Growth through cooperation (2)
Growth through cooperation (2)
The following is an excerpt of a statement made by Governor of Bank Indonesia J. Soedradjat Djiwandono at the Bankers' Annual Meeting on Jan. 19, 1996. This is the second of two articles.
JAKARTA (JP): In line with the buoyant economy in 1995, the condition of national banks has improved although they still face substantial challenges and problems.
Bank credit recorded a 23.5 percent growth in 1995 and was contributed mainly by the rapid credit expansion of national private commercial banks. Thus, national private commercial banks played a greater role in credit allocation last year. Bank loans were mainly absorbed by the manufacturing sector followed by the services and trade sector.
Nevertheless, the services sector recorded the highest credit growth rate especially in the financing of the property sub- sector. Based on the type of use, consumption credit recorded the highest growth rate followed by working capital and investment credit.
The high credit demand during 1995 has encouraged banks to increase fund mobilization. During 1995, public fund accumulated by banks grew by 21.5 percent. This positive development contracted the widening gap between funds and credit in the middle of the year.
Meanwhile,it seems that banks were rather successful in their efforts to improve their efficiencies. The average ratio of operating expenses to operating income dropped from 95 percent in 1994 to 90 percent in 1995. Total bank assets grew by 18.8 percent. Exceptional growth was recorded in off-balance sheet activities. This is positive as long as it reflects bank efforts to diversify towards fee-based income activities. However, we must be alert to the extent of additional risks created by off- balance sheet items. In this regard, banks should continue to follow prudent principles.
In the context to Capital Adequacy Ratio (CAR) compliance, of the total number of banks registered, 221 banks or 92 percent of the total have complied with the average CAR of 10.8 percent. Improvements were also recorded in compliance with the requirements of Loan to Deposit Ratio (LDR) and the Net Open Position (NOP) regulations. However, non-compliance with the Legal Lending Limit (LLL) has increased compared to the previous years. This needs our serious attention.
In view of increasing economic activities this year, we must be constantly vigilant towards upward pressure on prices. Measures taken in macro or sectoral terms will determine our success in reducing the inflation rate this year. It is estimated that the inflation rate this year will be contained at lower level than in previous years.
The increasing economic activities also require us to be constantly alert and prepared for potential pressures on the external equilibrium. It is that demand for imports remains high along with the increase in investments.
However, with various policies undertaken last year and forward, import is expected to grow slower. This predictions is supported by the declining import growth rate since the second half of last year. Besides that, non-oil/gas exports of Indonesia are expected to recover in conjunction with positive developments in external markets and increased domestic production capacity.
In relation to that, the current account deficit this year is expected to be smaller than in the previous year, comprising 3.1 percent of GDP or US$ 6.9 billion. Meanwhile, capital flows this year are not expected to differ much from the previous year. High capital inflows are expected, with a large proportion inflow to finance the private sector. In general, this development reflects that the balance of payments will remain stable and foreign reserves will still be maintained at a secure level. Briefly, these are our macroeconomic prospects for 1996.
Bearing in mind the various macroeconomic indicators mentioned above, allow me this opportunity to explain the direction and fundamental principle of monetary and banking policies for this year.
Basically, five major principles underlie the direction and fundamental principles of this year's monetary policies. The first principle is that the Government will continue to place high priority on the stabilization of the macroeconomy. Developments is a precondition of continuous economic growth. It is of course, extremely important that we achieve our target of high economic growth and equitable distribution. However, without a stable macroeconomy, such achievements will not last.
The second principle of policies adopted in 1996/97 is the principle that the instruments of fiscal and monetary policies should be employed in a coordinated, integrated and balanced manner to achieve the macro objectives. The 1996/97 RAPBN emphasize that the principle of balanced budgeting should be strictly adhered to and any increase must be within limits.
The third principle is that various instruments in monetary policy, whether macro instruments such as interest rates, open market operation (OMO), exchange rates, or micro instruments such as various prudential rules, will be closely coordinated together to provide mutual support in achieving the targets. This harmonization of macro and micro monetary instruments was an important theme in the formulation of policies in Bank Indonesia and this effort will be further intensified.
The fourth principle that I would like to emphasize is the extent that drastic measures may be avoided. In adopting macro economic policies, the Government will always ensure that it is carried out in a timely, well planned and just manner. Surely, we do not wish our economy to fluctuate as a result of drastic policy and shock oriented.
Nevertheless the avoidance of drastic measures requires the support of the public, including the financial and banking sector. In particular, the banking sector is expected to be more responsive in reading the signs and directions of government policies as well as economic growth trends. Banks are expected to be more proactive, flexible in making smooth adjustments in line with developments while not ignoring prudential principles in their banking activities and management.
The fifth principle, which is closely related to the third principle, is the principle of cultivating cooperating and mutual understanding between the Government and economic entities, particularly in the financial sector, in achieving our mutual goals. Shocks and drastic measures can be avoided by more effective communication among all parties towards greater mutual understanding of broader mutual interests.
