Growth through cooperation (2)<\/p>\n
The following is an excerpt of a statement made by Governor of
\nBank Indonesia J. Soedradjat Djiwandono at the Bankers' Annual
\nMeeting on Jan. 19, 1996. This is the second of two articles.<\/p>\n
JAKARTA (JP): In line with the buoyant economy in 1995, the
\ncondition of national banks has improved although they still face
\nsubstantial challenges and problems.<\/p>\n
Bank credit recorded a 23.5 percent growth in 1995 and was
\ncontributed mainly by the rapid credit expansion of national
\nprivate commercial banks. Thus, national private commercial banks
\nplayed a greater role in credit allocation last year. Bank loans
\nwere mainly absorbed by the manufacturing sector followed by the
\nservices and trade sector.<\/p>\n
Nevertheless, the services sector recorded the highest credit
\ngrowth rate especially in the financing of the property sub-
\nsector. Based on the type of use, consumption credit recorded the
\nhighest growth rate followed by working capital and investment
\ncredit.<\/p>\n
The high credit demand during 1995 has encouraged banks to
\nincrease fund mobilization. During 1995, public fund accumulated
\nby banks grew by 21.5 percent. This positive development
\ncontracted the widening gap between funds and credit in the
\nmiddle of the year.<\/p>\n
Meanwhile,it seems that banks were rather successful in their
\nefforts to improve their efficiencies. The average ratio of
\noperating expenses to operating income dropped from 95 percent in
\n1994 to 90 percent in 1995. Total bank assets grew by 18.8
\npercent. Exceptional growth was recorded in off-balance sheet
\nactivities. This is positive as long as it reflects bank efforts
\nto diversify towards fee-based income activities. However, we
\nmust be alert to the extent of additional risks created by off-
\nbalance sheet items. In this regard, banks should continue to
\nfollow prudent principles.<\/p>\n
In the context to Capital Adequacy Ratio (CAR) compliance, of
\nthe total number of banks registered, 221 banks or 92 percent of
\nthe total have complied with the average CAR of 10.8 percent.
\nImprovements were also recorded in compliance with the
\nrequirements of Loan to Deposit Ratio (LDR) and the Net Open
\nPosition (NOP) regulations. However, non-compliance with the
\nLegal Lending Limit (LLL) has increased compared to the previous
\nyears. This needs our serious attention.<\/p>\n
In view of increasing economic activities this year, we must
\nbe constantly vigilant towards upward pressure on prices.
\nMeasures taken in macro or sectoral terms will determine our
\nsuccess in reducing the inflation rate this year. It is estimated
\nthat the inflation rate this year will be contained at lower
\nlevel than in previous years.<\/p>\n
The increasing economic activities also require us to be
\nconstantly alert and prepared for potential pressures on the
\nexternal equilibrium. It is that demand for imports remains high
\nalong with the increase in investments.<\/p>\n
However, with various policies undertaken last year and
\nforward, import is expected to grow slower. This predictions is
\nsupported by the declining import growth rate since the second
\nhalf of last year. Besides that, non-oil\/gas exports of Indonesia
\nare expected to recover in conjunction with positive developments
\nin external markets and increased domestic production capacity.<\/p>\n
In relation to that, the current account deficit this year is
\nexpected to be smaller than in the previous year, comprising 3.1
\npercent of GDP or US$ 6.9 billion. Meanwhile, capital flows this
\nyear are not expected to differ much from the previous year. High
\ncapital inflows are expected, with a large proportion inflow to
\nfinance the private sector. In general, this development reflects
\nthat the balance of payments will remain stable and foreign
\nreserves will still be maintained at a secure level. Briefly,
\nthese are our macroeconomic prospects for 1996.<\/p>\n
Bearing in mind the various macroeconomic indicators mentioned
\nabove, allow me this opportunity to explain the direction and
\nfundamental principle of monetary and banking policies for this
\nyear.<\/p>\n
Basically, five major principles underlie the direction and
\nfundamental principles of this year's monetary policies. The
\nfirst principle is that the Government will continue to place
\nhigh priority on the stabilization of the macroeconomy.
