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INDONESIAN COMMERCIAL NEWSLETTER
August 2010

FOCUS

BANK STILL RELY ON CONSUMER CREDITS


Indonesian banking industry has survived the global financial crisis almost unscathed.  The crisis has badly hit world's major economies and other Asean countries notably Singapore and Malaysia. The country's banking industry, which was almost bankrupt as a result of the 1998 monetary crisis, is now stronger and more prepared. The recent global financial crisis had led to large withdrawal of foreign funds from various developing countries but the impact hardly had adverse effect on Indonesia's banking industry thanks to policy adopted by Bank Indonesia that continues to call for strict observance of prudential banking principle in the use of foreign funds.

However, prudent policy is not without negative effects. The flows of fund to the real sector had been slowed. Bank Indonesia's cutting its key rate (BI rate) to an all time was apparently not enough to encourage credit expansion to the real sector. 

Actually, in 2007 credits began to grow. Earlier, following the government's decision to raise the oil fuel price late 2005, the Central Bank adopted a tighter monetary policy by raising the BI rate, resulting in a sluggish credit expansion growing only 13.9% in 2006. The central bank's benchmark interest rate (SBI) was cut again when the condition of the country's economy improved. The SBI rate was gradually cut to its lowest ever at 6.5%, which is maintained until today.

After a slow down in 2009 as a result of the global financial crisis, credit expansion grew in 2010.  In 2009, credit grew only 10% after a surge of 30.5% in the previous year.  In the first 8 months of 2010, bank credits rose 14.1% and the growth is expected to reach 20% in the whole of the year.


The increase in credits resulted in a rise in Loan to Deposit Ratio, which was relatively low earlier.  In 2006  and 2007, the LDR of Indonesian banks was around 60% showing banks failed to mobilize a large part of third party funds they held.  At that time large funds were parked in SBI, which relatively offered a high interest rate. In 2008, LDR began to scale up to reach 74.6%. In 2009 it scaled down again to 72.88% with the slow down in credit expansion. However, in 2008 it began to rise again to reach 78.01% by August to follow the country's economic recovery.

Table - 2
Loans to Deposit Ratios

Trade sector remained the largest recipient of bank credits, followed by the manufacturing sector, The trade and manufacturing sectors became the target of credit expansion  as the prospects of the two sectors  were more encouraging with the support form the big domestic market  that has proved capable of weathering the impact of the financial  crisis,

Credits for he manufacturing sector in 2010 was fairly large at Rp264 trillion, but the amount was smaller compared with the total credits of Rp271 trillion for the sector in 2008,

Banks  decided it was safer to put their funds in the healthier trading sector  than in the manufacturing sector, which has remained in the doldrums , Many manufacturing companies  still failed in recovering  from the monetary crisis a decade earlier,
Table - 3
Commercial bank credits by sectors
       
Consumer credits have more than doubled in the past five years
Banks still are very selective  in disbursing large credits, They  still see consumercredits  more attractive  and profitable, In the past five years consumer credits have increased  in portion from 28,6% to 30,6% of total bank credits, Meanwhile the portion of working capital credits dropped from  52,3%  in 2006 to 49,6% , There was no much change in the  portion of investment credits,

Consumer credits have more than doubled in the past five years - from, Rp226 trillion in 2006 to Rp501 trillion by Aug, 2010,

Table - 4 Credits of commercial banks by types
            

The largest credit providers are state banks , but noteworthy was foreign  and joint venture banks have also are more aggressive in offering consumer credits,  Previously foreign and joint venture banks had little interest in consumer credits, They were interested mainly in providing corporate and investment credits, financing large projects and working capital, They began to eye consumer credits in the wake of the 1998 monetary crisis, which left large non performing credit in the corporate sector  with the collapse of a number of conglomerates,

In the past 10 years, the credit portfolio of foreign banks shifted more to consumer credits, They  began to  provide   corporate credits  again  only in the past two years  offering larger  investment  and working capital credits compared with in the previous two years,

Table - 5
Consumer credits provided by commercial banks and BPRs by groups

Foreign banks extend consumer credits more trough credit  and non collateral credits, Around Rp12,4 trillion  of the total Rp21,28 trillion consumer credit of foreign banks  are extended through credit cards,   HSBC, Citibank, ANZ Bank and  Standard Charter Bank are among foreign banks extended consumers credit  more through credit cards,

Foreign banks account for more consumer credits extended through credit card larger than extended by state banks,

Table - 6
Credits extended through credit cards
       
Banks are more interested in consumer credits as they carry higher interest rates,  In August 2010, the  interest rate on rupiah consumer credits  averaged 13,8%  as against only 11,8% on investment credits and 12,6% on working capital credits,  Meanwhile, the BI rate is still 6,5%, Therefore,  consumer credits have high interest spread.

Table - 7
Average interest rates of commercial bank credits by types
       
Banks continue to eye consumer credits

In the first half of 2010, the country's economy expanded by 6% yoy, therefore,  the market consumer credit is expected to remain  potential  and attractive that almost all banks will seek to have a share in the market,

There have been warnings that excessive  consumer credits   could trigger a surge in inflation  and cause greater credit risks, However, most banks dismissed the warning  as so far the country's economy had continued to expand  driven by the consumer sector amid the global crisis.

In addition, the non performing loan of banks in the consumption sector was relatively low at 3% in August 2010, much lower than 6% in 2006,

Table - 8
Non performing loans of banks by types of credit
       
The expansion of  automotive industry, property, electronic    and retail  sectors  has been driven mainly by consumer credits, These sectors  are expected to remain the driving motors for the country's economic growth , therefore, the market consumer credits is expected to continue to expand in the coming years,

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