BANKS’ STRATEGY IN RESPONSE TO NEW REGULATION

Year after year development of Indonesia's banking sector we changing for the better. Bank’s state of health and their strong resistance were the criteria. To learn a lesson from the monetary crisis of 1997, bankers were demanded to be more prudent in running their operations for batter result. Effective risk management must be strictly implemented.

Now in 2013, bankers lied To face a com­plex situation. Bank operators did not only have to face global economic crisis with its impact on fund raising end pipelining. They also had to face various Bank Indonesia’s new regulations being issued last November. To cope with the regulations might affect business, particularly in terms or expansion plans.

Some BI regulations left homework to be done by banks, among others multi-licensing. This rule became complicated because it was related to ef­ficiency as reflected in the interest margin (NIM) and operational coat (BOPO). Banks with high NIM and BOPO would be difficult to obtain expansion permit in spits of their big capital.

Other regulations were on zoning and calculation of minimum capital for expansion. BI had stipulated that banks which opened branches in zone one and zone two were obliged to open branches in zone five and zone six. This compulsion might cause bank­ers to think twice before expanding. They would re­calculate the plus-minus of opening branch office in a “dry” zone where banking business was still under developed.

Zone One and Zone Two represented areas which were overbanked, such as among others
Greater Jakarta, West Java, East Java. Central Java, Bali, and Banten; whilst Zone Six was known as underbanked zones such as West Sulawesi, NTB, North Maluku, NTT and Gorontalo.

In the banking industry there is the rule of bank follows the trade in the sense that where business and economy grew banks would step in. So with reference to BI’s policy, if banks were forced to open branch offices in underdeveloped zones they would need incentives to avoid prolonged loss.

Based on profit oriented principle, opening of any branch office, wherever it might be, must prom­ise profit, in long term or short term. While waiting for incentives to be offered by BI, for the time being banks would simply wait and see in planning expan­sion of network. Each time they wished to open a new branch office outside Java, banks must consider some indicators. The primary thing was money circu­lation, and activities of the real sector and their infra structure.

In case the three factors were favorable, bank would be willing to open their branches there. In regions were income was high, but the reel sector being stagnant it could be unappealing to banks. For example a region where natural resources was abun­dant such se oil gas or coal. Those areas may be rich, but most of the money flowed to Jakarta. Heed office of oil-gas companies were in Jakarta, so transactions were also all in Jakarta. In short, regions as such were not attractive to banks.

The spirit of this policy was to encourage equal wide spreading of people's access opportunities to banks as intermediary institutions. While there was still time, it was most advisable for banks to prepare a strategy in response to BI’s new policy. In opening a branch office, it was advisable fix banks to review their bank’s business plan (RBB) as there was still plenty of time to make revisions till end of next June.

Based on cost-and-benefits ratio, opening of branch offices in zone five and zone six must offer profit within a certain period of time. Banks should better hurry to open branch offices in zone five and six as the market potential was still open. Soon when many banks open their branch offices in zone five and six, competition would be tight and the market would probably even be saturated.

Back to the new BI policy, in fact the zoning regulation had its benefits if Bank Indonesia issued the regulation on branchless banking. A regulation as such would enable banks to appoint agents to serve their customers in remote areas. If they opened branch offices, the cast would be higher and they were not even sure to be profitable.

Therefore survey of economic and investment potentials in the regions was necessary as reference for opening of branch offices. Banks were advised not to loosely open branch offices in zone five or zone six just for the sake of complying to BI’s regulations without calculating the consequences.

Other regulation to be anticipated by banks were rules on allocation of productive credit and small-and-medium business (UMKM) in certain percentage. Meaning, banks which had portofolio of productive credit over reasonable limit, must reduce credit and alter them to productive line; around 20% must be channeled to UMKUM. Around 65% - 75% must be allocated to the productive sector depending on what class the bank belonged to.

A policy as such was excellent, in the sense that it opened access for UMKM to bank services, however the adjustment process was not easy and needed time. Banks choosed to put brakes on credit giving rather that to change credit portofolio careless­ly as it might trigger non performing loans.

In spite of BI making restrictions, bankers predicted that consumption credit was still the propeller of growth. The Loan to Value policy (LTV) in mort­gage (KPR) and vehicles had their impact but not sig­nificant. The point was that demand for automotives remained high.

BI’s policy to increase DP for Mortgage and Automotive credit had it positive impact on cases of Non Performing Loan. Meaning consumption credit remained to soar up high, but with better quality. It seemed reasonable if banks set growth target of consumption credit this year at least 20% whilst the highest was 25%-30%. Meaning higher than the average growth target of the banking sector in the range of 20%-22%.

Some developers predicted that next year de­mand for mortgage would be high in spite of BI mak­ing KPR rules. The phenomenon was the emerging new middle class which uplifted consumption level. There were even banks which extended KPR mort­gage facilities in the range of Rp 500 million – Rp 1 billion due to the vast market. Moreover demand for investment credit was also to meet consumer’s need. For example development of housing, apartments or buildings like malls and office buildings.

Bank Indonesia’s data had it that per Septem­ber 2012 last growth of consumer’s credit was 19% coming to Rp 759 trillion, credit for working capital came to Rp 1,236 trillion and investment credit grew by 30% to become Rp 559 trillion. Meanwhile con­sumption for credit interest was also still high, i.e. 13.67%, capital credit interest was 11.71% and in­vestment credit interest was 11.36%.

In 2013 automotive industry circles were optimistic about meeting sales target of four-wheel vehicles numbering 1.2 million units. Consumers’ purchasing power was positive with the support of emerging young middle class who were In need of private cars. Various four wheel transportation were launched in 2012 last year in line with people's increased purchasing power, serving as uplifter of car sales to the level of 1.2 million units.

In tact there ware some tactical maneuvers which might bring relief to the automotive industry, i.e. the low cost and green cars which was predicted to be launched this year end. With mass production of cheep cars, total automotive sales could again be jacked up. This was the reason why automotive producers were willing to invest trillions of Rupiah to build automotive industry in Indonesia.

The conclusion was that BI must tighten their regulations, but the banking sector must be responsive so as not to be confined to the convenient zone which would weaken the banking industry. Responsiveness was important in order to maintain high performance amidst hard competition.

Business News - February 15,2013