Banks financial condition improving, but lending remains slow: BI

The Jakarta Post, Jakarta

Behind the apparent progress made by the banking sector in improving its financial health, the slow growth in lending to the private sector remains a major concern, according to the central bank's assessment.

Speaking on Tuesday before the legislators at House Commission IX on financial affairs, Bank Indonesia Governor Burhanuddin Abdullah said such a condition had resulted in huge overliquidity in the banking sector.

"Today, the sector has some Rp 200 trillion (US$23.67 billion) in excess liquidity; some Rp 140 trillion of which is invested in SBI (Bank Indonesia promissory notes). Banks then enjoy Rp 12 trillion to Rp 16 trillion in interest payments.

"This has created a sort of circle for some time now, which is unhealthy. Some part of the money is supposed to go to corporations to help fuel the economic wheels," he explained.

In its latest report, the central bank said that new loans in the first eight months of this year only grew by 1.83 percent compared to the same period last year. The new loans stood at Rp 50 trillion, which accounted for some 57.3 percent of the planned full-year lending volume, from Rp 49.1 trillion in the same period last year.

The increase, Burhanuddin said, was far than enough for the industry to play significant role in speeding up the economic growth.

"The bank loans need to grow between 20 percent to 22 percent per annum to be able to push economic growth to around 5 percent," he said.

Indonesia's economy, which has been growing by 3 percent to 4 percent in the past couple of years, could use a boost from robust productive activities to help it achieve higher economic growth. But the slow growth in lending provides little ammunition for the sector to do so.

Analysts and bankers have said that the country's corporate sector is still deemed risky, as its debt restructuring process remains slow. Most banks are consequently focussing their loans more on consumers -- which includes credit for individuals and small and medium-sized enterprises (SMEs) -- rather than for the corporate sector.

One important development that should also be taken into account is the fact that many corporations are turning to alternative financing sources other than banks. Corporate bonds issue has been among the favorites. More than Rp 20 trillion worth of corporate bonds had been issued as of September.

Elsewhere, Burhanuddin also said the slight improvement in lending was a stark contrast with progress made by banks in improving their financial health.

Bank's third-party funds in the banking sector had grown by 0.7 percent as of August, while the average capital adequacy ratio (CAR) was at 26 percent, far above the central bank's minimum requirement of 8 percent. The return on assets (ROA) of banks also stood at a relatively healthy 2.4 percent.