Financial intermediation still faces barriers

Financial intermediation still faces barriers

The Jakarta Post, Malang, East Java

Persistently high business risks, low business confidence,
inadequate expertise in lending to small and medium-scale firms,
and the big sums of bad corporate debts that have yet to be
restructured seem to stand in the way of expansive bank lending
despite increasing monetary stability.

Bank Indonesia governor Burhanuddin Abdullah again raised the
issue of the slower-than-expected pace of bank lending and
persistently high credit interest rates, even though the central
bank has steadily eased its monetary policy by lowering its
short-term benchmark interest rate to as low as 9.2 percent from
almost 13 percent earlier this year.

Burhanuddin noted in a speech at the 15th Congress of the
Indonesian Economists Association on Monday that the central
bank's monetary policy had not yet created a symmetric impact on
the real (business) sector, due to a host of problems still
besetting the business world.

"Quite a large portion of the huge sum of new credits already
approved by banks has not yet been disbursed," Burhanuddin said.

Panelists at the congress pointed out that despite the much
acclaimed macroeconomic stability, creditors still attached high
risk premiums on businesses in Indonesia due to the slow pace of
structural reform.

Halim Alamsyah, one of the panelists, noted that since many
big businesses had yet to restructure their debts, there were not
yet many creditworthy borrowers around into which banks could
plough their excess liquidity.

Small and medium-scale businesses do grow significantly, but
most banks lack the expertise in lending to these kinds of
enterprises, Alamsyah said.

"Declining business confidence is also responsible for the
slow expansion of bank lending, as can be concluded from the big
portion of pledged credits remaining undisbursed," he said.

He also noted another basic problem the banking industry has
faced since the 1997-1999 banking crisis.

Most banks, Alamsyah said, lost the credit profiles of most of
their old clients after their bad loans were transferred to the
Indonesian Bank Restructuring Agency, so they now lack what
banking analysts call "information capital" to assess the
feasibility of loans.

Alamsyah said most banks now had excess liquidity but they
preferred to invest their funds in liquid financial assets such
as government bonds, mutual funds and Bank Indonesia's
certificates of deposit in order to avoid risk.

Alamsyah and three other analysts from Bank Indonesia also
noted in a research paper that the fragile condition of the
banking industry and the corporate sector, as well as the still
ineffective intermediation function of most banks, made monetary
management much more difficult now.

Consequently, they said, the central bank's monetary policy,
be it contractive or expansive, most often failed to create a
symmetric effect on the banking industry.

Citing an example, they pointed to the persistently high
credit interest rates (more than 18 percent for working capital
loans) despite the steep decline in the central bank's interest
rate.

Most banks have not lowered their credit interest rates
because the decline in the central bank's benchmark interest rate
cut into their income from government bonds. In order to maintain
their revenue, the banks decided to maintain their credit
interest rates.

The analysts also cited the risk of an unstable currency as a
result of the placement of most of the banks' excess liquidity
into financial assets.

If banks continue to keep most of their excess liquidity in
financial assets, especially now when foreign portfolio capital
has begun to flow into the country in significant sums, the
rupiah could be vulnerable to instability.

If, for example, the differentials between domestic and
foreign interest rates become much smaller or if there is
political turbulence, the excess liquidity could easily attack
the rupiah by flying to safety (buying dollars or other foreign
currencies).

"It is therefore important for the central bank to
consistently soak up the excess liquidity in order to minimize
the risks of speculative attacks on the rupiah," the analysts
said.

But this step should be made in such a way so as not to stifle
the economy, because the impact of a tight monetary policy is
much more devastating when banks and most companies are still
fragile compared with the effects of a credit crunch pursued in a
relatively normal situation, they said.