Figure 8: Almost all firms who received KUR in 2015 received multiple KUR loans within a 5-year period Figure 8: Almost all firms who received KUR in 2015 received multiple KUR loans within a 5-year period **Number of KUR Loans Received Between 2015 and 2020 by Year of First KUR Loan Number of KUR Loans Received Between 2015 and 2020 by Year of First KUR Loan** <!-- Start of picture text --> 100%<br>100%90% 11.6611.66 2.862.86 8.658.65 11.1311.13 0.750.75 1.951.95 10.4710.47<br>90% 21.84 8.20 21.17<br>21.84 8.20 21.17<br>80%<br>80%<br>70% 35.15<br>70% 42.09 35.15<br>42.09<br>60% 40.95<br>60% 33.27 40.95<br>33.27<br>50%<br>50%<br>89.53<br>40% 89.53<br>40% 76.88<br>76.88<br>30%<br>30% 52.98<br>44.38 52.98<br>20% 44.38 42.03 42.2<br>20% 42.03 42.2<br>10%<br>10%<br>1.88<br>0% 1.88<br>0% 2015 2016 2017 2018 2019 2020<br>2015 2016 2017 2018 2019 2020<br>1 2 3 4 or more<br>1 2 3 4 or more<br><!-- End of picture text --> ~~Soorce: Author calculatons using survey or KUR borrowers~~ The low interest rates make KUR an attractive option for borrowers, leading to a lack of incentives for businesses to graduate to unsubsidized lending. Indeed, borrowers pay approximately half the interest rate of an unsubsidized commercial loan of a similar size.<sup>24</sup> The declining interest rates of KUR loans over time even led to some borrowers applying for new KUR loans at different banks to reimburse previous KUR loans and lower their overall interest payments. In some cases, KUR distributors encouraged borrowers to take repeated KUR loans after repaying their first loans and made promotional visits to attract repeat borrowers. Graduation from the KUR credit subsidies, an often-stated goal of the program, has been inhibited by the ability to access repeat KUR loans and a lack of incentives to use more costly unsubsidized loans.

Acknowledging the challenges with repeat borrowing, in 2023 the Government of Indonesia amended the KUR regulations to introduce a graduation policy.<sup>25</sup> This policy limits the number of times borrowers in the productive sectors (agriculture, plantation, fishery, and animal husbandry) can receive micro KUR to four, up to a maximum of IDR 100 million per planting season or production cycle, and limits the number of micro KUR loans to 2 in other sectors.<sup>26</sup> The policy also increases the interest rate by one percentage point for each successive micro and small KUR loan (i.e. from 6 percent for the first KUR loan to 9 percent for the fourth KUR loan), helping borrowers prepare to graduate to non-subsidized loans. As they are implemented,

> 24 The prime lending rates for micro credit loans offered by two large banks were 11.25 and 14 percent for Bank Mandiri and BRI, respectively, in October 2021. In contrast, KUR interest rates stood 6 percent in 2020 (Permenko No. 8 of 2015, Article 13 paragraph 2, Article 17 paragraph 2; Permenko No. 15 of 2020, Article 8, paragraph 3, letter c).

> 25  Regulation Number 1 of 2023 of the Coordinating Minister of Economic Affairs, Concerning Guidelines for the Implementation of KUR. January 25, 2023. 26  There are no strict limits on the number of times borrowers can receive small KUR; however, the total amount of cumulative lending cannot exceed 500 million IDR.

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