About the Banking Sector in Indonesia

Indonesia Business banking sector is very interesting indeed, when compared with other countries in the region. With a very high profit margin, which was mainly driven by higher consumer credit sector (again derived from the consumption of the middle class), plus the number of non-performing loans (NPL) were maintained below 3% level, making this sector a haven for investors. No wonder if the sector is to be an idol in Indonesia, due to earnings growth is staggering. No wonder also foreign banks-banks scramble to Indonesia to take advantage of that opportunity. Speaking of Indonesia's banking sector, the most significant issue is the recent warm transfer banking supervision function from the central bank to institute superbody Financial Services Authority (OJK), which is planned to be fully operational by 2014. OJK is indeed expected to facilitate coordination in the financial industry in general, especially during times of crisis. The difficulty of coordination as it did during the 2007 crisis would not happen again if the OJK is established. However, there are fundamental structural problems in the banking Indonesia, the high number of foreign loans with savings interest rate (spread). Rate cuts BI rate has been performed by the government, but not necessarily followed by a decline in interest rates. There is a very big gap in this case, which also indicates that the transmission of monetary policy of the Central Bank through the BI rate is not running in Indonesia. There is a phrase used to say cynical people to describe the condition of the banking business in Indonesia: "With ongkang-ongkang feet, no need to take the hard work, the bank

certainly get lucky". This proverb is acceptable and make sense, because people still need the banks to save and borrow money. The bank just sit waiting for customers to save money and then lend it to others. An Indeed, since May 2012, the central bank has succeeded in forcing the banking industry to lower interest rates through interest rate policy to announce Primary Credit (prime lending rate) to the public, for the purpose of transparency. This policy was successful in reducing the net interest margin (NIM) as an indicator of interest rate spread in the banking industry. In early 2012, NIM rate remained at 5.9% position, and successfully lowered to 5.2% in March 2012, but again increased to 5.48% at year end 2012. banks will reap profits from the interest spread. But the rate of decline in NIM is certainly still very far from expectations. This figure is also still very much when compared to the banking indicators. Bank Indonesia itself has also said he would direct the figures surrounding NIM to 4%, still very far from current. Expectations NIM is expected to decline. The results of the PwC survey said that 72% of executives surveyed level banker estimates that the number of Indonesian banks NIM will be narrowed to the front. One interesting result of this survey is: apparently obtained investment grade rating Indonesia could bring negative consequences to the national banking industry, as banks have to compete with other sources of alternative funding can be obtained by prospective borrowers. The high risk premium to be borne by banks is one reason often cited bankers. The reason this is in stark contrast with the number of bad loans (NPL) has actually been stable bank below the 2.2%. Contrast is also the trend of the BI rate has been steady at 5.75%, compared to a 6.75% in September last year. So the reason is really quite absurd.

Lack of infrastructure constraints Indonesia may be the reason that the most acceptable as a reason for the high interest rate, because the high cost of logistics will keep overhead costs to be included in the calculation of the interest rate is high. Viewing figures Indonesian banking indicators, it appears there was something very surprising. Apparently indicator of Operating Expenses to Operating Income (ROA) is still very high. This figure is still stable at around 75%, far from the state average in the range of 60% ASEAN. It shows that banks operating in Indonesia is far from efficient. This is actually the source of the problems high interest rates in Indonesia. Ownership structure of banking in Indonesia is still opening the door to the creation of manipulation in the determination of interest rates. I even suspect a cartel among major banks in Indonesia to set interest rates. Indeed, there are currently a total of 120 banks in Indonesia, but most are small players who simply follower. The player with the largest market share is only dominated by only a few banks. Collusion between the big players (especially state-owned banks) is still possible to create a cartel in interest rates.