This report defines subsidyi as including all direct and indirect gifts and loans of assets, personnel, and services; exemptions from taxes; and the implicit benefit of paying liability and equity holders a below-market rate of return. Under this definition, all of these programs currently receive some form of subsidy. However, the extent of these subsidies varies.

**Table 8**

**Interest Rates Required to Eliminate Program Subsidies**

||**Req**<br>**Elim**<br>|**uired I**<br>**inate S**<br>|**nterest**<br>**ubsid**<br>|**Rates**<br>**(Perc**<br>|**to**<br>**ent)**<br>|**Current Rates**<br>**(Percent)a**|
|---|---|---|---|---|---|---|
||**1991**|**1992**|**1993**|**1994**|**1995**||
|**BKK**|NA|NA|139|64|64|<br>64|
|**LKP (Dompu District)**|NA|187|325|225|198|<br>128|
|**PHBK**(total subsidy)|659|723|613|427|277|<br>107|
|**PHBK (cash subsidy)**|263|282|_257_|212|159|<br>107|
|<br>**P4K (total subsidy)**|461|168|<br>84|91|98|<br>27|
|<br>**P4K (cashand**<br>|322<br>|109<br>|61<br>|77<br>|86<br>|<br>27<br> <br>|
|**subsidized loan to BRI)**|NA|NA|N|NA|NA|<br>131-34|

a/ Estimated average annualized interest rate including fees, forced savings requirements, and interest paid on forced savings.

b/ If BKD units return the borrower's forced savings when the loan is repaid, the effective interest rate is approximately 131 percent on an annualized basis. Some units do not return forced savings, or do so with a considerable delay. If the forced savings is never returned, the effective interest rate is 347 percent.

Table 8 provides estimates of the interest rates that programs would have been required to charge over time to eliminate all subsidies, appropriately provision for bad debts, and pay a market rate of return to liability and equity holders.<sup>6</sup> BKK would have had to charge an interest rate of 64 percent in 1995. This rate is equal to the average rate it currently charges. This indicates that while the program receives subsidies, the profit it earns is sufficient such that it does not require subventions to operate on a sustainable basis. The LKP program would have had to charge a rate of 198 percent in 1995, down from 325 percent in 1993. The 1995 figure is however somewhat higher than the rate required in 1992. P1HBK would have had to charge a 227 percent interest rate in fiscal 1995/96 to fully cover all costs attributed to the program. To cover all costs excluding the in-kind costs of salary and overheads BI attributed to the program, the program would have had to charge 159 percent. While PHBK's full-cost figure is the highest of the programs reviewed, its required interest rates have declined every year since 1992. Indeed, PHBK's required rates in fiscal 1995/96 are only about 65 percent as high as the rates required in the previous year. P4K's interest rate required to

- All five programs fund part of their portfolios from savings accounts required from borrowers. These required savings accounts earn an interest rate below that which the program would have to pay to obtain marginal additional resources from another source. For the purposes of this analysis, this practice is considered to be equivalent to generating additional fee income from loans and is not counted as a subsidy. An alternative approach would have been to assume that this forced savings policy constitutes a subsidy equal to the difference between the interest paid on the required savings and the interest the institution would have had to pay on marginal additional liabilities. Footnote 39 on page 47 reviews LKP's total subsidy if forced savings were counted as a subsidy in this way.

- 6 This analysis is based on a Subsidy Dependency Index (SDI) for each program. See Annex 7 for a description of how the SDI is calculated.

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