Bank lending expands

Bank lending expands

The central bank disclosed on Wednesday a confidence-building
trend within the economy, saying that bank lending increased by
25 percent to Rp 9.5 trillion (US$1.07 billion) in August from Rp
7.6 trillion in July. Yet more encouraging is that almost 34
percent of the total credits was extended to small and medium
enterprises.

This is very encouraging, especially to analysts who remained
bearish about the economic prospects and who still harbored a
sense of foreboding, arguing that the economic recovery was still
quite fragile.

The encouraging trend could feed on itself, reinvigorating
business confidence. Many businesspeople had so far disregarded
the government claim on the strengthening macroeconomic
stability, arguing that such stability was necessary but not
enough to revive the real sector.

The lending expansion indicates many positive developments.
First of all, it reflects the easing of inflationary pressures,
as shown by the steady decline in Bank Indonesia's benchmark
interest rate to as low as 13.78 percent on Wednesday from 17
percent early this year.

The government's success in checking the inflation rate at
5.61 percent for the first eight months of this year should be
attributed partly to the relative stability of the rupiah at a
range of Rp 8,800 to Rp 8,900 to the American dollar over the
last few months.

Yet, more heartening is the fact that the stability of the
rupiah seemed to have been able to pass two stress tests over the
past few weeks. One was the new bout of massive demonstrations
during the annual meeting of the People's Consultative Assembly.
The rupiah also held up despite the volatility in the yen-dollar
exchange rate.

The credit expansion also shows that the banking industry has
been able to significantly improve its intermediation role, no
longer dependent mainly on interest revenues from the government
bonds it holds as capital.

Certainly, banks are confident and able to increase lending
operations without being overly concerned about eroding their
capital standard only because the degree of economic risks has
decreased.

We are confident that bank lending will increase even at a
much faster rate within the next few months as a result of the
recent release of 1,454 debtors with Rp 81.6 trillion in bad
debts from the "hospital" of the Indonesian Bank Restructuring
Agency (IBRA).

The new creditors will certainly work hard to restructure
these corporate debtors to enable them to gain access to new
credit lines and to increase their operational rates.

Barring any major social or political developments that could
shatter the budding confidence, all these positive developments
would strengthen the virtuous circle within the economy.

Bank Indonesia will have a broader leeway to decrease its
benchmark interest rate, thereby forcing banks to be more
aggressive in seeking credit-worthy corporate borrowers.

Lower interest rates will in turn encourage depositors to seek
other investment instruments with higher returns, and the stock
market will most likely be one of the first to benefit from this
shift. This process will sustain to make much of more efficient
allocation of resources.

It is, however, entirely misguided for the government to be
complacent, let alone relax the implementation of reform
measures, notably in the economic and legal sectors. It should
instead always be on guard, not yielding to the temptation to
launch populist programs.

Billions of dollars in bad debts still languish at IBRA,
meaning that thousands of businesses are still hostage to their
bad debts and unable to assume full-capacity operations. These
corporate debtors have yet to be unshackled from IBRA to enable
them to return to sound operations. After all, only sound
business units can build up a robust economy.

In addition, hundreds of ongoing concerns that were ceded by
former bank owners in repaying their debts to the government are
still debilitated under IBRA management.

As these companies operate in a wide range of industrial
areas, including upstream manufacturing that produces basic
materials to downstream industries, their operations will affect
the efficiency of the whole economy.

Certainly, these businesses are currently unable to operate
optimally because the status of their owners is still uncertain
and their access to new credit lines is virtually closed. Unless
these companies are also released to new investors who are
capable of bringing in better management and fresh capital, they
will never be able to operate soundly, let alone strengthen their
competitiveness.