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OUTLOOK & ECONOMICS

Cautious banks threaten Indonesia’s recovery

By Rupert Walker, | 25 November 2009

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Despite boasting healthy ratios, Indonesia's banks are doing too little to boost the
economy.

Indonesia's main banks are in good shape, but are frustrating a supportive government's
plans to stimulate the economy by adopting less than generous lending regimes.

Bank Indonesia, the central bank, has cut its benchmark interest rate by three percentage
points since the start of the year to a record low of 6.5% in August, yet domestic banks have
reduced their lending rates by less than a quarter of a percentage point and cut deposit rates
by just over 1.75 percentage points.

They have been earning net interest margins of around 6%, one of the highest in Asia, but
lending by the top commercial banks rose by only 1.1% to Rp1,378 trillion ($138 billion) in the
first half of the year, according to central bank data.

"As elsewhere in the world, Indonesia's banks are taking advantage of generous public
financial support to build up their capital and boost profitability, but meanwhile households
and companies struggle to pay their bills," said a Jakarta-based economist.

New lending to meet the central bank's revised loan growth forecast of 12% will have to total
more than Rp162 trillion in the second half of the year, yet only Rp15 trillion was lent in the
first six months.

Non-performing loans ratio rose to 4.06% in July, up from 3.2% at end-2008, and loan growth
had averaged 20% annually during the past five years, so perhaps it's no bad thing that the
brake has been applied.

However, Suresh Narang, chief country officer and head of global markets at Deutsche Bank,
insisted that "NPLs don't appear to be a major issue at the moment".

Bank Century

So far there have been few bank casualties; but by far the most prominent, Bank Century, has
become a political battleground. The government took control of Bank Century last November
and injected Rp1 trillion, and has since spent a further Rp6.7 trillion to keep it afloat, but

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opponents of President Yudhoyono and reformist finance minister Mulyani Indrawati have
alleged that the rescue was engineered to protect big depositors close to the president.

But their supporters say that the allegations are an attempt to smear Mulyani, who has been
tough on corruption in the tax and customs offices, and prevent her appointment to the new
cabinet this month. The Supreme Audit Authority (BPK) will decide shortly whether the bailout
was to prevent systemic risk in the banking system or to protect vested interests.

Government Support

According to Beatrice Woo, senior credit officer at Moody's Investors Service, Indonesia has a
"highly supportive banking framework, shown by government behaviour towards the banks
during the 1997 Asian financial crisis (when it provided a Rp450 trillion bailout) as well as
during this current downturn".

Among its programmes are an increase in the maximum amount of deposits insured to Rp2
billion from Rp100 million, the eligibility of current credits as collateral for short-term liquidity
facilities, and the lowering of minimum reserve requirements. In addition, the government has
secured $5.5 billion in contingent lines of support from the Asian Development Bank, World
Bank and others.

The banking system's capital adequacy ratio was 17.34% at July 2009, and foreign currency
obligations, mostly deposits, make up just 14% of banks' liabilities.

But the banks' assets comprise just 47% of GDP -- half the ratio during the 1997 crisis. Banks
have been prepared to lend -- but at punitive rates of 14% to 15%, so companies have frozen
their borrowing, such that, for example, undisbursed but approved loans at Bank Bank Negara
Indonesia, the country's fourth biggest lender, amount to 30%.

Part of the reason for the sluggish response is that large institutions, such as state-owned
enterprises, have demanded higher interest rates for time deposits, while many retail
customers have moved their funds out of savings deposits into more attractive government
bonds yielding nearly 9.5%. High rates on central bank promissory notes have also crowded
out corporate access to bank lending.

But more likely, banks are simply still risk averse, cautious to whom they lend.

This article first appeared in the October issue of FinanceAsia magazine.

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