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Banks warned of liquidity
mismatch in housing loans

Bank Indonesia (BI) has urged local lenders to develop their mortgage-based financial instruments as ways to boost their housing loans, an untapped banking segment that the central bank argues provides lucrative business opportunities.

At the moment, many Indonesian banks remain heavily dependent on third-party funds such as time deposits and savings to finance housing loans, without realizing opportunities for other funding sources within the financial market, BI spokesperson Difi Johansyah said.

 “Why is our mortgage-to-GDP [gross domestic product] still low? It’s because our housing segment is still separated from the financial market, while in other countries, there is a strong relationship between mortgages and the financial market,” he said in a discussion on mortgages in Jakarta on Tuesday.

Indonesia’s mortgage-to-GDP ratio currently stands at 2.8 percent, data from local banks shows.

Difi added that turning to the financial market for funding sources, such as issuing bonds or developing mortgage-backed securities, would benefit banks, which frequently faced the risks of liquidity mismatch when channeling housing loans.

“We need to solve the funding problem in this credit segment as there is potential for mismatch since banks are using their three-month term deposits to channel housing loans that usually come in tenors of 10 to 15 years,” he noted.

Third-party funds remain the major funding source for banks in Indonesia. Indonesia’s banking industry has a loan-to-deposit (LDR) ratio of 84 percent, higher than its neighbors such as Malaysia (77 percent) or the Philippines (70 percent), with higher LDR translating into less liquidity, meaning a bank has less capacity to expand its lending business.

The liquidity problem has hit several Indonesian banks focusing on housing financing. For example, Bank Tabungan Negara (BTN), the housing loans of which comprise 86 percent of its credit business, had an LDR ratio of 100.9 percent as of December 2012.

“We are trying to solve our liquidity mismatch problem,” said BTN director for mortgage and consumer lending Mansyur Syamsuri Nasution, who also attended the discussion. He added that in the future, BTN would try to boost its long-term deposits and tap new sources of funding, such as bonds and mortgage-backed securities.

BTN, in an apparent attempt to diversify its funding sources, last year issued Rp 2 trillion (US$205 million) in bonds, and has planned to issue another Rp 2 trillion in the second quarter this year.

The state-run lender has already raised mortgage-backed securities called KIK-EBA, worth Rp 1 trillion last year. It has planned to raise up to Rp 1.5 trillion from the mortgage-backed securities this year.

Securities now account for 7 percent of BTN’s funding composition, in which third-party deposits are still overwhelmingly dominant as they account for 83 percent, according to the lender’s financial report. “This year, we will continue tapping securities to grow [BTN’s funding sources],” added Mansyur.

At present, BTN remains the only lender in Indonesia issuing mortgage-backed securities, but state-run Bank Mandiri, the nation’s largest bank by assets, has also expressed its interest to issue KIK-EBA this year.

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