"We no longer approve credit proposals to finance development of new oil palm plantations in peat lands," head of the Pekanbaru branch of the state bank, Agus Sanjaya, said at a palm oil discussion here on Tuesday.
The bank will also be strict in providing credit only for oil palm plantations over land which already has the status of right to cultivation land use (HGU), Agus said.
The policy is in response to negative environmental issue against oil palm companies and falling prices of the commodity lately, he said.
Agus did not rule out the possibility that the state bank would lose big clients in Riau as peat lands make up most of the lands in that province.
Riau is one of the largest provinces having the widest oil palm plantations in the country, which is the worlds largest palm oil producer and exporter.
Bank Mandiri will turn to a number of other sectors for credit expansion, he said, adding the people of Riau should not concentrate too much on palm oil related business.
"We will turn to health, educational, construction, infrastructure, downstream oil and gas , communications and trade sectors for credit expansion," he said.
However, the bank still considers the palm oil sector as the most potential for credit expansion, he said.
Oil palm plantations accounted for 10.5 percent of the banks credit target of around Rp700 trillion in 2015. In Riau alone 60=70 percent of the banks total credits were for palm oil sector.
"We still see significant profit in that sector despite the tightened credit policy," he said.
He said the shrinking price of palm oil caused only slight decline in the credit quality of the bank in Riau, "only around 1 percent of the total credit extended in 2015."
He said the level is still considered safe as it is still within the coverage of the provision fund paid by borrowers before disbursement.
"The provision fund was still larger than non performing loans," he said.
Falling price of palm oil was not the main contributor to the NPL, but it is attributable mainly to mismanagement of the loan fund by the borrowers, he said.
"Our worries are caused more by debtors miss management," he said, citing "credit , which was proposed for the purchase of fresh fruit bunches of oil palms, was used for other purposes."
Meanwhile, chief researcher from a research institute of the University of Riau Prof. Dr. Almasdi Syahza, said it is time for Bank Mandiri to provide credits to encourage development of downstream palm oil industry.
Development of downstream palm oil industry is almost stagnant in Riau which has 3 million hectares of oil palm plantations, the professor said.
"Bank Mandiri should give priority to financing downstream sector of the palm oil industry . The business potential in that sector is high," he said.