34288 - Ekonomi SME Loan

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Summary of Investment Information

Project Number

34288

Company Name

PT BANK EKONOMI RAHARJA

Date SPI Disclosed

Oct 6, 2014

Country

Indonesia

Region

East Asia and the Pacific

Projected Board Date

Nov 6, 2014

Environmental Category

FI-2 - Limited

Status

Hold

Last Updated Date

Nov 30, 2016

Department

Regional Industry - FIG Asia & Pac

Industry

Financial Markets

Previous Events

Approved : Apr 22, 2015

Sector

Commercial Banking - General

Project Description

The proposed project (the “Project”) will likely consist of a senior debt package for up to US$45 million to PT. Bank Ekonomi Raharja, Tbk. (“Bank Ekonomi” or “the Bank”) in Indonesia. The Project will support the Bank’s lending program for SMEs. The IFC financing package will allow the Bank to expand the volume and maturity of its SME loan portfolio. The proposed project is also consistent with both IFC’s Indonesia and financial markets strategy given that this project will help provide more access to finance for SMEs, and promote job creation.

Sponsor / Cost / Location

Product Line	IFC Investment (million USD)
Risk Management
Guarantee
Loan	45.0
Equity

IFC's loan to the financial institution described in this SII is targeted for on-lending to the following sector(s):

Product Type	Use of Proceeds
Straight Senior Loan	Loans to SME Borrowers
Straight Senior Loan	Loans to SME Borrowers

IFC's Definitions of Targeted Sectors can be found here.

Development Impact

1. Job creation: To eventually create more local employment opportunities by increasing access to finance for SMEs.
2. To support economic growth in frontier regions: While big cities in Indonesia especially Jakarta are growing rapidly with increased banking penetration, frontier regions are left behind in terms of access to finance for SMEs, which hinders the economic growth in these regions. Having established its strong network in the frontier regions with plans to expand into other frontier regions to provide access to finance for SMEs, Bank Ekonomi will support the continued growth of the local economy.

1. Balance sheet and liquidity strengthening: IFC long-term facility will enable the Bank to better match its assets and liabilities as well as to manage interest rate risks. So far, given its credit rating as a mid-sized bank and current market volatility, Bank Ekonomi has not been able to issue bond from the capital markets to obtain long-term local currency funding. Moreover, liquidity support from its parent, HSBC Group, is mainly in US dollars. Thus, IFC financing will provide the Bank with long term funding in local currency, currently scarce in the market, that the Bank needs to manage its liquidity risk.
2. Counter-cyclical role: Given current volatility in the emerging markets and expected uncertainty in long-term foreign investments in markets such as Indonesia, IFC expects to play a critical counter-cyclical role supporting sustainability of mid-sized banks in Indonesia and also sending a positive signal in the market.

E&S Category Rationale / Risks and Mitigation

This project has been classified as Category FI-2 according to IFC’s Environmental and Social (“E&S”) Review Procedure. IFC will provide a loan facility to Ekonomi amounting to US$45 million equivalent in Rupiah to support expansion of the Bank’s lending to Small and Medium Enterprises. The review of the portfolio confirmed that SME financing comprises about 47 percent of bank''s total lending activities. The loans supported by IFC financing will be used for providing SME loans of up to US$ 1 million with a maximum two year tenor on working capital and a maximum five year tenor on investment financing. The Bank supports SMEs operating in various sectors such as small agribusiness, general manufacturing, trade (wholesale and retail), construction, transportation or tourism. The average loan size to SME is at the level of $250,000. Based on combination of types of financial instruments used by Ekonomi for SMEs, size of loans, tenor, and sectors of exposure, the overall SME portfolio risk is considered to be medium-low.

The E&S risks and potential impacts of this investment derive from the E&S risks of the Ekonomi’s lending activities to SMEs operating in medium risk sectors such as construction, transportation, general manufacturing and agribusiness. Although this project will not support corporate finance activities there is a reputational risk associated with corporate portfolio of Ekonomi. The bank is exposed to a number of clients operating in high risk sectors such as palm oil, oil & gas, and chemicals. The E&S appraisal, however, confirmed that Ekonomi has a sound policy and E&S risk management processes, one of the most advanced in Indonesia. The current system includes: a) rigorous screening and assessment of potential clients, including assessment of clients’ commitment, capacity and track record and assigning Sustainability Risk Rating in case of clients operating in sensitive sectors b) verification process for permits, licences, authorizations required by the national law and regulations; c) policies for sensitive sectors such as chemicals, energy, mining and metals, forestry/palm oil and defense referring IFC’s Performance Standards and relevant WBG EHS Guidelines; d) dedicated E&S team that is part of credit risk management department; e) E&S risk categorization process following IFC’s approach; f) a system of internal verification of E&S due diligence including site visits; g) application of PS to project finance; h) designing Corrective Action Plans; i) including E&S covenants in legal agreements (legal agreements include for instance an acceleration provisions giving Ekonomi the right to accellerate loan in case of E&S policy breeches); j) ongoing monitoring.The existing processes and procedures of Ekonomi Bank are sufficient for addressing E&S risks related to financing SMEs. The only requirement for the Bank is to update its Exclusion List to include all activities reflected on IFC's Exclusion List improve its approach to checking quality of collateral (real estate).

Type of Action	Action	Timeframe
Upgrade of SEMS	Ekonomi shall provide revised documentation for its SEMS as follows:	On or prior to commitment
	a) Amend Exclusion List. Ekonomi agrees to amend the Exclusion List/List of ineligible business activities for financing to reflect all activities from IFC’s Exclusion List.	On or prior to commitment
	b) Improve the current approach to checking quality of collateral (real estate). The bank has to appropriately assess and monitor the risk of environmental liability arising in respect of the collateral, such as land contamination or presence of toxic material on a property.	On or prior to commitment

Contacts

For Inquiries About the Project, Contact

Main Contact person : Antony Colin Turner
Email address : mailto:tonyturner@bankekonomi.co.id
Telephone number : 021-2554 5800
Website : http://www.bankekonomi.co.id

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IFC supports its clients in addressing environmental and social issues arising from their business activities by requiring its real sector clients to set up and administer appropriate grievance mechanisms and/or procedures to address complaints from Affected Communities in relation to environmental and social issues arising from IFC's clients' business activities. Since 2012, IFC's Financial Intermediary clients applying the Performance Standards are required to develop External Communications Mechanisms to receive and review inquiries or complaints from any interested party regarding the E&S risks and impacts of their operations.

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