Banking industry improves, but can't propel economy<\/p>\n
Rikza Abdullah, Contributor, Jakarta<\/p>\n
Indonesia's banking industry has shown improvement but it
\nremains weak in its ability to fuel real economic growth in the
\ncountry.<\/p>\n
During the first 11 months of 2002, for example, Indonesia's
\ncommercial banks managed to improve their combined capital and
\ntotal funds collected from depositors but they, for some reason,
\nfailed to channel most of the deposited funds to borrowers.<\/p>\n
They, therefore, are now being challenged to improve their
\nefforts to provide more credit for business players this year
\nwith an aim of propping up economic growth. But there seem to be
\nfurther handicaps that may hamper them from extending substantial
\nincreases in loans.<\/p>\n
According to the latest monthly report by Bank Indonesia,
\ncommercial banks (totaling 145 in January 2002 and 141 at the end
\nof the year after the merger of five banks in September) managed
\nto increase their combined capital by 52.6 percent from Rp 62.3
\ntrillion (US$6.9 billion) as of the end of 2001 to Rp 95.1
\ntrillion as of last November. However, their total assets
\ndeclined by 0.35 percent from Rp 1,099.7 trillion as of December
\n2001 to Rp 1,095.8 trillion as of last November.<\/p>\n
The capital increase helped improve their combined capital
\nadequacy ratio (CAR -- the ratio of their capital against risk-
\nweighted assets) from 20.5 percent to 22.8 percent during the
\nsame period.<\/p>\n
The banks could also increase the total funds collected from
\nthird parties by 2.2 percent from Rp 797.4 trillion as of the end
\nof 2001 to Rp 815.4 trillion as of last November and their
\ncredits at a higher rate, 12.1 percent, from Rp 358.6 trillion to
\nRp 402.2 trillion, thereby improving their loan-to-deposit ratio
\nfrom 44.9 percent to 49.3 percent.<\/p>\n
Bank Indonesia Governor Syahril Sabirin said in a meeting with
\nbankers in Jakarta on Jan. 10 that because the health of the
\nbanking industry had improved, while the macro-monetary
\nconditions were getting better, it was a good time for commercial
\nbanks to expedite the expansion of their credits.<\/p>\n
He explained to the bankers' gathering -- the first of its
\nkind to be held in five years -- that the country's macro-
\nmonetary conditions had improved since the start of the economic
\ncrisis in late 1997, marked by the recent stability of the
\nrupiah's conversion rate against the U.S. dollar, the downward
\ntrends of the consumer price index and banking interest rates as
\nwell as the improvements in the country's balance of payments and
\nforeign exchange reserves.<\/p>\n
Executives of 80 banks surveyed recently by Bank Indonesia
\nexpressed optimism that commercial banks' assets were likely to
\ngrow by an average of 5 percent in 2003. In line with the
\nexpected asset increases, banks would also improve the quality of
\ntheir productive assets and increase the volume of their credits,
\nhe said.<\/p>\n
\"However, in spite of the improvements, banks are now still
\nfacing various hurdles in improving their intermediary function,\"
\nSyahril said.<\/p>\n
Uncertainties and the high risks in the real business sector
\n(such as production, trading and transportation) had lowered
\ncompanies' capacity to absorb banking loans and at once caused
\ncommercial banks to be too cautious in extending new credits to
\nthem. As a result, companies operating in the real sector fell
\nshort in utilizing all the funds allocated by commercial banks
\nfor credit expansion in 2002, he said.<\/p>\n
Because banks found many problems in increasing loans to
\ncompanies for investment purposes last year, banks were trying to
\npromote credits for consumption, particularly those for the
\npurchase of houses and cars.<\/p>\n
But consumption, which made a significant contribution to the
\neconomic growth in 2002, is expected to slow down this year due
\nto the expected decline in the private sector's investment
\nactivities.<\/p>\n
The expectation of the decline in the private sector's
\ninvestment activities is based on an assumption that investors
\nwill continue keeping away from the country due to the poor law
\nenforcement, the uncertainty in the implementation of rules on
\nregional autonomy, the increase in labor disputes and the
\npossible political instability prior to the 2004 general
\nelections.<\/p>\n
An expectation that the economy is likely to grow by only
\nabout 3.5 percent to 4 percent this year will also add problems
\nto the expansion of banking credits because such a low level of
\ngrowth would not improve employment conditions in the country.<\/p>\n
Indonesia's economy grew by about 3.5 percent last year. That
\nlevel of growth could help the country increase its employment by
\nonly about 1.2 million out of the 2.5 million new people entering
\nthe work force annually. As a result, the country's unemployment
\nincreased slightly to 8.9 percent as of the end of last year.<\/p>\n
In trying to improve their intermediary function, banks may
\nalso face difficulties in extending more credits to exporters and
\nexport-oriented producing companies because the growth of
\neconomies in their main importing countries, such as the United
\nStates and Japan, is likely to continue slowing this year.<\/p>\n
Commercial banks will also need to lower their interest rates
\non credits in line with the steady declines of interest rates
\ncharged by Bank Indonesia on its SBI promissory notes. Otherwise,
\nborrowers will turn to non-bank finance companies or the capital
\nmarket in procuring fresh funds.<\/p>\n
Interest rates on one-month SBIs declined by 469 basis points
\nfrom 17.62 percent per annum at the end of 2001 to 12.93 percent
\nat the end of 2002. In line with the decline in SBI interest
\nrates, commercial banks lowered their one-month deposit interest
\nrates substantially from an average of 16.07 percent per annum in
\nDecember 2001 to 12.87 percent in November 2002. But interest
\nrates on their loans for working capital were slashed only
\nslightly, from 19.19 percent at the end of 2001 to 18.44 percent
\nlast November. They even slightly increased interest rates on
\ntheir loans for investment capital from 17.99 percent to 18
\npercent during the same period.<\/p>\n
Their reluctance to lower credit interest rates have driven
\nconsumers to borrow money from non-bank finance companies for the
\npurchase of vehicles or for the procurement of machinery and
\nother industrial equipment by businesspeople.<\/p>",
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