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Many have accused Indonesia's banks of having been too "risk
averse" in their lending. But there are not many companies that enjoy
the unique combination of having good business prospects and healthy
balance sheets. Banks that are willing to lend have to walk the extra
mile in assessing the bankability of companies.
Some time ago we visited a company that apparently had favorable
prospects. It is an animal meat protein provider that controlled
approximately one-third of the market segment they are serving.
However, the company had just finished a restructuring and its balance
sheet was still laden with debt -- although they secured a
lower-than-market interest rate. Located below the company's
headquarters is a branch of a large commercial bank (one of the top
five Indonesian banks).
The company only had one bank loan (which was not extended by this
bank). Ironically, the bank in the lobby approached the company to
propose consumer loans, but apparently refrained from offering any
other lending possibilities.
Another bank that approached the company confined itself to offering a
cash-management system.
The company's business looks attractive, considering the large market
size, and revenue is considerable (trillions of rupiah) and stable.
There are no religious obstacles to eating poultry, and Indonesia
currently has the lowest consumption per capita of meat among the ASEAN
countries.
While avian flu initially posed a threat to the business, the company
may have actually benefited from it in the end as it weeded out its
smaller and weaker competitors -- forcing the industry to consolidate
around the big producers.
We do understand that a more in-depth analysis of the company is
needed, and that banks have to work hard to get a feel for the
business. But in the current economic environment where strong
companies in a good business are a rarity, one should be ready to walk
the extra mile to find hidden opportunities.
How did the banks react when we asked about the company? Many banks
accepted the potential of the business, but they appeared to be
concerned about the impact of Avian flu and other diseases.
This, in our view, highlights the orthodoxy of the banks in considering
loans. The company only experienced a slight hiccup at the height of
the avian flu threat, and revenue has actually trended upward since
2004.
The avian flu impact was mostly felt by small-scale producers, and the
need to provide biosecurity will only increase dependence on big
producers as the latter are the only ones able to procure vaccines at
acceptable prices due to their economies of scale.
Consider the potential.
The company has several production bases across Indonesia. Value chains
from the business are wide and long, spreading from suppliers, farmers,
traders, to restaurants and hotels. Tapping the value chain would
provide banks with clients to finance and serve.
This risk aversion on the part of the banks probably partly explains
the slow growth in lending up to first quarter of 2007.
The loan portfolios of commercial banks have not grown very much as
many parts of Indonesia, especially Java, and particularly the Greater
Jakarta area, were hit by widespread flooding that interrupted economic
activities in mid-February.
Loans by the end of March 2007 stood at Rp 800 trillion, only slightly
up from Rp 792 trillion at the beginning of the year.
We recently heard of banks announcing new loan commitments to
infrastructure projects.
However, we doubt that disbursement will take place anytime soon as
many regulatory and operational obstacles stand in the way. In fact,
unless the banks are willing to gain a better understanding of
individual industries, we doubt that loan growth will be as fast as
many expect (i.e., around 20 percent p.a.).
What is needed is a new paradigm, and a corresponding new
organizational approach, of gaining deeper understandings of specific
industries, accompanied, of course, by adequate risk controls. We
notice the limited attention being paid to credit research and even
less attention to the importance of research in overall lending
functions.
Without credit research, it will be difficult for the banks to
understand business risk as knowledge remains confined to account
officers, instead of being shared among the other functions of the
entire organization.
Interesting advice was proffered by a senior banker on how to create a
cheap cost-of-funds bank. Follow the chain, the banker said. Start by
opening a branch at, say, a textile market (like Tanah Abang, for
instance); thereafter, follow the customer's flow of funds. That way
the money will not be lost to other banks.
We believe that a similar process could be applied on the lending side.
These are just some of a variety of possible measures that could boost
bank lending capacity. We believe that the key to a bank's
competitiveness lies in its ability to create an exclusive niche that
is hard to penetrate. So, bankers, it's time to walk the extra mile!.
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