Credit crunch continues in local banking industry

JAKARTA (JP): The amount of the loans being channeled by domestic banks remains far below the amount of their third-party funds, reflecting the lack of growth in the industry's lending activities.

Bank Indonesia senior deputy governor Anwar Nasution said total bank lending as of the end of August was Rp 267.62 trillion (US$31.48 billion), compared to total third-party funds of Rp 525.40 trillion.

"We can say that there's an indication of a credit crunch occurring in the domestic banking industry," he said during a hearing with House of Representatives Commission IX for banking and the state budget.

"The credit crunch trend is further confirmed by the declining loan-to-deposit ratio (LDR) and adjustments to (investment) portfolios made by the banks in the interbank money market and SBI notes," he said, referring to the Bank Indonesia SBI promissory notes.

He said banks' LDR had dropped from 78.31 percent in December last year to 32.24 percent in August this year.

He also said the amount of bank money invested in SBI notes jumped by Rp 7.28 trillion to Rp 79.52 trillion during the same period.

Although some banks have increased their new lending over the past several months, total outstanding bank credits is projected to decline to Rp 254.29 trillion by December this year, compared to Rp 277 trillion at the end of December last year and Rp 545 trillion in December 1998.

He said the drop in outstanding bank credits was due to the massive transfer of nonperforming loans to the Indonesian Bank Restructuring Agency.

Local cash-strapped businesses and legislators have been calling on the central bank to push domestic banks to lend more of their money to the real sector.

A credit crunch normally refers to a condition where banks are forced to cut back their lending, particularly to cool down an overheating economy.

But the current credit crunch is more the result of abnormal conditions caused by the financial and economic crisis that struck the country in the middle of 1997.

Anwar said banks could not resume their normal lending activities because the restructuring of the country's corporate sector, which owes a massive amount of bad debts, had yet to be completed.

"Most banks also think the default risk is still high because economic conditions have not yet recovered due to various factors, including social and security conditions ... ," he said.

Anwar said banks preferred to invest their money in the relatively risk-free SBI notes.

"In an environment of a relatively high default risk, then SBI is the safest investment alternative, although banks will not gain much margin," he said.

Anwar said some banks had difficulty expanding their lending because they needed the cash to ensure they could meet the minimum capital adequacy ratio (CAR) requirement of at least 8 percent by the end of next year.

CAR is the ratio between capital and risk-weighted assets. The current minimum CAR requirement is 4 percent.

Anwar added that although some banks were ready to channel loans to those companies which had been restructured by IBRA, the new lending was made impossible because it would cause the banks to violate the legal lending limit.

Anwar said some banks had started lending to new customers, but the loans were limited to credit for consumption and credit for small and medium-scale enterprises. He added that these loans were less significant to overall lending portfolios.

He also said some foreign banks operating in the country had seized the opportunity provided by the absence of local banks in the credit market, and were channeling badly needed working capital to local cash-strapped companies, particularly exporters.

Discussing the interest rate on the SBI notes, Anwar said the benchmark interest rate on the one-month SBI note would be maintained at between 13 percent and 14 percent in a bid to help curb inflationary pressure from the recent increase in domestic fuel prices.(rei)