programs, and theuse made of the smaLl term-lending procedures manual;
- 103 -
Annex 6Page 6
(b) assist branches in appraisal and supervision of RCP and otherterm-lending loans, especially the first few loans in eachsubsectoral category;
(c) train branch and regional office term lending staff in criteriaand techniques for subloan appraisal and supervision;
(d) monitor the term lending collections performance of branches,and advise on ways to improve collections; and
(e) recommend ways to improve internal procedures for RCP and otherterm-loans, especially with a view to reducing the processing timeand paperwork of loan appraisal.
The development bankers at BRI's regional offices would work closely withBI.
9. The senior development banker should have more than 5 years'experience in investment credit, and the other development bankers at least5 years', including extensive practical experience in small-investmentcredit programs in developing countries. Experience with smallholder agri-cultural credit would be particularly useful. Familiarity with loan appraisaland supervision techniques would be essential.
Agricultural Experts
10. The three agricultural experts would advise BRI on both productionand marketing of the commodities in which they specialize. Because of thewide geographic spread of their categories, the Fisheries Specialist and theLivestock Specialist would be based in Jakarta. The Perennial Crops Specialistwould be based in the Palembang Regional Ofice, which covers South Sumatraand Lampung provinces, where the pepper and coffee lending would take place.They would work closely with the respective Directorates General in theMinistry of Agriculture. When in Jakarta, they would advise the PlanningBureau head on matters related to the planning of the lending programs intheir respective categories, and the Investment Credit Bureau head on issuesinvolved in implementation. When in the field they would serve as advisorsto the Regional Managers. Their major functions would be to:
(a) advise the Planning Bureau on technical aspects related topreparation of annual lending programs, for both RCP andother term-lending categories;
(b) help identify, prepare and appraise new categories for agriculturallending under both the RCP and other term-lending programs;
(c) provide technical training to BRI staff, and assist thosestaff in the technical aspects of subloan appraisal.
- 104 -
Annex 6Page 7
11. The consultants should all have university degrees, preferably aPh.D, M.Sc., or equivalent degrees, in agriuclture or related fields, and atleast five year's practical experience in production and marketing of theirrespective subsectors, preferably in Indonesia, or at least in ecologicallyand economically similar areas.
- 105 -
ANNEX 7Page 1
INDONESIA
RURAL CREDIT PROJECT
Consultancy on Accounting, Management Information andRelated Matters - Terms of Reference
The following terms of reference are contained in the March 30,1977 addendum to the consultancy contract between BRI and Price WaterhouseAssociates (the "Consultant").
(a) Management Information
(i) Compile a set of all the existing financial and statisticalreports prepared within BRI for internal and externaldistribution and, for each report, obtain an understandingof the content, frequency, purpose, source of preparationand underlying work flow procedures.
(ii) Ascertain BRI's present approach to, and basis for, thepreparation of budget estimates or planning forecasts.
(iii) Based on a review and evaluation of the findings under(a) and (b) above, prepare a discussion paper for theBRI Board of Directors setting out the recommendedimprovements to strengthen the use of information as ameaningful, timely and reliable planning and controlaid to management and commenting, in outline, on(i) the framework and components of the recommendedmanagement information system; (ii) its objectives andbenefits; (iii) its basis of preparation and the resultingrequired changes in the existing accounting procedures andchart of accounts; (iv) its cost; and (v) the requirementsand timetable for its phased implementation.
(iv) Once the recommendations are acceptable to the BRI Boardof Directors, in conjunction with the Project ManagementOffice (PMO) (i) design the management information system,including the cash reporting system, and its underlying basisof preparation and procedures in detail; (ii) prepare asupporting and explanatory manual of procedures; (iii)determine the approach, requirements and timetable for imple=mentation; and (iv) supervise the implementation of thenecessary changes in procedures and reporting requirements inone test branch.
- 106 -
ANNEX 7Page 2
(v) Prepare detailed budgeting procedures to provideinput to the management information system, includingthe cash reporting system, to be incorporated in theaccounting manual.
