Banks told to use loans productively

Banks told to use loans productively

JAKARTA (JP): Bank Indonesia Governor J. Soedradjad Djiwandono
warned here yesterday that a misuse of foreign commercial
borrowings will create a problem in the country's economy.

"Therefore, I would like to ask banks to ensure that these
funds are used productively, especially for export-oriented
activities," he told around 300 bank executives at last night's
Annual Bankers' Meeting.

Soedradjad said that the foreign commercial loans raised by
the private sector grew by over 300 percent to US$7.3 billion
last year from $2.3 billion in the previous year as the impact of
the high interest rates domestically and the decline in the
capital market performance.

In 1994, the buoyant capital market enabled businesses to
obtain financial funds through the local capital market, he said.

"However, it seemed that in 1995 the capital market became
less attractive as an investment option," he said, adding that
such situations, combined with tight domestic liquidity,
encouraged business people to turn to foreign commercial loans.

Soedradjad said that the upward trend in private offshore
commercial borrowings required serious attention. He, however,
did not spell out specific actions which should be taken in
dealing with the sharp increase in overseas commercial
borrowings.

Soedradjad also discussed the direction of the central bank's
monetary policy in his address at last night's meeting, which was
attended by executives and commissioners of state-owned as well
as private banks, both domestic and foreign.

He said the Indonesian economy, supported by strong domestic
demand, made heartening progress in 1995, with improvements in
almost all sectors.

However, he said, the rapid growth of domestic demand was not
balanced by growth in national production and, as a consequence,
imports grew much faster than exports.

Deficit

With the rapid growth of imports, the current account deficit
for the 1995/1996 fiscal year, which will end in March, is
expected to increase to $7.9 billion, far higher than the
government's earlier estimate of around $3.1 billion.

Soedradjad, however, said that the balance of payments is
projected to remain in surplus due to the large inflows of
capital in both the government and the private sector.

"Foreign reserves will also remain adequate, so that, overall,
the balance of payments will still be secure," he said.

But he warned that potential instability of the macro-economy
is threatening the growing economy.

Therefore, he added, efforts to reduce the current account
deficit and control inflation will remain the priority of the
government's policies this year.

Regarding the banking sector, the condition of domestic banks
has improved although they are still facing substantial
challenges and problems, Soedradjad said.

"No less than Standard and Poor's has appraised Indonesia's
efforts to overcome problem banks and problem loans positively,"
he said.

The encouraging development of the banking sector was partly
reflected by their success in improving efficiency, he said,
adding that the average ratio of operating expenses to operating
incomes dropped from 95 percent in 1994 to 90 percent in 1995.

He said that more than 90 percent of the 241 banks in the
country have met the requirement on the minimum Capital Adequacy
Ratio (CAR).

Improvements were also recorded in their compliance with the
requirements on the Loan to Deposit Ratio (LDR) and the Net Open
Position (NOP) regulations.

"However, non-compliance with the Legal Lending Limit (LLL)
has increased, as compared to the previous year. This needs
serious attention," he noted.

The increasing number of banks not complying with the Legal
Lending Limit requirement, according to Soedradjad, has become
alarming lately.

He said complying with the Legal Lending Limit requirement is
important because most of the problem loans taking place in the
banking industry are related to the violations of the Legal
Lending Limit, the ceiling on credits for bank owners and
executives or their companies.

In this regard, Soedradjad said, the central bank will
continue to closely monitor developments on credit extensions and
that it will not hesitate to take legal actions against violators
of the Legal Lending Limit.

"I would like to remind bank owners to avoid actions which can
be categorized as taking advantage of their banks for personal
interests, or the interests of their groups of companies.

Soedradjad also said that the expansion of the money supply
(broadly-defined) will be limited at 17 percent and credit growth
at 16 percent this year.

At the dinner party, one of the most important events held by
the central bank in outlining its annual monetary programs,
Soedradjad spotlighted five main principles in managing the
country's monetary system in 1996.

The first principle is to place a high priority on the
stabilization of the macroeconomy, the second to use fiscal and
monetary instruments in a more coordinated, integrated and
balanced manner, and the third to improve the harmonization of
macro and micro monetary instruments.

The fourth principle is to avoid any drastic shock therapy in
putting the economy on the right track, while the last one is to
cultivate better cooperation and mutual understanding between the
government and economic entities in the financial sector. (hen)

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