Pushing bank lending<\/p>\n
Bank Indonesia has strengthened its moral suasion toward banks
\nto expand their lending and to lower their credit interest rates
\nin proportion to the central bank's significant easing of its
\nmoney policy since last year. Yet businesspeople are still
\ncomplaining of a credit crunch and persistently high lending
\nrates, saying that banks have not yet fully resumed their
\nfinancial mediational function.<\/p>\n
However, an analysis by Michael Taylor, a banking expert at
\nthe International Monetary Fund's Jakarta office, dispels the
\nnotion that banks have been highly averse to new lending, saying
\nthat credit expansion in the country was very high, amounting to
\n18 percent in 2001 and 30 percent in 2002.<\/p>\n
Why does the discrepancy seem so wide and what is the real
\nproblem in the credit sector?<\/p>\n
An earlier study by the Investment and Banking Research
\nAgency, a private research institution, found that new credit did
\nexpand by over 30 percent in 2002, but this lending growth was
\nmeasured on the basis of approval -- or commitment -- and not on
\ndisbursement, because Rp 42 trillion (US$5.1 billion) of the
\ntotal loans committed in that year remained undisbursed until
\nJanuary 2003.<\/p>\n
Bank Indonesia Governor Burhanuddin Abdullah confirmed last
\nweek that about Rp 80 trillion of credit already pledged by banks
\nhad not yet been disbursed as of May, for various reasons.<\/p>\n
Whatever the differences in calculations that led to the
\ndiscrepancy in the quantitative and qualitative analysis of the
\ncredit sector, most businesspeople -- and even the bankers
\nthemselves -- did acknowledge that credit expansion had been much
\nslower than expected, given the much easier monetary policy of
\nthe central bank and the strengthening macroeconomic stability.<\/p>\n
Many reasons are provided for the slow lending growth and
\npersistently high lending rates. The major factors often cited by
\nbankers are the persistently high risk of doing business,
\ninadequate institutional capacity at banks to assess credit
\nrisks, vulnerable composition of banks' capital assets and
\ninadequate regulations on bankruptcy proceedings.<\/p>\n
On the other hand, businesspeople cite persistently high
\ncredit interest rates, high risks they are still facing in their
\nbusiness operations and unusually high collaterals demanded by
\nbanks to explain the condition.<\/p>\n
All these issues point to the as yet fragile condition of the
\nbanking industry and the slow progress in structural reforms,
\nincluding corporate debt restructuring and long-delayed
\namendments to the Bankruptcy Law.<\/p>\n
As around 50 percent of the capital of the ten largest banks
\n-- which account for more than 90 percent of the banking
\nindustry's assets -- still consists of government bonds, they
\nshould certainly be extra careful in issuing new loans,
\nespecially because most big businesses have yet to restructure
\ntheir debts and operations have yet to become creditworthy
\nborrowers.<\/p>\n
Since under the current the bankruptcy proceedings borrowers
\nare still in a more advantageous position than creditors -- just
\nwitness how extremely difficult and legally complex it is for
\nbanks to foreclose on collaterals or bankrupt recalcitrant big
\nborrowers -- banks remain highly averse to lending to big
\nbusinesses.<\/p>\n
Consequently, most lending has so far been extended to small
\nand medium-scale borrowers, notably consumers. This group of
\nborrowers is considered less likely to put up a strong legal
\nbattle against creditors in case loans turn sour.<\/p>\n
Put another way, creditors consider it much easier and less
\ncostly to foreclose on the collaterals of pledges by these
\nborrowers than dealing with the big ones who, because they are
\nusually protected by high caliber lawyers, prefer to resort to
\nprotracted legal fights.<\/p>\n
However, such a development is not conducive for economic
\nrecovery, because small and medium-scale enterprises, however
\nimportant their role, they still depend on big enterprises for
\nbasic or intermediate materials.<\/p>\n
The problems in the credit sector are once again dictating how
\nimperative it is for the government to accelerate the pace of
\nstructural reforms to reduce the risks of doing business.<\/p>\n
In fact, the persistently high risks in the business sector
\nnot only pose serious threats to the banking industry, which has
\nyet to complete its operational restructuring, but also to
\neconomic recovery.<\/p>\n
If banks remain highly averse to new lending and instead
\nprefer investing their funds in financial market instruments such
\nas mutual funds, government bonds, Bank Indonesia deposit
\ncertificates and inter-bank market instruments, Indonesia's
\neconomic recovery will remain weak.<\/p>\n
More threatening, however, is that these liquid assets can
\neasily be turned into ammunition to attack the rupiah in case of
\nweakening market confidence in macroeconomic or political
\nstability.<\/p>",
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"sponsor": "Okusi Associates",
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