No quick fix to sluggish bank lending: Experts
Dadan Wijaksana, The Jakarta Post, Jakarta
Experts warned the central bank against seeking an instant solution to the slow growth in bank loans to the corporate sector, as aggressive lending without proper risk management would cause another financial crisis.
"Indeed, we need to see speedier growth in corporate lending, but accelerating it without referring to prudent banking principles will be a mistake," Standard Chartered economist Fauzi Ikhsan said on Monday.
The lack of a sound credit assessment mechanism was among the reasons behind the banking crisis in the late 1990s.
Bank Indonesia, in a bid to accelerate the country's economic growth, has repeatedly urged domestic banks to increase lending to the corporate sector instead of focusing merely on consumer loans.
Over the past two years, the central bank has been cutting down its benchmark interest rate aggressively, hoping the move would encourage banks to increase the provision of cheaper corporate loans. Banks, however, have generally been reluctant to boost lending to the sector, as is reflected in the relatively low loan to deposit rate of 40 percent as of November 2003.
Banks prefer to channel their money into the consumer sector or retail sector, as the corporate sector is still considered risky.
Fauzi said the answer was to find ways to resolve the problem on both the supply and demand sides.
"At present, banks enjoy a huge excess of liquidity, and while the risk in the corporate sector remains high, they have no choice but to pour the lending into other sectors ... in this case, in consumer lendings."
The banking sector is estimated to have an excess liquidity of between Rp 25 trillion ($2.94 billion) and Rp 30 trillion daily.
Fauzi's remarks echoed a similar statement issued recently by the International Monetary Fund (IMF).
"I think one needs to make sure one doesn't encourage a sort of a quick solution to this, by encouraging banks to just put money on the private sector. The important thing is to allow them to do it properly and prudently," said visiting IMF senior Asia Pacific advisor Daniel Citrin last week.
Sluggish corporate lending is occurring as consumer loans, such as housing, automotive, electronics and credit card loans, have been rising rapidly.
Ryan Kiryanto, banking analyst at BNI, said that, without full-blown efforts to fix the basic problems in the corporate sector, such as high risk, low demand and low credit absorption capacity, growth in corporate loans would remain insignificant.
In regards the current trend of banks pouring loans into the consumer sector, Fauzi and Ryan concurred that it was tolerable and had yet to pose a danger to the economy, at least in the short to medium term.
"Percentage-wise, the size of those (consumer) loans are relatively small, far below those for corporations.
"Moreover, unlike before the crisis, nowadays we see that consumption credit is more diversified, which also means that the risks are diversified," Ryan said, adding that almost all consumer loans prior to the crisis went to the property sector.
Fauzi said this lending trend would become a real problem if the economy failed to resolve the huge unemployment problem in the long run, as without jobs, households would default on their loans.
"If that happens, for a country with 70 percent of its GDP made up by private consumption, that could spell trouble," he said, referring to gross domestic product.