INCREASING NON PERFORMING LOAN IN TIMES OF ECONOMIC SLOWDOWN

By theory, the development of the banking sector would be in parallel with economic development in that country. If economic condition was stable, the banking sector would perform well and that applied in reserve. Now that Indonesia’s economy was slowing down many circles feared that it would was slowing down many circles feared that it would generate chain effect on the banking sector.

Now many circles were expecting economic slowdown could be stopped by asking the Government to make a breakthrough strategy. Some kind of unusual economic maneuvers to troubleshoot problems.

Even if there were obstacles faced by businessplayers, they would still urge the central and local Governments to make breakthrough maneuvers.

Breakthrough maneuvers was needed but it must not break the fundamental rules. If the Regulation turned out to be an obstacle than it should be changed for the better.

Too late to take action would shrink economy, with domino effect on the banking sector clearly visible.

If economy slowed down, businesspeople would be unable to perform to the maximum and his income would be reduced. In the end, if businesspeople relied their financing on Bank’s credit, their deal might end up as non performing loan (NPL) as they were unable to fulfill the obligations t the bank.

According to mid-year report of Info bank Research Bureau, there were 14 banks who had to work hard to minimize NPL which had gone to as high as 5% while 105 other banks must fight off NPL. By this year end many banks were still in the slowdown zone worth credit growth of 10% - 12%.

So far the national banking industry still had enough resistance against external pressures. It was clearly visible in bank’s stance with reserves well above 100% and Car still safe at 20%.

Still NPL was still something to watch on as it was constantly on the upturn since 2013 by 1.77% to become 2.16% by end of 2014 and continued to rise in 2015 with ratio of 2.48% per April last. Amidst hard work to control NPL, banks were still having difficulty to make profit because the net profit was still suppressed by credit slowdown.

Besides, overhead cost of banks was still beyond control and as quality of credit tend to drop, banks had to increase the burden of CKPN of their products. Banks had to watch on degradation of their credit quality as economy was in low mood due to people’s less purchasing power.

Although the Government planned to realize budget plan in Semester 2 this year, the contribution was not significant because the propelling factor of growth to GDP 56% was from household consumption. Jacking up of GDP from the export side was still handicapped by low commodity prices abroad.

Relaxation of Loan to Value by BI had not shown any significant impact on credit pipelining because people’s purchasing power was still low while banks were still showing act of prudence.

Outcome of survey by banks showed that respondents were revising credit growth of 2015 from initial 17.1% to become 12.2%. Survey was exercised on 42 banks based in Jakarta and commanding over 80% of total credit pipelining.

Slowdown of growth of bank’s credit in Q II-2015 was due to low need for financing by debitors. In a condition of economic slowdown the business sector financed by banks was also low. By May 2015 bank’s credit only grew by 10.3% for a year.

In a condition of economic slowdown, bank’s were watching on the potential of NPL especially in working capital credit and investment credit. In May 2015 credit for investment was posted at 2.81% up by 0.25% against March. NPL in credit for working capital was posted at 2.94%, up by 0.18% against March.

Slowdown in bank’s credit growth in Q II-2015 was also seen in the increasing number of respondents whose new credit was below target. Survey unveiled that respondents whose new credit was below target came to 73.3%, higher than the previous quarter at only 67.4%.

Slowdown in credit growth caused bank liquidity to be eased. Statistics of Indonesia’s banking in April 2015 released by OJK last June showed that Loan to Deposit Ratio (LDR) was only 87.94% while in April 2014 it came to 90.79%.

Income from industrial interest in April 2015 grew by 18.6% a year from Rp.178 trillion to Rp.210 trillion. Interest burden increased by 47.36% for a year from Rp.90 trillion to Rp.113 trillion. Income from net profit only grew by 10.5% of Rp.87 trillion to become Rp.96 trillion.

Meanwhile BI’s policy to keep benchmark rate at 7.5% was rated as negative sentiment to Indonesia’s economy. BI’ monetary policy which tend to be tight was contradictory to the fiscal policy which tend to be expansive.

To be competitive against Asean states, ideally BI Rate should be around 4% - 5%. The key to lowering BI Rate was to control Inflation to around 3% - 4% as in other countries.

So it was natural that most banks tend to adapt themselves to national economic condition. When economy was slowing down, banks could not force themselves to aggressively exend credit. If they did so at all it might trigger NPL.

People’s lessened purchasing power due to falling commodity prices resulted in some provinces relying on commodity sector having downturn of demand of the consumption sector. This region, would undergo economic slowdown such as the province of Riau, East Kalimantan and South Sumatra.

The banking sector being suppressed as result of low economic performance was confirmed by observation by some banks who revised credit growth target of this year. Nearly all banks had undergone slowdown of credit growth as world’s economy slowed down.

It was right indeed for OJK to collect some revised Bank Business Plan for Semester II/2015. Previously BI and OJK projected credit growth of 15% - 17% this year. However with a number of revisions presumably there were down correction to around 12% - 13% slightly above realization of last year’s growth at only 10.6%

Per last April the banking industry posted credit growth of 10.36% to become Rp.3,747 trillion against Rp.3,395,9 trillion per April 2014. Credit consisted of consumption credit Rp.1,069,8 trillion, working capital credit Rp.1,762.3 trillion and investment credit Rp.915,2 trillion.

Indeed BI was in a dilemmatic position. If they relaxed monetary policy amidst economic slowdown it would trigger NPL and inflation. On the other hand if they tighten monetary policy it would put brakes on economic growth. So BI’s action to relax macro prudential policy by maintaining BI Rate 7.5% was a compromise for the short term.

Meeting of the Board of Governors of BI in July 14 last had stipulated BI rate to remain at 7.50% with Deposit Facility 5.50% and Lending Facility at Level 8.00%. this decision was in line with the effort to keep inflation at 4 + 1% in 2015 and 2016.

Besides, the BI Policy was also designed to stabilize macro-stability amidst continued uncertainty of global economy, through implementation of macro prudential policy which was accommodative. BI was also fostering coordination with the Government to control inflation and accelerate fiscal stimulus for economic growth.

BI also supported effort of the Central and local Governments to accelerate budget realization especially infra-structure projects and to continue various structural policies. This was what the Government had to do without telling BI to lower BI Rate. (SS)

Business News - July 31, 2015