Central Bank, Kadin at odds over low lending

Dadan Wijaksana/Tony Hotland, The Jakarta Post/Jakarta

The corporate sector needs to improve its risk management skills to keep up with the banking sector and make corporations more bankable, thus increase lending to the corporate sector, a top official at the central bank said.

Bank Indonesia senior deputy governor Miranda S. Goeltom said on Wednesday the difference in expertise and expectations in risk management between the two sectors contributed to the low level of bank credit absorption by the corporate sector.

"Today, the management of risks by the banking sector has started to improve, but this has yet to be paralleled by improvement in risk management skills among corporations.

"This has resulted in a condition under which banks maintain a cautious approach to financing the corporate sector," Miranda said on a sidelines of a seminar held by prominent lobby group Indonesian Economists Association (ISEI).

The corporate sector argues that banks' reluctance to lend more money merely indicated their refusal to share the burden of business risks, as banks instead opted to invest their funds in the "more secure" Bank Indonesia promissory notes (SBI) -- a trend that has resulted in excessive liquidity in the banking sector of about Rp 400 trillion (US$43 billion).

This was also deemed among the reasons why banks are still keeping relatively high interest rates for working capital. On average, lending rates are between 14 percent and 15 percent, high above the BI benchmark rate of 7 percent.

The excess liquidity in the banking sector has also created a problem to the central bank in a bid to curb inflationary pressure and speculation against the local currency.

Meanwhile, banks claim that the corporate sector still presents a high financing risk, as most corporations have yet to recover fully from the financial crisis and are struggling with their restructuring processes.

"So, I believe the problem of the current slow credit expansion lies not on the lending rate, but more on the expertise and expectation toward risk management," Miranda said.

However, Mohammad S. Hidayat, chairman of the Indonesian Chamber of Commerce (Kadin), brushed aside the remark.

"It's what they claim. But actually, there are plenty of business risks that cannot be dealt with alone by the business community. For instance, uncertainty," said Hidayat, citing as examples the latest bomb attack at the Australian Embassy to widespread smuggling.

He went on that banks should also be willing to share the burden, as other risks should be categorized as calculated risks.

"If this was the case, then more bank credit can be absorbed by the private sector," he said, but fell short of mentioning whether sharing such burdens meant the banks had to lower their lending interest rates.

The private sector's low credit absorption -- under 15 percent of late -- is seen as an obstacle to the acceleration of economic activities, which could have contributed to generating higher economic growth.

Calculations show that credit absorption in the corporate sector must expand by at least 22 percent to support stronger economic growth.

The economy has been growing at an annual rate of around 4 percent during the past year, and is projected to grow by 5.5 percent next year. The economy needs to grow by between 6-7 percent per year in order to provide sufficient jobs for the millions of job seekers.