Author : Slamet Hartono

Summary : High lending cost due to high administrative costs and high default rate constrained the development of the Kredit Usaha Tani (KUT) program in Indonesia. The program lender realized a net lending cost of -24 percent per year, implying a loss if 0.24 rupiah for every rupiah loan granted to the borrowers. This study attempted to determine reforms in the KUT program than can reduce the net lending cost and improve the financial welfare of the farmer-borrowers. The Liquidity-Specified Linear Programming (LS-LP) model was used to achieve the objectives of this study. Primary data collected from 100 KUT borrowers in Yogyakarta, Indonesia was used to specify parameters of the model. Variations in the interest rate (16 percent, 28 percent, and 40 percent), credit limit (Rp 125,000; Rp 160,000; and Rp 195,000), and mode of loan disbursement (cash-kind to cash-only) were simulated in the validated LS-LP model. Results revealed that the welfare loss of of the farmer-borrowers due to increase in interest rate can be offset by increasing the credit limit and changing the mode of loan disbursement from cash-kind to cash-only. Simultaneous increase in interest rate and credit limit coupled by cash disbursement yielded higher objective function level and net cash-flow. Moreover, liquidity position of the farmer-borrowers to meet unexpected events was also improved. The study recommended that reforms, in terms of increasing interest rate and credit limit, as well as changing loan disbursement from cash-kind to cash-only are needed to improve the financial welfare not only of the farmer-borrowers but also of the lender.