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.