'Higher growth needs bank restructuring'

The Jakarta Post, Jakarta

A speedier and healthier restructuring process in its banking sector is an important prerequisite to expediting the recovery of Indonesia's ailing economy, said a noted economist.

Economist Faisal Basri said here on Monday that a higher economic growth was wishful thinking, if the banking sector remained reluctant to provide lending to the real sector.

"It's hard to hope for a quick recovery in economic growth with such a low LDR as it is currently," Faisal said in his paper, presented before a seminar on the country's strategy for economic development.

Faisal was referring to the loan-to-deposit ratio, a ratio that measures a bank's loan exposure against third-party funds collected from the public. A high LDR ratio means that a bank has channeled a considerable volume of credit.

He added that the LDR average in Indonesia is currently far below that of other countries in the Southeast Asia region. As of December last year, the country's banking sector posted an LDR average of 44 percent, as compared to around 80 percent recorded by other Southeast Asian nations.

The current average was even more discouraging in comparison with the LDR average before the financial crisis in 1997-1998, when it measured 149 percent.

Faisal said that this indicated that the banking sector, which was meant to be the backbone of the economy, is experiencing a sluggish pace of recovery.

Consequently, the slow pace impinges upon efforts to revive the real sector, which has been on the receiving end of the economic fallout during and after the financial crisis.

Worse still, the current condition has come about at the expense of the public's collective pocket. In the aftermath of the financial crisis, in 1998, the government injected Rp 430 trillion worth of capital in the form of bonds to domestic banks, later known as recapitalization bonds.

These bonds were injected to replace loans that had gone bad -- due to industries' failure to repay them as a result of the crisis -- and in order to strengthen the banks' capital.

The injection of these bonds ensued in a severe consequence, as not only had the government handed out the world's largest bail-out package, but it had also committed itself to making interest payments for the bonds using taxpayers' money.

Faisal pointed to the following reasons to explain the low LDR.

On the supply side, providing lending to the hugely indebted real sector still faces a high risk of defaulting, which means that banks have to provide a significant amount of provision funds to help keep their capital in check.

The planned ruling to be issued by Bank Indonesia, that will require market risks to be included in calculating a bank's capital adequacy ratio (CAR), is also expected to derail its interest to dole out credit.

To make matters worse, Faisal went on, there was a trend for banks to issue a large amount of mutual funds using their recapitalization bonds as collateral, which made them even more hesitant to provide loans.

Another reason is the recent tendency for corporations to issue bonds as capital-raising tools, because it is cheaper than procuring credit from banks.

Meanwhile, demands from the private sector for new loans remain low, amid a relatively modest economic growth.

Despite the economic growth of between 3.8 percent to 4 percent in the past few years, the growth should be attributed to a robust domestic consumption, not to a massive expansion in local industries amid mediocre exports and a fall in investment.