\nDevelopments is a precondition of continuous economic growth. It
\nis of course, extremely important that we achieve our target of
\nhigh economic growth and equitable distribution. However, without
\na stable macroeconomy, such achievements will not last.<\/p>\n
The second principle of policies adopted in 1996\/97 is the
\nprinciple that the instruments of fiscal and monetary policies
\nshould be employed in a coordinated, integrated and balanced
\nmanner to achieve the macro objectives. The 1996\/97 RAPBN
\nemphasize that the principle of balanced budgeting should be
\nstrictly adhered to and any increase must be within limits.<\/p>\n
The third principle is that various instruments in monetary
\npolicy, whether macro instruments such as interest rates, open
\nmarket operation (OMO), exchange rates, or micro instruments such
\nas various prudential rules, will be closely coordinated together
\nto provide mutual support in achieving the targets. This
\nharmonization of macro and micro monetary instruments was an
\nimportant theme in the formulation of policies in Bank Indonesia
\nand this effort will be further intensified.<\/p>\n
The fourth principle that I would like to emphasize is the
\nextent that drastic measures may be avoided. In adopting macro
\neconomic policies, the Government will always ensure that it is
\ncarried out in a timely, well planned and just manner. Surely, we
\ndo not wish our economy to fluctuate as a result of drastic
\npolicy and shock oriented.<\/p>\n
Nevertheless the avoidance of drastic measures requires the
\nsupport of the public, including the financial and banking
\nsector. In particular, the banking sector is expected to be more
\nresponsive in reading the signs and directions of government
\npolicies as well as economic growth trends. Banks are expected to
\nbe more proactive, flexible in making smooth adjustments in line
\nwith developments while not ignoring prudential principles in
\ntheir banking activities and management.<\/p>\n
The fifth principle, which is closely related to the third
\nprinciple, is the principle of cultivating cooperating and mutual
\nunderstanding between the Government and economic entities,
\nparticularly in the financial sector, in achieving our mutual
\ngoals. Shocks and drastic measures can be avoided by more
\neffective communication among all parties towards greater mutual
\nunderstanding of broader mutual interests.<\/p>\n
In view of our economic development trends and based on the
\nabove mentioned considerations, the various monetary targets of
\n1996 will be directed towards efforts to maintain macroeconomic
\nstability and achievement of predetermined goals, among others,
\neconomic growth, inflation rate and current account deficit. In
\nrelation to this, for fiscal year 1996\/97, growth in money supply
\nin broader sense (M2) and credit are targeted at 17 percent and
\n16 percent respectively.<\/p>\n
At the same time, interest rates will be aimed at level that
\ncan sustain internal and external equilibrium. Domestic and
\nforeign interest rate differentials will be closely monitored to
\nmaintain them at a suitable level that can minimize disruptions
\ncaused by capital flows.<\/p>\n
The same measures are also directed towards real domestic
\ninterest rate to ensure that the growth of domestic demand is
\nconsistent with the targeted current account deficit and
\ninflation. This policy is supported by an increasingly flexible
\nexchange rate system in order to maintain realistic exchange
\nrates, that support competitiveness and allow market dynamics.
\nWith these policies, it is hoped that the exchange rate of rupiah
\nwill support monetary management and export activities, as well
\nas to deter speculative capital flows<\/p>\n
Foreign reserves will be increased at the very least to
\nfinance 4-5 months worth of imports. Meanwhile, the policy to
\nmaintain the stand-by loan around US$2 billion will be continued.
