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.