(b) Management Performance Evaluation System
To ensure that the fullest management control possible arisesfrom the output of thte management information system theConsultant will develop a system to evaluate the performanceof the different organizational levels of management within BRI.
Such system should produce key comparative operational data forvarious aspects of bank operation and should highlight areas oflow and high management effectiveness.
The procedures to be followed by a "trouble shooting" team toinvestigate these exceptional areas and to make such areasmore effective when contributing to an overall improvementin management performance are to be developed.
Such recommendation for measurement and improvement of managementperformance are to be incorporated in a BRI Management ControlManual by the Consultant.
(c) Financial Reporting System
Redesign chart of accounts and redesign managment reportingsystem. The work program for this area should be as follows:
(i) Review all existing management reports (statisticaland financial), analyze data therein, determine theuse of data by executives, obtain executives' viewson data required.
(ii) Discuss with management best approach to managementreporting including budgets and reach agreement onreporting structure at all levels.
(iii) Design new management reporting system.
(iv) Prepare accounting policy statements to meet needsof reports.
(v) Analyze existing charts of accounts, prepare newchart of accounts to provide data required bymanagement report and Bank Indonesia.
- 107 -
ANNEX 7Page 3
(vi) Define each account showing new source ofentries, composition of balance and balancereconciliation or verification requirements.
(vii) Define cross references between new and old chartof accounts.
(viii) Define all standing journal entries and author-ities for entries required to support chart ofaccounts.
(ix) Define budget and forecasting procedures tosupport management reporting structure.
(x) Write procedures for budget and management reportpreparation. Such system should produce keycomparative operational data for various aspectsof Bank operation and should highlight areas oflow and high management effectiveness.
(xi) Write conversion procedures from old chart ofaccounts, design necessary forms.
(xii) Design training course for instructing staff ofnew chart of accounts.
(xiii) Test new system at one mechanized and one manualbranch.
(xiv) Design implementation and training timetable.
(d) Rationalization of the Mechanized System
(i) Establish criteria for level of mechanizationrelating to volume of business i.e. the numberof transactions below which mechanizationwould not be used.
(ii) Establish criteria for locations which can andshould be mechanized, i.e.:
(1) Maintenance availability(2) Level of staff capability(3) Ability to provide back-up
machines within acceptable time(4) Customer service levels required
(iii) Logistical study to determine machine use strategyand location of equipment pool.
- 108 -
ANNEX 7Page 4
(iv) Recommendations for renewal of service contractand service levels required including timelimitation at maintenance pool areas.
(v) Review statistics collected from fact findingquestionnaires and using agreed criteria makerecommendations as to which branches should bemechanized.
(vi) Design and write procedures for a manual back-upsystem for use in mechanized branches includingrevisions to the existing mechanized system wherenecessary.
(vii) Design and write procedures for:
(1) conversion from mechanized system tonew system for nonmechanized branches;
(2) conversion from mechanized system toback-up system and reversion to mechan-ized system;
(3) machine movement and maintenance controlsystem.
(viii) Design retraining and implementation programs.
(ix) Implement at test branches:
(1) back-up system (one branch);
(2) changeover from mechanized system tononmechanized system (one branch).
(x) Review trends in BRI operations and based on criteriain (i), (ii) and (iii) above, make recommendations tothe Board on the best potential future course for theBank to follow in relation to future mechanizationprograms.
(e) Revision of Manuals
(i) Define the format of all manuals covering:
(1) mechanized and back-up system;
(2) nonmechanized procedures standard toall branches;
(3) user handbook requirements.
- 109 -
ANNEX 7Page 5
(ii) review all flow charts, correct and modify wherenecessary using existing Price Waterhouse Associatescharts.
(iii) Write detailed procedures.
(iv) Supervise printing and issue of procedures.
(f) Training
Train selected BRI staff in the use of the proposed internalaudit working papers both formally and in the field in twoBRI branches operating under the new mechanized system. Thework program will be as follows:
(i) Design training program and training material.
(ii) Conduct formal training course.
