Credit crunch continues in local banking industry

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)