Tuesday, 4 September 2012


It was interesting to observe the relationship between stability of the banking sector and economic growth of a nation. By theory or common senses, stability of the banking sector was in parallel with economic growth. A strong and healthy banking sector indicated high economic growth. The question was were the theory and logic applicable in Indonesia, a deeper insight would be necessary for that matter.

So far stability of the banking industry up to June 2012 was still strong enough, although slightly under pressure compared to same period last year. The central bank and bankers rated that Capital Adequacy Ratio (CAR) of the banking sector by end of year was still above minimum standard set by Bank Indonesia, in spite of high credit expectation.

Data of Bank Indonesia (BI) showed that Financial Stability Index/FSI which indicated stability of the banking sector, stockmarket and bond market in June 2012 was at level 1.7 points or up by 0.05 points compared to December 2011 at 1.65 points. To compare against same period of 2011 at 1.68 points increase of index was only 0.02 points.

However, the index was still below maximum level of safety of the banking sector which had been stipulated by the banking sector which had been stipulated by the banking sector by 2 points. As footnote: the lower the index the more stable the national financial industry.

Condition of the banking sector this year was indeed better than that in 1997 – 1998 when FSI was at the level of 3.23 points and 2.34 points when the subprime mortgage smashed America in November 2008. BI record had it that the national banking sector was relatively more resistant because exposure of portofolio credit to foreign investors was only 14%, mostly from America, Singapore and China.
 According to data of the Indonesian banking sector the average CAR of general banks up to May 2012 was posted at 17.88%. Stress test conducted by BI showed that if economic growth were at standstill, CAR of the banking sector would drop by 237 basic points to become 15.51%. When worse comes to worst if economic growth was -5%, CAR of the banking sector would drop by 614 basic points to become 11.74%.

In terms of market risk, there were three points of consideration i.e. increase of Rupiah bank interest, depreciation of Rupiah exchange rate value, and price of SBN bonds. If Rupiah bank interest rate were increased to 10%, CAR position of the banking sector would drop by 197 basic points to become 16.91%. If Rupiah were depreciated by 50% CAR would only drop by 21 basic points or at the level of 17,67%. If downturn of SBN price reached 35%, CAR dropped by 238 basic points to become 15.50%.

Based on worse scenario, there were some banks whose CAR dropped to below the minimum margin set by Central Bank of 8%. However, most of the banks were still resistant, because CAR of average industry was above 8%. In this case BI must ask bank owners and shareholders to inject more capital.

Showdown of global economy and uncertainty in crisis solution in Europe was predicted to start affecting demand for (Indonesia’s) credit in Semester II – 2002. Credit for export was the payment segment most potential to be affected by global economic slowdown. Credit for working capital (KMK) would also slowdown in line with weakening of domestic economy. Credit for consumption would predictably not as impressive as in Semester I-2012. The Loan to Value (LTV) rules could cause credit for consumption to slowdown.

Credit for investment was the credit sector growth of which was promotable in Semester II-2012. Credit for investment could grow especially in infra structure development. Initiative in infra-structure projects would drive credit for investment (KI) to grow, although land clearing was still a hard-to-solve problem.

To anticipate credit downturn, it was advisable for banks to re-address their credit from export oriented companies to companies oriented to the domestic market. To anticipate CAR downturn the banking sector could take various measures such as releasing rights issue, issuing subordination bonds or asking for capital injection from shareholders.

Hence it seemed reasonable if bankers were optimistic that the banking industry could still grow higher. Credit through Semester II could still grow by 20%. Through Semester I 2012 credit growth was posted at around 25\8%. The only thing was that upon entering this Semester II banks should be careful in responding to economic slowdown as projected by many international institutions like the World Bank, IMF and ADB.

The banking industry should focus attention on premium economy that dominated prevalent contribution in forming Gross Domestic Products (GDP). The sectors of communication, trading, hotel & restaurants and processing industry became were four of the greatest contributors to GDP.

Unexpectedly and surprisingly the agricultural sector were lowest in terms of contributors due misperception of banks that these sectors were high risk sectors. For that matter bank regulators and the Government must give comprehensive portrayal and understanding of the agricultural sector to the bankers so that the ingrained perception could be changed.

In accordance with the belief of “bank follows industry” it was best for the banking sector to abandon the wrong philosophy. The economic sectors of high potential and sustainable growth were the sectors worth financing because the risk was controllable.

Beyond other sectors the sectors of hotels & restaurants, processing and services were the greatest users of credit facilities. This was still good because the three sectors were tradable sectors as well as labor intensive by nature. In the future, other labor industry sectors like agriculture, mining, and infra structure must be spurred on by injecting more credit so they could sustain better economic growth.

With credit growth through Semester I-2012 at 28%; while the projected economic growth of Semester I-2012 around 6.3%, it indicated that support of the banking sector to economic growth was not maximized. Why? At least there were two contributing factors. Firstly, part of credit facilities were still addressed to non tradable sectors. Secondly, part of the credit facilities extended by banks were not or not yet liquidated by the debtors (know as undisbursed loans which was 30% of total given credit amounting to Rp 2,050 trillion or equal to Rp 600 trillion) due to liquidation phasing factor and difficulty in clearing land for developing infra-structure projects.

With credit pipelining being more oriented to the labor intensive sector, contribution of the banking sector to economic growth would be even greater. By theory, every 4% of credit growth would sustain 1% of economic growth. So if Semester I-2012 size of credit growth was 28%, supposedly it was able to sustain economic growth of 7%.

Somehow in reality the realization of credit growth was only 6.3%. This means there was a missing link between credit growth and economic growth because of credit distribution being more aimed at tradeable sectors or labor intensive sector. Therefore, banking regulators together with the Government must direct and encourage banks to be more aggressive in financing tradeable sectors so economic growth could be jacked up higher.

Business News  - July 25, 2012

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