Government-directed lending<\/p>\n
Government-directed lending, risk concentration and connected
\nlending, besides the meltdown of the rupiah, were the main causes
\nof the banking crisis in late 1997. Yet the current government,
\noverzealous to prime the pump, seems unable to resist the
\ntemptation to interfere in credit assessments, prodding state
\nbanks to lend to particular projects or businesses it accords
\nhigh priority.<\/p>\n
The state minister of state enterprises has asked state Bank
\nMandiri, Indonesia's largest bank by assets, to \"explore the
\npossibility\" of injecting fresh funds into state-owned PT Kertas
\nKraft Aceh to enable it to resume production, which was halted in
\nApril 2003. The request, according to a report from the state
\nminister of state enterprises to the House of Representatives on
\nTuesday, was made even though the paper manufacturer already has
\nRp 300 billion (US$33.3 million) in bad debts, including Rp 165
\nbillion to Bank Mandiri.<\/p>\n
Though the request was simply a suggestion, the management of
\nBank Mandiri could take it as a lending directive. After all, the
\ndirectors of state banks, like all other state companies, are
\nappointed by the state minister of state enterprises, in his
\ncapacity as the nominee shareholder for the government in all
\nstate companies. More worrisome is that what was disclosed at the
\nmeeting with the House could only be the tip of the iceberg.<\/p>\n
There is nothing wrong for the government or the central bank
\ndirecting or encouraging lending to particular sectors designed
\nto be prime movers of the economy, as long as the directive or
\nguidelines are based on across-the-board fiscal or monetary
\npolicies, and not on preferential treatment for a specific
\ncompany or project.<\/p>\n
Bank Indonesia, for example, issued new regulations last month
\nthat eased legal lending limits for the development of
\ninfrastructure and to businesses dealing in basic necessities.
\nThis ruling, which is effective for all companies operating in
\nthese two sectors, makes good sense because of the important role
\nof these sectors in improving economic efficiency and checking
\ninflation.<\/p>\n
But a specific lending recommendation to Bank Mandiri could
\nresurrect the bad habit of government intervention in credit
\ndecisions at state banks. This would undermine sound banking
\npractices and adversely affect the entire banking industry, in
\nview of the dominant role of state banks and given that Bank
\nMandiri's nonperforming loans were already close to 7.50 percent
\nof its total credits, much higher than the maximum 5 percent set
\nby the central bank as a prudential guideline.<\/p>\n
House members, during a hearing with the central bank board of
\ngovernors on Monday, criticized Bank Mandiri's management for the
\nsize of its bad credits to state companies and for the
\nquestionable manners in which the bank wrote off its bad loans.
\nIt was disclosed at the meeting that Bank Mandiri's bad loans and
\nsubstandard credits to 13 state companies alone reached Rp 1.37
\ntrillion.<\/p>\n
However, not all was bad news at the bank. We should give
\ncredit where credit is due. As Bank Indonesia Governor
\nBurhanuddin Abdullah noted at the meeting, the majority of Bank
\nMandiri's big corporate credits remain good, though after some
\nrestructuring, citing the bank's Rp 4 trillion in loans to the
\nRadja Garuda Mas business group as an example.<\/p>\n
But government-directed lending should still be prevented
\nbecause such \"pressure\" could undermine risk management at state
\nbanks. Credit assessments should be based solely on the
\ncreditworthiness of borrowers, which can decline or improve over
\ntime due to various factors.<\/p>\n
True, the pace of credit expansion should be heightened to
\nsupport the government's economic growth target of 6 percent. It
\nis also true that the banking industry has significantly
\nimproved, as can be seen from key indicators such as capital
\nadequacy ratio and the level of nonperforming loans.<\/p>\n
However, the lending scandals (frauds) that led to the closure
\nof two banks in 2004 and another one last month indicate how
\nfragile the banking industry still is, and how credit assessments
\nand internal controls at commercial banks, and the quality of
\nsupervision by the central bank, badly need further improvement.<\/p>\n
The extension of credits should always follow prudential
\nregulations and sound assessments. This is especially imperative
\nfor state banks, not only because their managements are often
\nvulnerable to pressure from government officials, but also
\nbecause it is difficult to determine the true condition of state
\nbanks given the significant role of government bonds on their
\nbalance sheets and their weak governance structures.<\/p>\n
The most effective way for the government to reinvigorate bank
\nlending is to reduce the persistently high business risks by
\naccelerating reform in such areas as the civil service, taxation,
\ncustoms and the legal sector<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/government-directed-lending-1447893297",
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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