Pushing bank lending

Pushing bank lending

Bank Indonesia has strengthened its moral suasion toward banks
to expand their lending and to lower their credit interest rates
in proportion to the central bank's significant easing of its
money policy since last year. Yet businesspeople are still
complaining of a credit crunch and persistently high lending
rates, saying that banks have not yet fully resumed their
financial mediational function.

However, an analysis by Michael Taylor, a banking expert at
the International Monetary Fund's Jakarta office, dispels the
notion that banks have been highly averse to new lending, saying
that credit expansion in the country was very high, amounting to
18 percent in 2001 and 30 percent in 2002.

Why does the discrepancy seem so wide and what is the real
problem in the credit sector?

An earlier study by the Investment and Banking Research
Agency, a private research institution, found that new credit did
expand by over 30 percent in 2002, but this lending growth was
measured on the basis of approval -- or commitment -- and not on
disbursement, because Rp 42 trillion (US$5.1 billion) of the
total loans committed in that year remained undisbursed until
January 2003.

Bank Indonesia Governor Burhanuddin Abdullah confirmed last
week that about Rp 80 trillion of credit already pledged by banks
had not yet been disbursed as of May, for various reasons.

Whatever the differences in calculations that led to the
discrepancy in the quantitative and qualitative analysis of the
credit sector, most businesspeople -- and even the bankers
themselves -- did acknowledge that credit expansion had been much
slower than expected, given the much easier monetary policy of
the central bank and the strengthening macroeconomic stability.

Many reasons are provided for the slow lending growth and
persistently high lending rates. The major factors often cited by
bankers are the persistently high risk of doing business,
inadequate institutional capacity at banks to assess credit
risks, vulnerable composition of banks' capital assets and
inadequate regulations on bankruptcy proceedings.

On the other hand, businesspeople cite persistently high
credit interest rates, high risks they are still facing in their
business operations and unusually high collaterals demanded by
banks to explain the condition.

All these issues point to the as yet fragile condition of the
banking industry and the slow progress in structural reforms,
including corporate debt restructuring and long-delayed
amendments to the Bankruptcy Law.

As around 50 percent of the capital of the ten largest banks
-- which account for more than 90 percent of the banking
industry's assets -- still consists of government bonds, they
should certainly be extra careful in issuing new loans,
especially because most big businesses have yet to restructure
their debts and operations have yet to become creditworthy
borrowers.

Since under the current the bankruptcy proceedings borrowers
are still in a more advantageous position than creditors -- just
witness how extremely difficult and legally complex it is for
banks to foreclose on collaterals or bankrupt recalcitrant big
borrowers -- banks remain highly averse to lending to big
businesses.

Consequently, most lending has so far been extended to small
and medium-scale borrowers, notably consumers. This group of
borrowers is considered less likely to put up a strong legal
battle against creditors in case loans turn sour.

Put another way, creditors consider it much easier and less
costly to foreclose on the collaterals of pledges by these
borrowers than dealing with the big ones who, because they are
usually protected by high caliber lawyers, prefer to resort to
protracted legal fights.

However, such a development is not conducive for economic
recovery, because small and medium-scale enterprises, however
important their role, they still depend on big enterprises for
basic or intermediate materials.

The problems in the credit sector are once again dictating how
imperative it is for the government to accelerate the pace of
structural reforms to reduce the risks of doing business.

In fact, the persistently high risks in the business sector
not only pose serious threats to the banking industry, which has
yet to complete its operational restructuring, but also to
economic recovery.

If banks remain highly averse to new lending and instead
prefer investing their funds in financial market instruments such
as mutual funds, government bonds, Bank Indonesia deposit
certificates and inter-bank market instruments, Indonesia's
economic recovery will remain weak.

More threatening, however, is that these liquid assets can
easily be turned into ammunition to attack the rupiah in case of
weakening market confidence in macroeconomic or political
stability.