(iii) Field training at two selected branches using thethe new mechanized system (one full audit and oneselective audit).
(iv) Review results from field testing and modify internalaudit working papers as necessary.
- 110 -
ANNEX 8Page 1
INDONESIA
RURAL CREDIT PROJECT
Draft Terms of Reference for the Evaluation Study
1. Under the project, an eight year evaluation study of projectlending would be undertaken. The study would focus on the economic impact ofthe subloans, and the problems encountered by subborrowers. The results of thestudy would be used by Bank Rakyat Indonesia (BRI) and the Association indesigning any future rural credit projects.
2. BRI would obtain assistance from a suitable Indonesian universityor institute with experience in survey research in economics to: (a) helpdevelop BRI's own subloan monitoring and evaluation capability; and (b)design and help implement the evaluation study. Interested organizationswould be asked to submit detailed proposals to BRI, which would, with theagreement of Bank Indonesia (BI) and the Association, select the best proposal.The proposals would describe the organizations' technical approach to thestudy, and should be specific, detailed and complete enough to clearlydemonstrate their understanding of the requirements for and the technicalproblems inherent in the study. Evaluation of the proposals would be basedupon the understanding shown of the project, the methodology to be used, thestaff qualifications, and the organizations' experience with similar studies.If no Indonesian organizations had fully suitable qualifications, short-termassistance from an individual consultant might be arranged, primarily forsetting up and supervising the research.
3. The study would be based on a sample of project subloans selectedat random from various subloan. categories. A sample size of about 400-500loans is anticipated selected over the three years of the project. By April1, 1979, a two-year contract would be signed; extensions would be based onperformance both in the study and in training BRI staff. After two years,BRI should be in a position to carry out most of the study, except probablyfor some of the data analysis.
4. The organization undertaking the study would have to:
(a) prepare and pre-test the interview questionnaires;
(b) train the interviewers (probably five to ten people), who would beBRI staff if availalble, who would visit the selected subborrowersregularly (every one to three months, depending upon how seasonalthe activity is);
(c) select the sample of subloans;
(d) design recording sheets to be filled out by the subborrowersbetween interviews;
- 111 -
ANNEX 8Page 2
(e) interview the loan officers who made the loans, and possiblyextension officers as well;
(f) analyze the interview questionnaire results;
(g) write semi-annual progress reports and a final reportpresenting the results and conclusions.
5. Preparation, pre-testing, training and sample selection would takeabout four months. Subloans would be selected shortly after being approved,so that base-line data on them could be obtained, covering pre-subloanproduction, employment, technology, marketing, input supply, etc. Theprogress of the subborrowers would then be followed over about the next twoto seven years depending on the category; the longest period would be forthe perennial crops, due to their long gestation period. Data analysiswould be done for each category as soon as adequate information was availableon that category.
6. The main subjects of investigation would be:
(a) the impact of the subloans on production, employment, etc.;this would be used both to calculate economic/financial rates ofreturn and to see how accurate the projected cash flows were;
(b) the main problems encountered by the subborrowers;
(c) the technical support needed and received from the Ministry of
Agriculture;
(d) the subloan repayment performance, and reasons for anyarrears;
(e) the amount, nature and effect of supervision done by BRI.
- 112 -
ANNEX 9
INDONESIA
RURAL CREDIT PROJECT
Draft Monitoring and Reporting Requirements
1. To serve its own requirements, as well as those of the Association,each participating BRI branch in the project provinces would maintain:
(a) a subproject file for each project subloan, including the documen-tation for the subloan, the repayment schedule for principal andinterest, and a record of all disbursements, repayments, andsupervision visits;
(b) a map showing the location of all subprojects;
(c) monthly lists, subloan by subloan basis, of all subloans outstanding,amounts in arrears or falling due, and subloan approvals, disburse-ments, collections and supervision visits during the month; and
(d) an up-to-date manual of credit procedures for the project, incorpor-ating all circulars or other directives received.
2. BRI would send the Association semi-annual progress reports on theproject, including the appraisal reports of all proposed new subloan categories,as well as the basic data on the project.
