Money in the bank: A man uses an ATM machine in a Jakarta shopping center. The country’s banking sector is holding up well despite the global credit crunch, although lending expansion remains a concern. JP/Ricky Yudhistira
While the financial health of Indonesia’s overall banking sector remains fairly sturdy despite massive shocks from the global banking crisis, one key indicator has eluded the sector’s performance this year — lending expansion.
Indeed, although the global crisis may have failed to knock the banking industry down, it however had a hand in bringing bank lending expansion almost to a halt as lenders became more cautious in
channeling loans on fear of bad loans, while on the demand side, businesses were taking a wait-and-see position waiting for demand to recover.
As of the end of November, new bank loans have grown by a modest 7 percent, data from the central bank shows, far lower than Bank Indonesia’s full-year growth target of 15 percent.
The growth is far lower than the 30 percent growth recorded in 2008 which contributed to the country’s economy expanding by 6.1 percent.
BI director of banking research and regulation Halim Alamsyah has said lending would likely grow only by between 5 and 7 percent during this year as banks still imposed fairly high lending rates, making businesses — many already producing less on slumping demand — even more reluctant to borrow.
While BI has cut its benchmark interest rate by 300 basis points since December last year to 6.5 percent, bank lending rates were only down 76 basis points, still hovering above 13 percent currently, according to BI data.
But bankers argued that banks have actually provided loans, only to see businesses refuse to borrow because they did not see a reason to borrow for expansion while demand remained low.
“That’s the reason why the rate of undisbursed loans is high,” said Mirza Adityaswara, chief economist of Bank Mandiri, Indonesia’s largest bank by assets.
Undisbursed loans, lending that is already approved but not yet taken up by the creditors, reached Rp 276 trillion (about US$30 billion) as of the end of November as industries were not working at full capacity pending the full recovery of the economy.
JP/Irma
Since Darmin Nasution was appointed in July as BI senior deputy governor — also taking the position of acting BI governor as former governor Boediono stood in the presidential election and was elected vice president — Darminhas taken steps to push the intermediary functions of the BI in macroeconomic and financial management.
One of these tasks was to arrange a meeting of 14 major banks, which resulted in an agreement in principle on Aug. 20 to cut deposit rates to 150 basis points above the existing BI rate up until Nov. 20. After that, they proposed to further cut the deposit rates to 50 basis points above the existing BI rate.
That move, successfully implemented, would supposedly have pushed lending rates down, because banks have said that amid the tight liquidity conditions depositors have asked for higher interest rates.
It is in the nature of banks to make profits, therefore they raised lending rates to compensate for the higher deposit rates they have had to pay, although Darmin has said that in Indonesia, the spread of the interest rates banks pay to depositors and the rates they receive from creditors has become too wide, signaling that the banking system was not yet efficient or effective in this respect.
“In Indonesia, top banks enjoy a spread of more than 5 percent. In neighboring countries the spread is between 3 percent and 3.5 percent,” he said.
That high spread has helped banks to register high profits this year. In the first nine months of this year, Mandiri scored a 16.8 percent growth in net profits; while Bank Central Asia (BCA) and Bank Rakyat Indonesia (BRI) booked higher growth in net pro-fits, rising by 27 percent and 25.1, respectively.
Darmin, who seems to feel uneasy knowing that the banks have managed to post such high profits despite slow growth in lending, has planned another move to provide incentives and disincentives for banks based on their record in performing their principal intermediary functions — notably lending money and collecting funds.
“Those that fail in performing their intermediary functions will suffer disincentives. There will be regulations next year,” he said.
BI’s recent moves are not without criticisms. Some analysts see BI’s recent moves to “force” banks to lend money as being authoritarian given Indonesia’s market-driven economy.
They argued that banks would automatically lend more once economic conditions began to improve.
But still BI persists with its policies.
BI also plans to work with the Capital Market and Financial Institutions Supervisory Agency (Bapepam-LK) to regulate securities with a maturity of less than one year to provide alternative funding sources for banks.
More funding sources will mean lower costs of funds, which may eventually push lending rates down.
Both regulations that are expected to come out early next year should help the banking sector to achieve higher lending growth of between 15 and 17 percent in 2010, as expected by BI.
Higher lending growth will help to boost the economy next year to reach the targeted 5.5 percent growth aimed at by the government. Demand is predicted to increase, hence businesses will need funds to raise production to meet the demand.
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