Although the authorities have granted many relaxations, loan demand will weaken across almost all sectors. The improvement of demand for loans will depend on economic growth. We hope economic recovery will come soon, at least in the fourth quarter of this year, although it will not return quickly to the 5 percent growth rate before the pandemic.

The government, under the Finance Ministry, expects the domestic economy to contract by between 0.4 percent and 1 percent this year. We at Bank Mandiri estimate that the domestic economy will grow very slightly at 0.02 percent this year, the lowest economic growth since 1998. We expect that loans will only grow about 1 to 2 percent this year – the weakest level since 1999.   

Loan growth until March was strong at 8 percent. But it was more because of the depreciation of the rupiah, which made foreign exchange loans look larger. The depreciation of the rupiah made loans, especially forex loans denominated in rupiah, look higher. If we adjust for the rupiah’s depreciation, loans in the banking industry as of March 2020 only grew by 6.2 percent, lower than the previous month of 6.7 percent. This will certainly weaken in the coming months.

On the other hand, the nonperforming loan (NPL) ratio in Indonesia has remained stable. The NPL to total loans ratio fell to 2.77 percent in March, down from the previous month of 2.79 percent in February. But the ratio of special mention loans, those in danger of falling into nonperforming status, to total loans steadily increased over the same period to 6.29 percent – the highest level in a very long time.

The increasing number of special mention loans was because banks accelerated the restructuring process for borrowers that had been affected by the epidemic. The Financial Services Authority (OJK) has said that 99 banks have already restructured loans worth Rp 609.07 trillion (US$43.2 billion). With the enormous amount of restructuring, repayments will certainly be postponed, both for loan principle and interest. The postponement of the payments will have an impact on bank liquidity.

Relaxation policies undertaken by regulators – the government, OJK and Bank Indonesia (BI) – are mostly meant to give banks flexibility in managing their liquidity and assets, especially BUKU 4 and BUKU 3 banks (those with minimum capital of Rp 30 trillion and Rp 5 trillion respectively) because of their status as systemically important banks (SIB).

At this moment, the banking industry’s liquidity remains ample because of BI’s quantitative easing (QE) policy. We expect liquidity in the banking system to remain sufficient, especially for large banks, as demand for loans decelerates and BI’s policy continues to accommodate liquidity needs. So far, Bank Indonesia has injected total liquidity of Rp 503.8 trillion through its quantitative easing policy. This includes expansion of monetary operations through term repo, lower reserve requirements in rupiah third-party funds and a relaxation of the additional demand deposit obligations to meet the Macroprudential Intermediation Ratio.

In addition to the QE policy, BI increased the Macroprudential Liquidity Buffer, or Penyangga Likuiditas Macroprudential (PLM), ratio by 200 bps for conventional banks and 50 bps for sharia banks to strengthen banks’ ability to manage their liquidity. The current PLM ratio, for both conventional and sharia banks, is 4 percent. A higher PLM is meant to push banks to own more government securities.

Government securities are currently seen as the most liquid asset besides cash. They can be converted into cash quickly through repurchase agreements with BI or in the interbank market if banks need cash. In addition, the OJK has released a number of relaxations, including lowering the minimum LCR and NSFR to 85 percent from 100 percent for BUKU 4 and BUKU 3 banks to give them more flexibility to manage liquidity.

Our concerns are more in the smaller banks, BUKU 1 and BUKU 2 banks, those that have paid capital less than Rp 5 trillion. This is because of their lack of ownership of government securities. As of March, the total value of government securities owned by BUKU 1 and BUKU 2 banks was only Rp 60.1 trillion (7.2 percent of total government securities owned by banks), while Rp 732.5 trillion (87.9 percent) was owned by BUKU 4 and BUKU 3 banks. Therefore, these smaller banks’ access to liquidity, either from BI or in the interbank market, is more limited.

We expect that there will be a flight to quality in which smaller bank customers will move their deposits into larger banks amid economic uncertainties. This trend has occurred before. The largest banks’ share of funding has increased over the past five years. The market share of third-party funds of BUKU 4 and BUKU 3 banks increased from 85 percent at the end of 2015 to 90 percent in December 2019 while the market share of third-party funds of BUKU 2 and BUKU 1 banks shrunk to about 11 percent from 15 percent during the same period.

Regulators are supposed to focus more on the smaller banks because they are very vulnerable to economic shocks.  It is very important, if not the most important thing, to maintain sufficient liquidity in the banking system, including liquidity in the smaller banks, in uncertain times because past financial crises have always been started by liquidity shocks.   

Popular

Is Indonesia really ready to embrace dual citizenship?

Tens of thousands seek better lives in Jakarta. But is the city losing its draw?

Elon Musk's Starlink granted licences to operate in Indonesia