2008-2009 DATA CONSULT. All rights reserved.
May 2012


A fairly strong growth has been recorded for Indonesia's banking industry in the past several years. Big banks have continued to chalk up an increase in profit.   In 2011, the country's banking industry reported an aggregate of  Rp75.02 trillion in  net profit or an increase of 31.1 percent  from the previous year's record of Rp57.31 trillion. The growth was higher than 2010's level of 26.8 percent.  Despite the high growth, the country's banking industry  still needs to improve efficiency and its  intermediacy role.

Greater  efficiency  and intermediacy role are still needed as the growth of  the country's banking industry is lacking in quality. The growth is attributable more   to monetary policy that allows bank to maintain high lending rates,  rather than   to operational efficiency. The interest margins between the deposit and loan interest rates in the country are relatively wide compared  with in other countries.

Banks are not easily cut their lending rates although Bank Indonesia has continued to cut its key rate, the interest rate on Bank Indonesia Certificate (SBI) which serves as the reference interest rate for banks.

Credit expansion is also attributable more to consumer credits. Consumer credit contributes to driving economic growth but on the other hand  it  could bring the economy to  facing greater risk of  default.

Consumer sector has been one of the main drivers of  the country's economic growth in the past several years. Banks, therefore, are encouraged to increase credit distribution to the people, but the central bank has signaled it would tighten its monetary policy to minimize the risk  and improve banking efficiency  and intermediacy role.

The central bank in 2012 will adopt a tighter monetary policy to forestall an increase in nonperforming loans. It has raised the down payment for consumer credits  especially  motor vehicle and housing  credits.

Another important issue is growing  foreign  domination of the country's banking industry.  Bank Indonesia  plans to revise  the regulation on foreign ownership in banks in the country.

Expansion Marked With  Growing  Number of Bank Offices

Banking expansion in 2011  was marked with the fast growing number of bank branches  that shot up to more than 1,000 offices. Micro banks lead in the  expansion.

Medium cities outside Java are the target of expansion. Competition is less sharp in medium cities compared with in big cities.

A number of banks plan to increase the number of their branches in 2012. Bank Mandiri, the country's largest lender in assets plans to open 8 new micro branches in Jambi to add to 12 units of branches already in operation in that province. The additional 8 branches have been included in its Bank Business Plan (RBB) for 2012  awaiting approval from Bank Indonesia.

Other banks also seeking to increase the number of their bank offices include Bank BJB, a bank owned by the West Java and Banten provincial administrations. Bank BJB has opened new branches in Banjarmasin, Palembang, and  Lampung, bringing the total number of its offices to 56 units all over the country.

PT Bank Bumi Artha Tbk plans to increase the number of its branches by 24 units in 2012 to add to 103 units it already had by the end of 2011.  It would buy  or rent buildings to house its new offices. The cost of buying a new building is around Rp2 billion-Rp3 billion.

SBI Rate Cut  To Press Down Lending Rates

The country's economic condition has been fairly good in the past three years amid the global financial crisis. The country's economy has been stable growing  by 5-7 percent per year.

Strong and big domestic market has helped offset a decline in demand from crisis hit Europe and the United States that the global economic slowdown has little effects on the country's real sector. The markets of Indonesia's commodities are diversified  and are less dependent on the country's traditional export market Europe  and the United States. The ASEAN markets have grown and are getting more important  for the country's commodities.

Meanwhile, the country has managed to keep its inflation in control allowing     the central bank to cut its key rate SBI. The interest on SBI has increased  several times but in general the trend is declining. The interest cut is expected to bring down the lending rates of banks to boost demand for bank credits.

The condition is quite convenient  and safe for banks to continue growth. In 2012, the country's economy is forecast to expand 5 - 6.5 percent  with inflation slightly lower at 4.5 percent.

The relatively low inflation rate allows more cut in bank lending rates to boost credit growth.

Banks Slow in Cutting Lending Rates

The cut in SBI rate by Bank Indonesia is aimed at encouraging banks to cut lending rates. However, banks are not immediately prompted to follow. The lending rates remain high despite repeated slashing of SBI rate by the central bank.

The interest rate on working capital credits  in the past four years has been cut only by 3 percentage points.

Banking Assets Growing

The country's banking industry has continued to chalk up an increase in assets. The growth was sharp in 2010  and  2011. In 2010, the banking assets grew 18.7 percent to Rp3,009 trillion and in 2011 the growth rate was higher at 21.4 percent  to Rp3,653 trillion .