3. In addition, annual review papers would be prepared by BRI forjoint review with BI and the Association. These papers, besides summarizingthe accomplishments and problems of the preceding 12 months, would addressissues affecting national policy, institutional structures and programperformance. Specifically, they would discuss the measures taken, or proposed,to overcome the constraints hampering smallholder development in Indonesia,and to strengthen BRI, including inter alia the following issues:
(a) coordination on the project between BRI and other agencies, espe-cially the agricultural extension services, and success in arrangingfor technical support from these agencies for subborrowers;
(b) procedural improvements in project sublending, and recruitmentand training of term-lending staff;
(c) collections performance under the project;
(d) adequacy of the interest spread to BRI; and
(e) distribution of subloans by province, sector, maturityand size.
- 113 -
ANNEX 10Table 1
INDONESIA
RURAL CREDIT PROJECT
Project Cost By Province(US$ million, 1977 prices)
West Central East South SouthCategory Java Java Java Yogyakarta Sumatra Lampung Sulawesi Total
1. By January 1, 1979, to appoint, with the agreement of theAssociation, at least six of the term-lending consultants, theremaining consultants to be appointed by April 1, 1978.
2. By February 1, 1979, to submit the first annual lending programcovering the period April 1979 - March 1980, for approval by theAssociation.
3. By April 1, 1979, to contract out the evaluation study, includinga program for development of BRI's capability in monitoring andevaluation, with the agreement of the Association.
4. By September 30, 1980, to submit to the Association auditedproject accounts, together with the audit report on thoseaccounts and the overall audit of BRI for calendar 1979.
II. Action to be Taken by the Government
1. To make adequate provision in the Ministry of Agriculturebudget, for the year starting April 1, 1979, for technicalsupport to subborrowers, including (a) strengthening the PMUs ofthe DG of Estate Crops, (b) establishing one bull unit per 50 cowsand providing one fEield extension worker per 300 subborrowersunder cattle breeding financing, and (c) constructing, maintain-ing and staffing brackish water and freshwater demonstrationponds in each district involved.
- 117 -
ANNEX 13Page 1
INDONESIA
RURAL CREDIT PROJECT
Guidelines for Project Lending
General
1. Terms, conditions, policies and procedures governing BI's KIKL/program would generally be adopted for lending under the project. The
applicable KIK rules and regulations, however, could subsequently be modifiedby BI provided that, in the opinion of the Association, such modifications
did not materially and adversely affect the project's objectives or implemen-
tation. Initially, the following main rules and regulations would apply;exceptions from the KIK rules are marked by an asterisk (*).
Subloans made by BRI
2. Purpose of subloans
(a) Subloans will finance viable subprojects in agriculture, includinglivestock, fisheries, forestry and agro-processing, that requirefinance for more than five years.(*)
(b) Subloans will finance both new operations and the expansion ormodernization of existing operations.
(c) Subloans will be used for the financing of investment expenditures(including the purchase of land, provided it does not require usingthe IDA-funded portion of the subloan for this), and the permanentworking capital requirements related thereto.
3. Eligibility of subborrowers. Enterprises or individuals whose networth does not exceed Rp 20 million, whose net current assets are no more
than Rp 10 million and whose total outstanding liabilities to banks do notexceed Rp 10 million, shall be eligible to receive subloans. Exceptions tothis rule shall be made where justified, on a category-by-category basis for
specific types of subprojects.(*)
4. Amount
(a) The amount of the subloan shall depend on the cost of thesubproject, the actual need of the subborrower, the collateral
offered, the subborrower's repayment capacity including netproceeds of the proposed subloan and other factors bearing on
/1 For the small working capital portion of the project, KMKP interest rateswould apply.
- 118 -
ANNEX 13Page 2
the subborrower's creditworthiness. The subloan may financeup to one hundred percent (100%) of the total subproject cost.
