Bank lending low despite decline in problem loans
Bank lending low despite decline in problem loans
By Hendarsyah Tarmizi
JAKARTA (JP): The country's banking system appears to have successfully survived the recent financial stress resulting from a high level of non-performing loans.
The success is reflected by the decline in the level of non- performing loans in June to 11.6 percent from the peak of 14.2 percent in late 1993.
The progress, according to Standard & Poor's, is attributable to several factors including strong economic growth, better focus on bank management and the imposition of stricter prudential requirements by Bank Indonesia, the central bank.
However, the growth rate in the banking industry's lending volume declined despite a decrease in the level of the non- performing loans.
The outstanding credits grew by only 14 percent to Rp 216.76 trillion (US$98.52 billion) in January-August period, far lower than the 25 percent increase booked in 1994.
The credits of several major commercial banks, in fact, grew much higher. Bank Bali booked an increase of 34 percent in its lending volume, Bank Danamon 33 percent, Bank Dagang Nasional Indonesia 36 percent and Bank Internasional Indonesia 25 percent.
In contrast, the lending growth rates of state-owned banks, excluding Bank Ekspor Impor Indonesia and Bank Tabungan Negara, are lower than the average. The outstanding loans of Bank Bumi Daya increased by only 11 percent during the first six months of this year, Bank Dagang Negara by 7 percent, Bank Negara Indonesia by 15 percent and Bank Rakyat Indonesia by 13 percent.
Bank Pembangunan Indonesia (Bapindo), the most severely hit by problem loans, booked a zero percent increase in its lending.
Rijanto, a senior banking analyst, described the lending growth in the banking system as within the indicative target of the monetary authority.
The problem lies in the banks' high exposure to the property sector, he said, citing that around Rp 41 trillion of the total credits were allocated to office buildings, condominium projects and real estate.
He said that the sluggish demand for office space and apartments could pose a problem to the country's banking system in the next two years.
The extensions of loans from the country's banking system have also undergone a major change, with lending from foreign and joint venture banks accelerating much faster than that of from state and private commercial banks.
"It seems that the foreign and joint venture banks have benefited from the slower growth in the lending volume of state and private national banks," he said.
Money supply
The lending growth in the first eight months of this year was relatively lower than that in 1994 and 1993. But the increase in foreign assets held by commercial banks has significantly increased the money supply.
The broad-term money supply (consisting of currency, demand deposits and quasi money) grew by around 26.5 percent during the January-September period, according to Bank Indonesia Governor J. Soedradjad Djiwandono.
The September figure of the broad money supply, as disclosed by the central bank governor at a business luncheon hosted by the Jakarta-based Financial Club early last month, was far higher than the 15 percent growth recorded in the January-August period.
Analysts estimated that the significant growth rate in the money supply mainly resulted from the sharp increase in foreign assets held by the commercial banks rather than from the rise in credits.
Bank Indonesia, according to the analysts, has no choice but to slow down credit in a bid to reduce the money supply and to cool down the economy.
The central bank's most recent move to squeeze the money supply is to raise the bank reserves requirement from two percent to three percent beginning February next year.
The tight money policy introduced by the central bank is not the first but it is different in nature from those applied in the previous years.
Using the reserve requirement as an instrument to squeeze lending is not usually the central bank's policy. It previously raised the interest rate of its own promissory notes (Sertifikat Bank Indonesia) or introduced shock therapy in dealing with the overheating economy.
Raising the interest rates is no longer effective because a higher rate could result in the inflow of short-term funds from overseas, which will then result in the increase in the money supply at home. Using shock therapy, like the one administered by the monetary authority in early 1990 is an unpopular approach.
In early 1990, the then Minister of Finance J.B. Sumarlin used shock therapy by withdrawing Rp 8.1 trillion in state-owned companies' funds from the banking system overnight.
The so-called Sumarlin shock, which resulted in the increase of interest rates to as high as 27 percent, was blamed for the sharp increase in the levels of non-performing loans.
The level of non-performing loans, which reached around 14.2 percent of outstanding loans in late 1993, declined to 11.6 percent in June, mostly taking place in state-owned banks.
The state-owned banks thus far have not yet fully recovered from the severe impact of the high level of their non-performing loans and their consolidation measures still continue despite a significant increase in their equities.
The tight condition is, therefore, not merely caused by the increase in the reserves requirement but also by the imposition of the central bank's tighter capital requirement.
Rijanto said that the central bank's requirement that banks increase their risk-weighted capital adequacy ratio (CAR) to 12 percent within six years will also limit the commercial bank's credit expansion.
Bank Indonesia's regulation issued on Sept. 22 requires commercial banks with foreign exchange licenses to increase their capital to Rp 150 billion and their CAR to nine percent in 1997, 10 percent in 1999 and 12 percent in 2001.
Soedradjad said that 92.08 percent of the country's 240 commercial banks have fulfilled the minimum 8-percent CAR requirement. Their average CAR significantly improved to 10.8 percent as of late July from 9.9 percent in late 1993.
According to the Australia-based Standard & Poor's rating agency, the burden of non-performing loans at certain banks, loan concentration to affiliates and large borrowers as well as high exposure to office and condominium projects, under-capitalization of small banks remain a major problem for the country's banking system despite the improvement of the level of non-performing loans.
The dilemma of high bank loans and credit concentration to affiliates and large borrowers can not be resolved easily, the agency said. "While Bank Indonesia has initiated regulations to limit and reduce such loans, the lack of capital market depth and immature syndication may prove as impediment to banks meeting legal lending limit guidelines," it said.
Interest rates
The central bank's credit squeezing policy, in addition to the requirement for banks to improve their CAR position, will further tighten the monetary regime, which, in turn, will further push up interest rates despite the downward trends of interest rates overseas.
"It is difficult to lower interest rates. The rates will stay at their current levels at least," said Abdullah Ali, the president of Bank Central Asia.
Bank Indonesia adjusted interest rates on money market securities at least twice this year in response to the increase in the key rates of the U.S. Federal Reserve. The adjustment resulted in the increase of annual interest rates on money market securities -- used by the central bank as an instrument to add to economic liquidity -- to 15.88 percent in May from 14.5 percent in January. The current rates remain stable at May's level even though the Fed's key rates had been lowered.
The average interest rate on three-month time deposits also stayed high at 17.5 percent during the past eight months as the consequence of the high level of the rates of money market securities.
Besides offering high interest rates, commercial banks also provide various prizes in their bids to attract more funds. This trend is likely to continue next year, given the tighter conditions in the money market. As a result, the lending rates will remain high at between 20 percent and 22 percent per annum.