The trend continued in 2012. By February, 2012, the banking assets grew 1.5 percent. The trend is forecast to continue throughout the year  with the country's economic and financial sectors  continuing to  grow.

Credit expansion and increase in third party funds held  contribute to the increase in assets. The expansion of bank offices  is expected to boost inflows of third party funds and  credit distribution.

Bank Ranking in Assets Changes

Bank Mandiri is the country's largest bank in assets. The state bank had assets valued at Rp478.4 trillion in 2001 . The second largest is  Bank Rakyat Indonesia (BRI) with assets valued at Rp416.4 trillion .

BRI has recorded an impressive growth over the past several years climbing to the second place putting behind BCA , which was earlier  the second largest .

Other banks recording  an increase in ranking include CIMB Niaga, which by the end of  2011  climbed to the fifth putting behind Bank Danamon. Bank CIMB recorded assets valued at Rp169.5 trillion  in 2011 larger than Bank Danamon's assets of Rp125 trillion .

The assets are relatively small  compared to the assets of top banks in neighboring countries including Singapore,  Malaysia,  and  Thailand. Big banks in those countries have assets three times larger than the assets of Indonesia's  largest banks. In Brazil, the assets of the largest bank is 10 times largest the  assets of the country's largest bank.

Banking Capital

Profit has been the main contributor  to the increase in bank capital as paid up capital did not change much from year to year.  In the coming years  with the economy to continue to grow , banking capital is expected to continue to grow.

In 2011, the capital of banks in Indonesia was recorded at Rp404.7 trillion   or an increase of 25.3 percent  from the previous year. The growing trend continued  until February 2012  when banking capital reached Rp456 trillion  or an increase of 13 percent in two months.

Banking Capital  Growing

The government  in February issued a new policy reducing risks in calculating risk weighted assets (ATMR). The circulation of the Central Bank No.  13/6/DPNP on Guidelines for the calculation of risk weighted assets  for Credit Risks through Standard Approach on 18 February 2011, cut the risks on a number of credits..

The types of loans provided with ATMR incentive include  house ownership   credit (KPR) with loan to value ratio of not more than 70 percent to have risk  burden of 35 percent, down from 40 percent earlier; and business credits : micro, small and medium business credits,  were given  risk burden of 75 percent down from 85 percent earlier. The policy is to reduce  provision for risks allowing banks to strengthen capital.

ATMR in February dropped to Rp2,477.6 trillion  from  Rp2,520.96 trillion  in December 2011. The decline was recorded when banks recorded credit expansion. In the first two months of 2012,credit expansion by banks totaled. In the first two months of 2012, credit  by banks  expanded by  Rp2.93 trillion to  Rp2,203 trillion.

Bank of India Indonesia Tbk  recorded an increase of 451 basis points in Capital Adequacy Ratio (CAR)  in the first three months of 2012 thanks to cut in ATMR. In March 2012, the CAR of the Indian bank  was recorded  at  27.7 percent up from 23.19 percent in December 2011.

Profit Pushes Up  CAR Safe Above Minimum Limit

Increase in capital will result in an increase in capital adequacy ratio (CAR). In February 2012,  CAR averaged  18.5 percent, much higher than 8 percent. The CAR was much higher than 8 percent , the minimum limit set by Bank Indonesia. The Indonesian banking CAR was  higher than the CAR in a number of other countries. In Singapore the CAR was 16.2 percent, Thailand 15.5 percent, Malaysia 14.6 percent .

Based on the Indonesian Banking Statistics (SPI)  issued by Bank Indonesia (BI), paid up capital has little contribution to the  increase in CAR . In two months period, there was almost no injection in  paid up capital. Paid up capital  in February  was recorded at Rp113.97 trillion  up  from  Rp112.72 trillion by the end of 2011.

Meanwhile,  last year's net profit that was added to capital was quite high. Last year banking profit totaled Rp75.08 trillion.

Third Party Funds

The amounts of third party funds held by banks have continued to grow in the past  several years. High liquidity of the public contributed to the growth of third party funds (DPK) .

In 2011, DPK was recorded at Rp2,784 trillion, up 19.1 percent from the previous year. The growth  was the highest  since 2006.

DPK of commercial banks in Indonesia have been dominated by public deposits. The second largest components making up DPK is giro. Deposits contribute 44.31 percent to DPK in 2011. Savings and giro accounted for 32.26 percent  and  23.44 percent respectively in the same year.

Increase in DPK allows banks to extend more credits. The DPK amounts are expected to continue to increase in the coming years to follow the improvement of the country's economic condition.

