Tony Sitathan – Benny Winoto Salim was a businessman dealing with palm oil and its by-products in Medan, Sumatra. In 1997, he set up a chemical trading and distribution company in Jakarta dealing mainly with asphalt and later the supply of an oil-based additive from overseas. He saw Indonesia as a potential market for the chemical trading business and opened more than 40 distribution outlets throughout the archipelago. Then came the economic crisis of 1997-98, after which Indonesia was forced into a painful process of restructuring its economy, tightening its money supply and reorganizing its banking system.

"The carnage of closing more than 90 banks that failed to meet their capital-adequacy ratio and the realignment of smaller but profitable banks into larger banking entities was necessary under the Indonesian Banking Restructuring Agency [IBRA] and the central Bank of Indonesia had to enforce the strict lending policies of international bodies like the World Bank and the International Monetary Fund [IMF]," said Sutu Widayo, an economic adviser and financial consultant to state-owned Bank Mandiri.

He said corporate lending policies were scrutinized and lending policies tightened – especially for small and medium companies. "The risk of again collapsing in a sea of debt is too much for Indonesia to bear. Going by estimates, more than US$55 billion was erased off as bad debts by these conglomerates and IBRA is currently struggling to recapitalize Indonesia's reserves."

But businesspersons like Benny were caught flat-footed. He could not expand his business at a time when the banks were tightening their purse strings. Although he had a good business relationship with several of the leading banks in Indonesia, he was unable to arrange any commercial loans for his company, just when he needed it most.

He claims that the commercial banks are only interested in providing consumer retail credit by increasing credit-card limits and making it easier to get personal overdraft facilities. Banks are looking at easier options of getting higher returns on their interests by extending personal or consumer linked loans. "They are providing limits of up to 100 million rupiah [$11,100], which is hardly sufficient to run a medium-sized trading and distribution company like ours and they are not willing to issue letters of credit [LCs] without a 110 percent bank guarantee or collateral as security," he complained.

At the leading locally based and multinational banks operating in Indonesia, getting approval for corporate loans has become an uphill task. "Its not impossible, but we are more stringent in our requirements and need full and proper authentication of documents and company assets before we lend any monies to corporate entities," said Immanuel Hutagalong, a senior officer at HSBC. "We have become stickier with our credit policies, which follow the guidelines set by the central bank."

The credit-card business has heated up in Indonesia, with several local and international banks increasing their advertising and promotional budgets in snagging new clients and increasing credit limits for existing customers. Tri Indra, the head of advertising and media agency PT SITA Parameswara, says the advertising and promotional budget for credit cards has increased by more than 20 percent since the first two quarters of 2002. "In nearly every major mall you visit, you see the sales promotions girls and bank representatives hawking credit cards," she said.

Osman bin Saleh, who works as an international marketing director for a coal-mining company in Indonesia, complains about the inability of the local banks to provide working capital for his operations. "Although we have done business with some of the reputable local banks in Indonesia, we are unable to get a revolving line of credit with them. Previously we were able to even execute red-clause LCs, from our clients, which means we get a partial draw-down of the face value of the LC even before the full settlement of the contract. Now it's very difficult to do so, without providing collateral or additional guarantees," he said.

Tired of dealing with the local banks, he has decided to venture into Singapore to get the banks there to issue LCs based on the suppliers and clients requirements. There is also less money to be paid in the form of taxes, banking interest and charges when dealing with Singapore-based banks compared with their Indonesian counterparts.

If the inflexibility of the Indonesian banking system is driving away business, it is an indication that changes are needed. And doing something now instead of later seems to be the best remedy, since foreign direct investment (FDI) has started to dry up as an alternative source of investments. FDI has contributed less than $1.7 billion so far this year compared with $4 billion last year.

There is currently a retail consumer boom in Indonesia. Several analysts have predicted Indonesia's economic growth to exceed 4.5 percent in 2003, while inflation levels are set to remain lower than in 2002, as the rupiah strengthens against the US dollar. Also IBRA has released information that money is coming back from overseas to Indonesia. So far it has calculated some $300 million a week making its way back to the bank coffers.

That is good news indeed for those in retail businesses. Imports are beginning to compete with locally produced goods, while luxury cars such as Ferraris and Harley-Davidson motorcycles are seeing faster sales growth in Jakarta than in any other major metropolitan city in Asia. With the consumer-driven economy, and the increased credit facilities given by finance houses and banks, the retail economy is heating up.

However, Indonesia's foreign exports and its manufacturing and industrial sectors seem to be lagging behind. "On average Indonesia's manufacturing sector and foreign exports are finding difficulties competing with products from other parts of Asia, notably China, especially in terms of price and product parity performance," said Samuel Hawthorne, an economist with Axiom Consulting, based in Hong Kong.

The lack of corporate funds and bank loans for small and medium corporations has turned into a handicap for genuine businesspersons. They are looking toward foreign investments and foreign credit facilitation in order to jump-start their businesses, which is not always an easy solution.

"Given Indonesia's current investment climate, foreign investors are risk-averse and wary about taking Indonesian assets and property as collateral for investment purposes," said Michael Sim, a private funder based in Singapore. "Indonesians are so used to the old management style of running companies that it makes it harder for foreign funders to appraise their business operations and make a value-based judgment on them."

So what is the solution for serious businesspersons such as Benny and Osman? There have to be reforms at the banking sector, complained Mickey Effendi, a private businessman who runs a tuna trading company.

"There should be greater transparency and accountability in awarding loans to companies running a feasible business with a sound business plan, instead of going only by strong references or the old way of doing business. Unless that happens, small and medium businesses would find it increasing difficult to operate and remain profitable in Indonesia," he said.