Analysts cheerless over banks' outlook
Berni K. Moestafa, The Jakarta Post, Jakarta
High Bank Indonesia interest rates, slow progress in debt restructuring and slackening economic growth created bleak prospects for the country's banking sector over the remaining two months of the year, analysts said on Wednesday.
Hans Anggito, senior analyst at Kim Eng Securities, said economic conditions had remained unfavorable for banks seeking an upturn in the fourth quarter of this year.
"Banks' third quarter reports haven't come out yet, but judging from our economic conditions I would say they aren't good, nor is the outlook for the last quarter (of this year)," he said.
High interest rates, and slowing gross domestic product (GDP) growth put a lid on banks' lending capabilities, he explained.
Hans said Bank Indonesia's interest rates were on average higher than rates last quarter.
This situation made lending for investments more expensive, making it difficult for banks to expand their loan base.
"I think at the moment the average bank's LDR (loan to deposit ratio) stands at 20 percent. At 1997 pre-crisis levels, they could reach as high as 80 percent," he explained.
Falling short in loan expansions, many banks turned to investing in the much safer promissory notes issued by Bank Indonesia known as SBIs.
SBI rates have been rising since early this year, hovering at above 17 percent over the past few weeks, compared to around 12 percent at the beginning of the year.
Other than SBIs, most of the heavily recapitalized banks also rely on interest payments from government bonds.
Bank Indonesia keeps its SBI rates high to absorb liquidity from the money market that could otherwise be used to speculate against the rupiah.
But this measure results in higher lending costs, as banks adjust their credit rates in line with the SBI rates.
Consequently, borrowing has become too expensive for many firms.
Given the slow debt restructuring process under the Indonesian Bank Restructuring Agency (IBRA), banks also lacked good assets to invest in, he added.
Among other things, IBRA was set up to restructure non- performing loans that it took over from struggling banks hit by the 1997 financial crisis.
Once restructured, the loans are supposed to be rechanneled into the banking sector. However, progress has been slow.
To have banks again take up their restructured loans, Hans said, was vital to revive the banking sector's intermediary role in the economy.
Senior economist Hendri Saparin of the Advisory Group on Economics, Industry and Trade (Econit), said she saw no signs of significant recovery in the banking sector.
She said as long as the industry remained fragile, the performance of the banking sector would be unlikely to improve significantly in the near future.
The government's decision to shut down unfit banks was necessary, but could have been avoided if it had taken a more comprehensive approach.
"Instead of coping with the issue on a case by case basis, we should seek and implement a comprehensive solution,"
The government does aim to consolidate more banks and make them stronger, but the plan is progressing slowly.
Hendri suggested that aside from mergers, the government must also categorize banks according to the scope of their operations.