Removing Obstruction in Real Sector

ANTARA FOTO/Sigid Kurniawan

Tellers serve customers at the headquarters of Bank Negara Indonesia (BNI) in Jakarta on Monday (19/3). Bank Indonesia (BI) said credit disbursement in February grew 8 percent year on year compared to January, which stood at 7.4 percent, and it showed surging credit in the corporate sector.

Bank loans remained relatively low in 2017, growing only 8.24 percent in a year. In January 2018, total loans grew only 7.4 percent year-on-year, while in February, total loans grew 8.22 percent year-on-year.

Lending growth, which always reached double digits before 2014, was below Bank Indonesia’s target. In January 2018, undisbursed loans accounted for 32 percent of total loans, or approximately Rp 1.467 quadrillion, up 5.39 percent year-on- year.

Many parties attributed high lending rates as the reason for the low growth in lending. In February 2018, the average bank lending rate remained 11.27 percent. In fact, the interest rates for the one-month and three-month time deposits dropped respectively to 5.65 percent and 5.97 percent.

Since 2016, time deposit rates have fallen by 205 basis points (bps), but lending rates have fallen by only 140 bps. The slow decline in the lending rate is caused by the fact that the banking industry still relies on interest income. As a result, the net interest margin (NIM) remains very high. Thus, despite the low lending growth, the profits of local banks increased by 23 percent to Rp 131.1 trillion in 2017.

Banks can certainly argue that the high NIM is not only to maintain profitability, but also to mitigate lending risks. This means that banks also need to anticipate non-performing loans (NPL), which increased by 2.88 percent to a total of Rp 134 trillion by the end of February.

The largest contributor to NPL was the mining sector. The drop in prices had led to a decline in commodity exports. In general, credit for the manufacturing sector in 2017 was included among high-risk loans. NPL in the industry sector reached 3.3 percent. On the other hand, the biggest contributor to the banking industry’s profits was the trade sector.

It is understandable that banks are still reluctant or highly selective in distributing their loans to the real sector. In fact, the demand for loans in the industry sector is very high. Kending growth in the industry sector is very important, because it has a great impact on the economy.

Source of the problem

The anomaly cannot be solved simply by blaming the bankers. Bankers should be encouraged not to take risks and to work efficiently. However, the more important thing is to resolve the source of the problems in the manufacturing sector.

The pressure of high costs in the country’s economy is still a classic problem. Inefficiencies range from dependence on imported raw materials, to high energy costs and to high logistics costs.

With such a high-cost economy, it is difficult to expect that industrial products will be able to enter the export market. Meanwhile, the domestic market is hampered by the weakening purchasing power. Household consumption remained stagnant, growing only less than 5 percent. In the midst of limited purchasing power, consumers cannot be blamed if they prefer buying cheaper imported products.

Moreover, under the liberal trade policies, it is difficult to protect the resilience of domestic industries. Thus, a series of problems in the real sector contributed to the high NPL.

Therefore, in order to increase lending growth to double digits, a serious effort must be to relax, facilitate and provide incentives to push the industry sector. Such measures are needed to support existing industries and to prevent them from collapse or from leaving the country.

This means that economic packages and the fiscal stimulus program should not be oriented only to new investors. The performance of existing investment in the country should be a reference and the main determinant for attracting new investors.

In macroeconomic calculations, if economic growth continues to stagnate in the 5 percent range, investors will postpone their investment. New direct investment (FDI) will flow swiftly if the Indonesian economy is able to grow above 5.4 percent. This is because countries with higher economic capacities, such as China and India, grew above 6 percent.

Similarly, Indonesia\'s competitors in ASEAN, such as Vietnam and Malaysia, had economic growth of above 7 percent and 6 percent, respectively. In fact, FDI is necessary to spur investment growth in the real sector.

On the other hand, although lending growth remained relatively low, capital market financing continued to increase in 2017. A total of Rp 257 trillion was realized in capital market financing, a growth of 30 percent. Many corporations are taking advantage of the opportunity to obtain low-cost funding from the capital market. Companies raised funds through a initial public offering (IPO) or by issuing corporate bonds.

A number of state-owned enterprises (SOEs) issued bonds in 2017, including SOEs involved in the infrastructure sector. In fact, some of the bonds carried short-term tenors. However, increased financing from the capital market certainly was still unable to offset the decline in loan disbursements from the banking industry.

Kompas/Totok Wijayanto

Enny Sri Hartati

The increase in alternative financing should encourage banks to boost their lending performance. Banks have no choice but to operate more efficiently. To grow their competitiveness, banks should create a slim institutional organ, instead of adding new board of directors.

We hope the banking sector will be able to contribute optimally and enhance its role in expanding the finance sector and accelerating the economy. Banks should be able not only to increase their lending, but also to help drive concrete structural transformation.

Enny Sri Hartati, Executive Director, Institute for Development of Economics and Finance