No quick fix to sluggish bank lending: Experts

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.