ABSTRACT
An argument often made in the literature is that formal loans are mainly directed to borrowers with established reputations and collateral. Because of the impracticability of physical-possession type security for loans to businesses and the costliness of, and other difficulties with, the legal documentation type, commercial banks in Indonesia must give a good deal of attention to other uncertainty-reducing and offsetting measures. For some loans, banks supervise the expenditure of loan money and monitor the activity of the firm by visiting its place of business or by requiring regular financial or trading reports to be submitted. To any person or organization contemplating making a loan, the possibility of default is of fundamental importance. The extent to which banks can offset anticipated loan losses and administrative costs by raising their lending rates is constrained by the demand conditions under which they operate.
