Business remains promising despite some difficulties

Rikza Abdullah, Contributor, Jakarta

The high growth of domestic consumption has helped Indonesia's multifinance companies accelerate the pace toward recovery after the recent economic crisis devastated it, forcing a large number of financial service companies to halt operations or even collapse.

Data at the Ministry of Finance show that as of the end of June, out of the 245 companies licensed to operate in multifinance services -- including leasing, factoring, consumer financing and credit card financing -- three had gone bankrupt, two had been liquidated, 10 merged into five and two others no longer operated. In addition, the ministry had also revoked the operational licenses of 14 others.

Susilo Sudjono, chairman of the Indonesian Financial Services Association (IFSA), said here on Thursday that out of the financial service companies that still held licenses from the ministry, only about 30 percent to 40 percent were still active, while the remainder did not show any business activities.

According to ministry data, the country's financial service companies enjoyed a combined net profit of Rp 923 billion in 1996, with total operational investments of Rp 26.58 trillion.

In 1997, they managed to sharply increase operational investments to Rp 38.03 trillion, but, instead of enjoying a profit, they suffered a combined loss of Rp 187.98 billion because of the steep depreciation of the rupiah against the U.S. dollar. The sharp rise of domestic interest rates after the start of the economic crisis in July raised their debt servicing to Rp 39.18 trillion from Rp 24.01 trillion in the previous year.

Their combined loss surged to Rp 4.66 trillion in 1998, as their business activities declined drastically, with total investments reaching only Rp 29.27 trillion. The business in the following year showed an improvement, enabling them to book a combined profit of Rp 539.62 trillion, even though their total investments fell further to Rp 21.99 trillion.

But they again suffered losses of Rp 2.39 trillion in 2000, even though there was a 36 percent increase in their operational investments to Rp 28.72 trillion.

In 2001, they could again increase operational investments by nearly 7 percent to Rp 30.04 trillion and at once reduce their total losses to Rp 118.96 trillion. But could they improve their performance and start making profit from this year on?

"We are sure our operational investments will grow by a minimum of 20 percent this year," Susilo told The Jakarta Post.

According to him, for healthy companies, financial services remain promising amid signs of the country's economy.

He explained that the demand for financial services was now very high and the companies had been equipped with adequate infrastructure and networking.

"The most important thing is that they should concentrate more on the business segment where they have advantages," he added.

Dennin Firmansjah, president of PT Saseka Gelora Finance, a finance company focusing its business on leasing, told the Post that the demand for leasing for heavy equipment, for example, was very high because construction of coal mines and roads had resumed, while contractors had not replaced their equipment since the start of the economic crisis.

"The demand for barges, each worth Rp 5 billion and over, is also very high now," he said.

Susilo, who is also president of PT Stacomitra Sedaya Finance, a company focusing on consumer financing, said consumer financing was now the most promising sector in the financial service industry.

"Some 60 percent of about 300,000 automotive vehicles are sold in the country every year with credits provided by financial service companies and commercial banks," he said. "And about 70 percent of approximately 2.5 million motorcycles are also sold on credit."

According to ministry data, financial service companies' credits for leasing increased from Rp 12.12 trillion in 1996 to Rp 16.9 trillion in 1997 but fell to Rp 15.64 trillion in 1998 and to Rp 10.92 trillion in 1999 before rising back to Rp 13.39 trillion in 2000 and to Rp 13.73 trillion in 2001. Out of the credits for 2001, 15.6 percent went sour.

Meanwhile, their financing for consumer goods purchases rose from Rp 6.36 trillion in 1996 to Rp 10.6 trillion in 1997 but fell to Rp 5.24 trillion in 1998 and to Rp 4.32 trillion in 1999 before rising back to Rp 8.39 trillion in 2000 and to Rp 12.26 trillion in 2001. Out of the credits for 2001, 2.1 percent went sour.

Dennis, who is also IFSA's vice chairman for industrial and business affairs, said the factoring sector had become less and less attractive over the past years due to the decline in industrial activities in the country. Credit card financing by financial service companies was also small because it required heavy investment.

Factoring by financial service companies steadily decreased from Rp 10.09 trillion in 1997 to Rp 3.25 trillion in 2001, while their credit card financing reached only Rp 431.89 billion and Rp 796.14 billion respectively. Out of the credits extended for factoring and credit card payments in 2001, 66.2 percent and 22.8 percent respectively went sour, according to Bank Indonesia in its annual report.

Susilo said a major problem encountered by financial service companies was the scarcity of funds, which made it difficult for them to expand business.

"Our major source of funds is banks," he said. "But banks, which are still restructuring themselves, are reluctant to increase their credits to us."

He said financial service companies were actually ready to pay annual interest of some 18 percent, a level that would give a high profit margin to banks.

Domestic banks extended Rp 11.85 trillion in credits to financial service companies in 1996, Rp 15.45 trillion in 1997, Rp 14.37 trillion in 1998, Rp 10.7 trillion in 1999, Rp 11.29 trillion in 2000 and Rp 14.18 trillion in 2001, while credits extended by foreign banks were recorded at Rp 9.17 trillion, Rp 19.27 trillion, Rp 16.39 trillion, Rp 8.57 trillion, Rp 7.42 trillion and Rp 6.79 trillion respectively.

"We will encourage our member companies to raise fresh funds by offering bonds to the public," Susilo said.

Bank Indonesia says in its latest annual report that because consumer demand will remain strong this year, while the intermediary function of commercial banks will improve, credits for consumption needs are expected to continue expanding.

Total consumption increased by 6.2 percent in 2001 and is projected to further increase by a range between 4.3 percent and 4.8 percent this year.