\nFurthermore, in order to strengthen our capability to absorb
\nturbulence in foreign exchange markets which may lead to monetary
\nvolatility.<\/p>\n
Bank Indonesia will continue to increase bilateral
\ncooperation among central banks in Asia. Besides repurchase
\nagreements with five central banks, this cooperation was also in
\nthe form of active exchange of information and experiences for
\nthe purpose of coordinating action to deal with large capital
\ninflows and outflows.<\/p>\n
At the same time, prudential policy in foreign debt
\nmanagement, which is one of the crucial in the management of
\nmacroeconomy, will be maintained and strengthened. Therefore, in
\norder to increase the effectiveness of foreign debt management in
\norder to achieve macreconomic targets, the Government will
\ncontinue its efforts to improve the regulation regarding PKLN
\nincluding improving the monitoring system of off-shore borrowing
\nby financial institutions and non-bank private companies. Related
\nto this, it is hoped that banks, in expanding their credits, take
\nnote of the impact of the monetary expansion in macro terms.<\/p>\n
We have made efforts toward overcoming those problems as well
\nto prevent their recurrence. To overcome the present problem
\nloans, we have to intensify our efforts. Banks must be more
\nrealistic in overcoming problem loans. Whenever claim efforts or
\nliquidation of collateral is ineffective, banks should
\nimmediately utilize allowance of bad debts in order to write-off
\nproblem loans.<\/p>\n
More important than efforts to overcome existing problem loans
\nand problem banks are efforts to prevent the occurrence of such
\nproblems. This problem is closely related to my request that
\nbanks give priority to quality over quantity. Besides, to
\nstabilize the national banking condition, Bank Indonesia in 1995
\nissued various new regulations which in brief, were aimed at
\nencouraging banks to impose self regulatory banking in their
\nbusiness activities, and to increase prudential banking as well
\nas banking disclosure requirements. Regulations such as
\nCommercial Banks Credit Policy Guidelines (PPKPB), Internal Audit
\nStandards for Banks (SPFAIB).<\/p>\n
Obviously, few regulations are not sufficient to ensure that
\nnew problems will not occur in our banking sector. More important
\nis the determination and will of banks to adhere to those
\nregulations and to constantly run their banks professionally and
\nfollow the principles of sound bank activities. Therefore, I hope
\nall of you will comply to the various banking regulations in
\norder to avoid unpleasant legal consequences, whether for the
\nbank or individual.<\/p>\n
As I have just described. the increasing number of banks not
\ncomplying with the Legal Lending Limit is becoming alarming
\nlately. The importance of complying with the Legal Lending Limit
\nwas among others, due to the fact that the occurrence of problem
\nbanks is often related to violation of the Legal Lending Limit.<\/p>\n
In view of its importance, Bank Indonesia will continue to
\nmonitor closely its development and will not hesitate to take
\nlegal action. In this regard, I would like to remind bank owners
\nto avoid actions which can be categorized as taking advantage of
\nthe bank for personal interests or the interests of their group
\nof companies.<\/p>\n
This reminder becomes more important in view of Act No. 1.
\n1995 regarding Limited Companies (PT) which will take effect this
\nyear. According to this act, the bank owner will have unlimited
\nliabilities if he is found using the bank solely for personal
\ninterests. In this category non-compliance with the Legal Lending
\nLimit could be an indication that the bank owner has used the
\nbank for personal interests.<\/p>\n
As we are aware, currently there is increasing interbank
\ncompetition both in fund raising and channeling activities. Such
\nintense competition is increasingly requiring that banks
\nemphasize professionalism and moral integrity, and observe
\nprofessional ethics to avoid unhealthy competition practices.<\/p>\n
In the banking business, especially in the present situation
\nwhere global interdependence between banks and financial
\ninstitutions is on the rise, no banks will profit from the
\nproblems of another bank but may instead be dragged down
\ntogether. The inherent risk is that disruptions in a bank will
\naffect another bank according to the domino theory.<\/p>\n
In this regard, allow me to remind you that whatever the level
\nof competition, banks need to continue to cooperate positively
\nand increase their solidarity to prevent the emergence of
\nproblems in national banking. Therefore, the ability to detect in
\nadvance inter-bank problems must be utilized positively.<\/p>\n
In this regard, Bank Indonesia encourages banks to formulate
\nlong term growth strategies, including restructuring so that each
\nbank is not only sound, but is sufficiently big and possess high
\nsustainability and competitiveness at the global level. In line
\nwith such restructuring, Bank Indonesia will tighten permits for
\nnew national banks and to encourage inter-bank mergers, whether
\nin the framework of overcoming problem banks or in a form of
\nmergers to increase competitiveness.<\/p>\n
Window A: Few regulations are not sufficient to ensure that new
\nproblems will not occur in our banking sector<\/p>\n
Window B: Currently there is increasing interbank competition
\nboth in fund raising and channeling activities.<\/p>\n
Window C: Bank Indonesia will continue to increase bilateral
\ncooperation among central banks in Asia.<\/p>",
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