(b) The amount of the subloan shall not normally exceed Rp 5 millionfor any single subproject, except as follows:
(i) A subborrower may obtain for additional financing toexpand a project previously financed under KIK or KMKP.The maximum outstanding balance to which he is then entitledis Rp 10 million, provided his debt-servicing record over thepast two years was satisfactory.
(ii) The subproject to be financed falls under a categorycovered by a specific lending program which inter aliaprescribes a subloan ceiling higher than Rp 5 million (*).
5. Maturity, grace period and repayment of subloans
(a) Subloan maturities, grace periods and repayment schedules shallbe established taking into account the nature of the subprojectbeing financed and projections of its cash flow.
(b) Subloan maturities shall be more than five (5) years but notexceed fifteen (15) years.(*)
(c) Subloan maturities shall include an appropriate grace period,during which interest may be capitalized.(*)
(d) Subloans shall be granted on an installment loan basis.
6. Rate of interest. Subloans shall accrue interest at a rate often-and-a-half percent (10.5%) per annum on the investment-financing portionof the principal amount outstanding from time to time, and twelve percent(12%) per annum on the portion of the subloan financing permanent workingcapital requirements.
7. Collateral
(a) Collateral pledged by subborrowers shall be sufficient to coverone hundred percent (100%) of the subloan amount.
(b) The main collateral for the subloan shall be the subprojectfinanced. If this is insufficient, the subborrower will offer
- 119 -
ANNEX 13Page 3
additional security, in the form of private property or guaranteesfrom a third party, to meet the preceding requirement.
8. Disbursement of subloans
(a) Disbursements are to be made in tranches, whenever appropriate,according to progress of work done, following physical inspectionof the subproject site.
(b) Wherever feasible, payments shall be made directly to thesupplier/dealer/contractor on the basis of pro forma invoices.
9. Procurement
(a) BRI shall ensure that procurement is effected prudently and thatprices paid are competitive. To do so, BRI shall, wherever feasible,require borrowers to obtain and submit to it three price quotationsfrom suppliers/contractors.
10. Penalty for nonpayment. A penalty rate of interest of three percent(3%) per annum shall accrue, over and above the interest rate specified above,on any principal and interest in arrears for more than ninety (90) days. Pay-ment of this penalty may be waived if the subloan is subsequently rescheduled.
Refinancing of subloans
11. Amount. BI shall refinance eighty percent (80%) of the subloanamounts granted by BRI to subborrowers; the IDA credit, sixty-eight percent(68%) of the refinancing amounts granted by BI to BRI.
12. Rate of interest. BI's refinancing loan (including the IDA-fundedportion) shall accrue interest at a rate of three percent (3%) per annum onthe principal amount outstanding from time to time.
13. Repayment of refinancing loans. The repayment schedule of eachrefinancing loan shall coincide, in terms of due dates, with the amortizationschedule approved for the subloan, and correspond to this schedule in termsof amount. BRI shall remain fully liable for the service of any refinancingloan, whether the corresponding subloan is serviced regularly or not.However, should BRI reschedule a subloan, the corresponding amount of therefinancing loan may similarly be rescheduled.
Credit insurance coverage
14. ASKRINDO shall insure BRI against the credit risk on seventy-fivepercent (75%) of the amount (principal and interest) in default, subject to amaximum of seventy-five percent (75%) of the amount originally approved forthe subloan. The insurance premium shall be agreed between ASKRINDO, BRI andBI, and shall be paid partly by BRI and partly by BI (*).
_ + 1040 ' 1o6- APRIL 1978
I~~~~~~~ Ki JAMBI _
-2° 2 > < gBANGKA-&6 PngkaIpinong
Ton jungponda
, g ( / ~~~~~~~~~~ < t C g~~~~~~~BEL ItUNG . < / t ALEMBANG A Ns <\<MBANGi 9< S8~~~~~~~~U T H A U M A T R A j:
Lu Xu ukinggau > Perabumulih BOKayuagung INDONESIA
RURAL CREDIT PROJECT<<\ Muaraenim ~\ Lht<-y g\ vSouth Sumatra & Lampung
A BRI regionai office
A BRI branchesp ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~40~