In view of our economic development trends and based on the above mentioned considerations, the various monetary targets of 1996 will be directed towards efforts to maintain macroeconomic stability and achievement of predetermined goals, among others, economic growth, inflation rate and current account deficit. In relation to this, for fiscal year 1996/97, growth in money supply in broader sense (M2) and credit are targeted at 17 percent and 16 percent respectively.
At the same time, interest rates will be aimed at level that can sustain internal and external equilibrium. Domestic and foreign interest rate differentials will be closely monitored to maintain them at a suitable level that can minimize disruptions caused by capital flows.
The same measures are also directed towards real domestic interest rate to ensure that the growth of domestic demand is consistent with the targeted current account deficit and inflation. This policy is supported by an increasingly flexible exchange rate system in order to maintain realistic exchange rates, that support competitiveness and allow market dynamics. With these policies, it is hoped that the exchange rate of rupiah will support monetary management and export activities, as well as to deter speculative capital flows
Foreign reserves will be increased at the very least to finance 4-5 months worth of imports. Meanwhile, the policy to maintain the stand-by loan around US$2 billion will be continued. Furthermore, in order to strengthen our capability to absorb turbulence in foreign exchange markets which may lead to monetary volatility.
Bank Indonesia will continue to increase bilateral cooperation among central banks in Asia. Besides repurchase agreements with five central banks, this cooperation was also in the form of active exchange of information and experiences for the purpose of coordinating action to deal with large capital inflows and outflows.
At the same time, prudential policy in foreign debt management, which is one of the crucial in the management of macroeconomy, will be maintained and strengthened. Therefore, in order to increase the effectiveness of foreign debt management in order to achieve macreconomic targets, the Government will continue its efforts to improve the regulation regarding PKLN including improving the monitoring system of off-shore borrowing by financial institutions and non-bank private companies. Related to this, it is hoped that banks, in expanding their credits, take note of the impact of the monetary expansion in macro terms.
We have made efforts toward overcoming those problems as well to prevent their recurrence. To overcome the present problem loans, we have to intensify our efforts. Banks must be more realistic in overcoming problem loans. Whenever claim efforts or liquidation of collateral is ineffective, banks should immediately utilize allowance of bad debts in order to write-off problem loans.
More important than efforts to overcome existing problem loans and problem banks are efforts to prevent the occurrence of such problems. This problem is closely related to my request that banks give priority to quality over quantity. Besides, to stabilize the national banking condition, Bank Indonesia in 1995 issued various new regulations which in brief, were aimed at encouraging banks to impose self regulatory banking in their business activities, and to increase prudential banking as well as banking disclosure requirements. Regulations such as Commercial Banks Credit Policy Guidelines (PPKPB), Internal Audit Standards for Banks (SPFAIB).
Obviously, few regulations are not sufficient to ensure that new problems will not occur in our banking sector. More important is the determination and will of banks to adhere to those regulations and to constantly run their banks professionally and follow the principles of sound bank activities. Therefore, I hope all of you will comply to the various banking regulations in order to avoid unpleasant legal consequences, whether for the bank or individual.
As I have just described. the increasing number of banks not complying with the Legal Lending Limit is becoming alarming lately. The importance of complying with the Legal Lending Limit was among others, due to the fact that the occurrence of problem banks is often related to violation of the Legal Lending Limit.
In view of its importance, Bank Indonesia will continue to monitor closely its development and will not hesitate to take legal action. In this regard, I would like to remind bank owners to avoid actions which can be categorized as taking advantage of the bank for personal interests or the interests of their group of companies.
This reminder becomes more important in view of Act No. 1. 1995 regarding Limited Companies (PT) which will take effect this year. According to this act, the bank owner will have unlimited liabilities if he is found using the bank solely for personal interests. In this category non-compliance with the Legal Lending Limit could be an indication that the bank owner has used the bank for personal interests.
As we are aware, currently there is increasing interbank competition both in fund raising and channeling activities. Such intense competition is increasingly requiring that banks emphasize professionalism and moral integrity, and observe professional ethics to avoid unhealthy competition practices.
In the banking business, especially in the present situation where global interdependence between banks and financial institutions is on the rise, no banks will profit from the problems of another bank but may instead be dragged down together. The inherent risk is that disruptions in a bank will affect another bank according to the domino theory.
In this regard, allow me to remind you that whatever the level of competition, banks need to continue to cooperate positively and increase their solidarity to prevent the emergence of problems in national banking. Therefore, the ability to detect in advance inter-bank problems must be utilized positively.
In this regard, Bank Indonesia encourages banks to formulate long term growth strategies, including restructuring so that each bank is not only sound, but is sufficiently big and possess high sustainability and competitiveness at the global level. In line with such restructuring, Bank Indonesia will tighten permits for new national banks and to encourage inter-bank mergers, whether in the framework of overcoming problem banks or in a form of mergers to increase competitiveness.
Window A: Few regulations are not sufficient to ensure that new problems will not occur in our banking sector
Window B: Currently there is increasing interbank competition both in fund raising and channeling activities.
Window C: Bank Indonesia will continue to increase bilateral cooperation among central banks in Asia.