THE IMPLICATIONS OF SLOWDOWN IN CREDIT GROWTH

Increase of bank’s credit interest as result of increased BI rate which today was settled at 7.25% was starting to slowdown credit extention. According to BI credit growth was already showing slowdown as indicated by credit extention which was only posted ed at 20% or down 2.2% against last August at 22.2%.

In view of the tendency, BI only dared to set growth of credit extention not more than 20% till end of this year. Slowdown in credit growth was not solely on account of increase of BI rate which directly lifted up banks credit; it was also caused by Rupiah depreciation on USD ehich came to 18% to 19%.

Although credit extention was interrupted, BI was asking banks not to worry because credit banking would remain to grow although at slower pace. Besides, BI also promised to focus attention on safeguarding credit growth in terms of quality, liquidity, capital adequacy, and prudence in extending bank’s credit.

Various indicators showed that performance of national banking was quite high in facing challenges as result of global economic turbulence which was starting to weaken national economic growth beside other internal problems like deficit in trade balance caused by import craze of commodities actually abound at home.

BI’s latest data unveiled that Capital Adequacy Ratio [CAR] of banks remained high at around 17.98%, way above the general standard of 8% while NPL was low at around 1.99% per August 2013. Hence resiliency of the banking sector in anticipating economic weakening was not doubted.

Macro economic stability which among others was identified by controlled monthly inflation also forced BI to be reserved not to increase BI rate again from the 7.25% level set last month, thanks to bettered of some economic indicators like deflation of last September and attainment of trade surplus in August for the first time this year.

However, the condition of trade balance was predicted to remain in deficit till end of year. The last time BI increased BI rate was on September 12 last at 7.25% which was posted as the highest since 2009. Increase of NPL preceeded by increase of bank’s credit was inevitable. In quarter III 2013 BI admitted there had been increased record of NPL but not significant.

Such was unveiled after BI made some check up at national banks. In general there had been increase of NPL, but BI rated was still within tolerable level because beside BI rate it was also on account of low export as some buyer countries were still injured by global crisis.

It was a pity that BI did not disclose in what sector NPL was happening, but one thing was sure NPL was trigged by Small Business [UMKM]. It was expected that BI would give their full attention on credit growth by giving certain stimulus so banks would not be reluctant to extend credit especially to small business who were in need of financing but NPL prone.

It must be understood that so far UMKM had been one of the national economic backbone contributing about 60% to GDP. It seemed right indeed that BI encouraged banks to allocate 20% of their total credit to UMKM segment was in the labor intensive sector which deserved support of banks.

If BI put pressures on credit for the consumptive sector, the intention was to keep banks stay healthy with controlled NPL potential. By regulation BI had the intention  to put brakes on credit extention, so importers’ drive to import raw materials and auxiliary goods could be minimized. It must be understood that limited resources of local raw materials and auxiliary goods had forced producers to do importing.

High import caused deficit in current transaction especially trade deficit and such was not healthy for national economy. Therefore by regulative approach BI intended to control import although such would bring negative impact in he firm of economic slowdown.

Somehow it was better for economy to grow in spite of low speed rather than economy growing fast but inclusive of economic diseases like high inflation of deficit in current transaction. These two “diseases” could degrade foreign investors’ perceptions of Indonesia’s outlook bringing depreciation of Rupiah value.

By BI’s serious attempt to improve current transaction through monetary policy mix, it was expected to regain investor’s trust so confidence in Rupiah could be restored. This was seen in Rupiah strengthening in the range of Rp11,000 per USD this week compared to two-three weeks ago where Rupiah position was in range of Rp11,500.- per USD.

As macro economy indicators improved, surely BI would regain the stance of monetary policy which was pro growth and where inflation was controlled. This signaled harmonization and synchronizing of monetary policy and fiscal policy managed by the Government through the Ministry of Finance.

Business News - October 21, 2013