Banking industry improves, but can't propel economy

Banking industry improves, but can't propel economy

Rikza Abdullah, Contributor, Jakarta

Indonesia's banking industry has shown improvement but it
remains weak in its ability to fuel real economic growth in the
country.

During the first 11 months of 2002, for example, Indonesia's
commercial banks managed to improve their combined capital and
total funds collected from depositors but they, for some reason,
failed to channel most of the deposited funds to borrowers.

They, therefore, are now being challenged to improve their
efforts to provide more credit for business players this year
with an aim of propping up economic growth. But there seem to be
further handicaps that may hamper them from extending substantial
increases in loans.

According to the latest monthly report by Bank Indonesia,
commercial banks (totaling 145 in January 2002 and 141 at the end
of the year after the merger of five banks in September) managed
to increase their combined capital by 52.6 percent from Rp 62.3
trillion (US$6.9 billion) as of the end of 2001 to Rp 95.1
trillion as of last November. However, their total assets
declined by 0.35 percent from Rp 1,099.7 trillion as of December
2001 to Rp 1,095.8 trillion as of last November.

The capital increase helped improve their combined capital
adequacy ratio (CAR -- the ratio of their capital against risk-
weighted assets) from 20.5 percent to 22.8 percent during the
same period.

The banks could also increase the total funds collected from
third parties by 2.2 percent from Rp 797.4 trillion as of the end
of 2001 to Rp 815.4 trillion as of last November and their
credits at a higher rate, 12.1 percent, from Rp 358.6 trillion to
Rp 402.2 trillion, thereby improving their loan-to-deposit ratio
from 44.9 percent to 49.3 percent.

Bank Indonesia Governor Syahril Sabirin said in a meeting with
bankers in Jakarta on Jan. 10 that because the health of the
banking industry had improved, while the macro-monetary
conditions were getting better, it was a good time for commercial
banks to expedite the expansion of their credits.

He explained to the bankers' gathering -- the first of its
kind to be held in five years -- that the country's macro-
monetary conditions had improved since the start of the economic
crisis in late 1997, marked by the recent stability of the
rupiah's conversion rate against the U.S. dollar, the downward
trends of the consumer price index and banking interest rates as
well as the improvements in the country's balance of payments and
foreign exchange reserves.

Executives of 80 banks surveyed recently by Bank Indonesia
expressed optimism that commercial banks' assets were likely to
grow by an average of 5 percent in 2003. In line with the
expected asset increases, banks would also improve the quality of
their productive assets and increase the volume of their credits,
he said.

"However, in spite of the improvements, banks are now still
facing various hurdles in improving their intermediary function,"
Syahril said.

Uncertainties and the high risks in the real business sector
(such as production, trading and transportation) had lowered
companies' capacity to absorb banking loans and at once caused
commercial banks to be too cautious in extending new credits to
them. As a result, companies operating in the real sector fell
short in utilizing all the funds allocated by commercial banks
for credit expansion in 2002, he said.

Because banks found many problems in increasing loans to
companies for investment purposes last year, banks were trying to
promote credits for consumption, particularly those for the
purchase of houses and cars.

But consumption, which made a significant contribution to the
economic growth in 2002, is expected to slow down this year due
to the expected decline in the private sector's investment
activities.

The expectation of the decline in the private sector's
investment activities is based on an assumption that investors
will continue keeping away from the country due to the poor law
enforcement, the uncertainty in the implementation of rules on
regional autonomy, the increase in labor disputes and the
possible political instability prior to the 2004 general
elections.

An expectation that the economy is likely to grow by only
about 3.5 percent to 4 percent this year will also add problems
to the expansion of banking credits because such a low level of
growth would not improve employment conditions in the country.

Indonesia's economy grew by about 3.5 percent last year. That
level of growth could help the country increase its employment by
only about 1.2 million out of the 2.5 million new people entering
the work force annually. As a result, the country's unemployment
increased slightly to 8.9 percent as of the end of last year.

In trying to improve their intermediary function, banks may
also face difficulties in extending more credits to exporters and
export-oriented producing companies because the growth of
economies in their main importing countries, such as the United
States and Japan, is likely to continue slowing this year.

Commercial banks will also need to lower their interest rates
on credits in line with the steady declines of interest rates
charged by Bank Indonesia on its SBI promissory notes. Otherwise,
borrowers will turn to non-bank finance companies or the capital
market in procuring fresh funds.

Interest rates on one-month SBIs declined by 469 basis points
from 17.62 percent per annum at the end of 2001 to 12.93 percent
at the end of 2002. In line with the decline in SBI interest
rates, commercial banks lowered their one-month deposit interest
rates substantially from an average of 16.07 percent per annum in
December 2001 to 12.87 percent in November 2002. But interest
rates on their loans for working capital were slashed only
slightly, from 19.19 percent at the end of 2001 to 18.44 percent
last November. They even slightly increased interest rates on
their loans for investment capital from 17.99 percent to 18
percent during the same period.

Their reluctance to lower credit interest rates have driven
consumers to borrow money from non-bank finance companies for the
purchase of vehicles or for the procurement of machinery and
other industrial equipment by businesspeople.