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.