TO MAINTAIN A HEALTHY CREDIT GROWTH

The Governor of Bank Indonesia Darmin Nasution stated that he would strive to put brakes on credit growth which in Semester 1 2012 had reached 25.8%; but to compare with Indonesia’s GDP which was around Rp 7,000 trillion, in fact the credit-to-GDP ratio was still only around 30% so actually there was still enough room for credit to grow.

Over the past 3 years, BI noted that credit growth had always been above 23%, even this year it could come to 25-26 percent. In fact the credit growth was still considerably safe and controllable provided it was allocated for productive investment.

It was a pity that the poured credit was spent on domestic goods consumption, including real estate business. Therefore it was necessary to put brakes on it, especially in the property sector including real estate through application of the loan-to-value (LTV) principle.

The fast growing real estate sector was feared to cause economic overheating in line with the sizable deficit. So economic overheating or not depended on two factors whether credit could drive investment or credit was aimed at investment in production of export commodities.

As told, BI had increased minimum down payment requirement for mortgage by 30 percent for consumers who wished to buy house by credit for house types above 70 effective per June 15, 2012 together with minimum DP of 25 percent for two wheel vehicle credit (KKB) and 30 percent for four wheel vehicle credit.

It seemed that the way Bank Indonesia wanted was that banks should keep their credit provision not to exceed 25 percent but only 20 – 24 percent only. This was the rate felt as safe and controllable and did not tend to lead to economic overheating. Moreover there was a growing new theory that an overgrown credit was feared to interrupt national economic stability. Therefore Bank Indonesia was pulling banks down to a level where increase was not too fast such as in consumptive credit, because productive credit could not be stopped from growing.

It was within 20% - 24% range that credit growth was to be maintained the way it happened 3 years before. Again controlling of credit growth level was necessary so as not to rock economic stability.

The banking regulator needed to monitor and to direct banks whereby to ensure that the channeled credit would bring benefit to the national banking sector. The attainment of Loan to Deposit Ratio (LDR) national wide was also rated as high, i.e. 81 percent, so it should be watched out.

By end of June, BI noted that growth of the banking sector had reached 25.8 percent. The figure had exceeded the trend which happened the year before which was only around 20 – 24 percent. As footnote in 2009 last credit growth was posted at 10 percent, in 2010 it soared up 22.8 percent. Lastly in 2011, credit growth increased again to become 24.5%.

The credit growth of 25 – 26 percent was also slightly above the long term trend which on the average rose for some years. It seemed that BI wished to return credit growth to the past trend in the range of 20 – 24 percent. By estimate, this fast growing credit was more or less on account of the Banking Business Plan (RBB) which was revised. Early this year it was announced that RBB for credit growth was 23 percent. However, the figure was further revised to become 25 percent.

Through various rules and plead to banks, BI was optimistic that credit growth which was rated as growth too fast could be pressed to a safe level (20 – 24 percent). Among the BI rules was the Loantor-Valve policy for the conventional banks which soon would also be applied on Syariah banks.

BI’s policy to release the LTV rule following the same LTV rule for conventional banks was necessary for confining growth of property and automotive credit not to exceed the normal limit. In this case LTV regulated the maximum limit of credit to be extended by banks from the price of asset to be purchased by candidate debtor. BI claimed that the Syariah banking industry had no objection to the application of LTV rules.

It was feared that if bank Syariah were restricted like conventional banks, the industry would spur on great financing. In that case many credit applicants would turn to Syariah banks since they fail to obtain credit from conventional banks and in the end there would be bubble in the mortgage and automotive market which finally ended in non performing loan.

In this case BI controlled credit growth by measuring growth, speed of credit pipelining, and credit ratio of non performing loan. The Central Bank itself deliberately issued LTV rule on March 15 this year to be effective by June 15 to halt buying of outomotives toward Labaran which traditionally soared high.

One thing noteworthy was that BI released LTV rules in response to the condition of deficit in current transaction in the past three months. As known, the extended credit was not used for investment in procuring raw material and auxiliary goods so national producers tend to import raw materials.

It would be much better if the productive credit was invested to build factories capable of producing raw materials and semi-finished materials (complementary components) so it might control the passion to import by local producers in the long term.

Essentially BI’s policy in regard to LTV rules and increased DP was not meant to stop credit flow, but only to ease down credit flow. Still banks should make credit expansion especially to respond to the need of middle class who had strong purchasing power and high mobility.

They needed good banking services whereby they could deposit fund or apply for credit facilities. Growth of Indonesia’s middle class which tend to excel in the past decade was seen as sustainer to performance of national economy. Such was rated as supportive to national fundamental economy. Naturally banks should not miss the golden opportunity in sight.

Growth of the middle class would continue until the momentum of demographic bonus of 2040 where Indonesia’s demographic structure would be dominated by people in productive age bracket while dependency ratio slowed down. Toward 2045 predictably Indonesia would be one of the world’s economic powers playing a great role in global economic growth.

In this case BI controlled credit growth by measuring growth, speed of credit pipelining, and credit ratio of non performing loan. The Central Bank itself deliberately issued LTV rules on March 15 this year to be effective by June 15 to halt buying of automotives toward Labaran which traditionally soared high.

One thing noteworthy was that BI released LTV rules in response to the condition of deficit in current transaction in the past three month. As known, the extended credit was not used for investment in procuring raw materials.

It would be much better if the productive credit was invested to build factories capable of producing raw materials and semi-finished materials (complementary components) so it might control the passion to import by local producers in the long term.

Essentially BI’s policy in regard to LTV rules and increased DP was not meant to stop credit flow, but only to ease down credit flow. Still banks should make credit expansion especially to respond to the need of the middle class who had strong purchasing power and high mobility.

They needed good banking services whereby they could deposit fund or apply for credit facilities. Growth of Indonesia’s middle class which tend to excel in the past decade was seen as sustainer to performance of national economy. Such was rated as supportive to national fundamental economy. Naturally banks should not miss the golden opportunity in sight.

Growth of the middle class would continue until the momentum of demographic bonus of 2040 where Indonesia’s demographic structure would be dominated by people in productive age bracket while dependency ratio slowed down. Toward 2045 predictably Indonesia would be one of the world’s economic powers playing a great role in global economic growth.

The Asia Development Bank’s (ADB) report on the Rise of Asia’s Middle Class sometime ago, indicated rise of Asia’s economy signified by the development middle class population in Asia including Indonesia. The World Bank’s report entitled “Global Development Horizon 2011-Multi Polarity: the New Global Economy” positioned Indonesia together with China, India, South Korea and Brazil as the epicentrum of global growth; these six countries contributing significantly to global economic growth in 2025.

The World Bank, the International Monetary Fund (IMF) and some international institutions projected global economic slowdown in resulting from crisis in Europe and the USA and Japan but also economic slowdown in countries originally expected to pose as sustainer of global economic growth: Brazil, China and India.

The World Bank predicted global economy this year would grow by 2.5 percent, while growth in emerging economies slowed down to 5.4%. The keep Indonesia from sinking in the quicksand of economic contraction, the banking sector would still channel out the needed credit but within the range rated as safe and controllable.

Business News - August 31, 2012