Growing surplus of cheap funds gives banks greater opportunity to offer  credits with more competitive interest rate. Cheap funds including savings have continued to increase.

The composition of cheap funds, however, has not changed much over the past years. In December 2010, saving accounted for 31.35 percent of DPK, slightly
higher than 30.03 percent  a year earlier.

In  2011,  savings rose in portion  to 32.26 percent  of  DPK.  In February 2012,  the portion fell slightly to 31.98 percent.

Credit Growing Fast

The performance of a bank could also be seen from its credit expansion. Until the end of 2011, a strong growth was recorded in bank credits.

In 2011, banking credit grew 24.6 percent. New credits in 2011  totaled Rp 2.2 trillion .

Since 2007, credit growth has been high averaging above 20 percent. A slowdown was recorded only in 2009 when  the growth weakened to 10 percent.
In 2012,  the credit expansion is forecast to remain high or at least the same as in 2011.

The growth was attributable mainly to working capital credits and investment credits which grew 33.21 percent in 2011 much faster than a growth of only 16.98 percent in 2010.  Working capital credit (KMK) has continued to make up the largest portion of the country's banking credit portfolio..

Meanwhile, consumer credits  grew 24 percent  year-on-year in 2011. Consumer credits are dominated by KPK, motor vehicle credits, credit cards and multipurpose credits.

Bank Mandiri the Largest Credit Provider,  2012

By February 2012, Bank Mandiri remained the largest credit provider in the country relegating BRI, which was the largest in 2011, to second place. BRI's outstanding credits  in 2011 stood at Rp283.8 trillion as against Bank Mandiri's Rp 273.8 trillion.

BRI curbed credit expansion in 2012 to improve its credit quality to prevent an increase in NPL in the medium  sector. BRI's NPL ratio in 2011 was recorded at 5 percent.

Medium scale credits are ones with ceilings of Rp 5 billion to  Rp 50 billion.  Most BRI's NPLs  are in medium scale industries and manufacturing sectors.

BRI also curbed corporate credit expansion  by more selective in extending credits for non state companies . Non state companies hampered the growth of credits for micro, small and medium business sectors (UMKM).

BRI's credits will be available for  non state companies if they help in boosting UMKM, such as  agribusiness sector , fishery  sector and  palm oil sector with its plasma farm system.  Micro sector has been the main target of BRI credit expansion . Providing credits for micro businesses has been the core business of  the state lender.

BRI on the contrary is more aggressive in offering credits for state companies (BUMN) early 2012.  In the first quarter of 2012, BRI's credits for BUMN grew 90 percent  to Rp36.14 trillion   from Rp 20.96 trillion  by the end of last year.

The profile of credits for BUMN also improved. The NPL of BRI in state companies  was zero. It was 1 percent in non BUMN.

Trade Sector The Largest Recipient Of Bank Credits

The domestic economy has expanded boosted mainly by growing trade sector  as indicated by the big role of the consumption sector in driving the country's economic growth  in the past several years.

Increase in the public income especially people of the middle class has been the main driver of the consumption sector in Indonesia. It is the trend not only in Indonesia, but also in  other countries recording strong growth amid the global economic slowdown such as India,  and Brazil.

Increase in the salaries of civil servants is one of the drivers of increase in public income. The salaries of civil servants have increased almost every year. Remuneration program has been implemented by the government in a number  of ministries including professional allowance for school teachers.

Meanwhile a number of regional administrations such as Jakarta has also provided significant amount of regional performance allowance since 2009.

Increase in the people's income  and consumption  helps boosted trade.

The banking sector has expanded amid the prevailing condition  that many banks have shown growing interest in financing trade. Investment in the industrial sector  also has increased significantly  as indicated by the growing bank credits for the sector.

However, the dominant consumption sector has attracted more credits to the trade sector. The second largest credit recipient is the industrial sector.
Placement of Funds in Bank Indonesia Remains Big

The function of banks is to provide credits for the public, but banks also are required to place funds in the central bank, Bank Indonesia. Placement of funds in Bank Indonesia is legal but too large funds placed in the central bank will make the banks  less productive.

The portion of funds placed in Bank Indonesia (BI) has tended to decline over the past years. In 2007, bank funds placed in the central bank reached 41.7 percent of bank credits.

The portion dropped to 24.6 percent in 2008, but rose in the following years. In 2011, the portion rose to 34 percent and  in February 2012  it fell slightly to 32.7 percent.

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ICN - May 2012