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In a recent conversation, an official of one company
expressed concern about the difficulty faced by its subsidiary in
fulfilling a contract. This was due to financing problems, i.e.,
difficulties in obtaining loans.
Due to legal lending limitations, the subsidiary was denied a loan by a
bank despite having a good name, a job contract and a very strong
balance sheet. The bank required collateral in the form of the personal
assets of the directors -- a request which, of course, was refused.
The company official continued by saying that lower interest rates
would not be followed by significantly stronger corporate lending,
unless loan requirements were eased.
Not long ago, the central bank unveiled plans to relax the loan
requirement regulations, including issuing new rules such as increasing
the limit for lending to affiliated parties, lowering the requirements
for loan classification, and providing research and database services
for the national and local economies.
However, apart from more accommodating regulations, banks also need to
be able to forecast business prospects (i.e., profitability and
business environment), before loan growth can increase significantly.
This requires predictability as regards macroeconomic variables and
other business assumptions. Unfortunately, it is well understood and
already the consensus that Indonesia is lacking in these aspects. We
would now like to take a closer look the predictability aspect in the
assessment of a hypothetical corporate loan.
Consider the palm-oil business, one of the government's priority
sectors. It takes seven years for a palm tree to reach its optimum
productive age. On undeveloped land, it will take at least eight to
nine years.
Let's consider what happened in regard to the regulatory environment.
In the space of one month, there was talk of limiting palm-oil exports
to ensure sufficient supplies to the biofuel industry, as well as a
plan to increase export duty so as to ensure cooking-oil supplies.
This was just one month! It needs to be remembered here that to reach
the optimum age for oil palms, it takes two administrations. This
example is just one highlighting the flip-flops that often occur in the
national spectrum; with decentralization, more uncertainty can arise as
we go down to the more parochial levels of government.
By the end of November 2006, bank lending had grown by approximately 10
percent for that year to around Rp 767 trillion, lower than the 23
percent recorded during the same period of 2005. Non-performing loans
were stable at 8 percent, while net interest margins were still at a
healthy 5.8 percent.
The Loan to Deposit Ratio was at a low 61 percent. Indonesia's
Loan-to-GDP ratio is still low at approximately 23 percent, compared to
India at 39 percent, Thailand at 75 percent and Malaysia at 107 percent.
Currently, the banking industry is in a very liquid position. Total
third party deposits stood at Rp 1,251 trillion as of the end of
November 2006, representing growth of 10.9 percent for the first eleven
months of last year. In addition, roughly 12 percent of total banking
productive assets were invested in central bank bills.
With the nominal amount of deposits throughout the banking system being
60 percent higher than the nominal amount of loans, similar growth
rates in deposits and loans would lead to a rise in liquidity.
Before loan growth can rise rapidly, we expect to see the banks
focusing on lending to businesses with higher predictability levels,
from consumer loans, such as vehicle-financing and mortgages, to medium
loans financing trade and services. This is a pattern we've been seeing
for several years.
Bank loans for services-based sectors (also known as the tertiary
sector in economic jargon) have been growing at a rate of 16 percent
per year, while loans for manufacturing-based industries (known as the
secondary sector) have been growing at a snail's pace of 5 percent per
year.
Financing manufacturing industry is often considered hazardous to a
bank's health. The irony is that, second to agriculture, the secondary
sector employs more people per unit of investment than the tertiary
sector.
But who would lend to an industry that has potentially explosive labor
problems? Who would be paid first in the event of bankruptcy: labor or
the creditors?
Before lending growth can become broad-based, we need to first start by
addressing the source of unpredictability: regulatory and
law-enforcement risks.
Shoddy Infrastructure is only one problem; but bigger ones concern the
soft aspects. Investors should be able to predict with confidence that
there will be minimal changes to a given policy during their investment
horizon. Investors also need to be afforded certainty that the law will
be upheld in court should a dispute arise, and that court decisions
will be enforced.
Institutionalizing the importance of having coherent and consistent
policies, along with a predictable judicial system, will take time to
realize. So, for the time being, we can expect to see the
services-based industries growing at a faster pace than manufacturing
industries.
Reducing unemployment through private sector investment will thus
become harder.
Let's just hope higher government spending on infrastructure projects
can fill the void.
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