Financial Sector Reviews: Loan Growth May Miss BI Target

Toll Road - Photo by Cabinet Secretary

JAKARTA (TheInsiderStories) – The Indonesian banking industry’s outstanding loans are growing at a more tepid pace than anticipated, due to weaker demand for property and working capital loans, reflecting the country’s muted economic expansion. This phenomenon is forcing the financial sector regulator to revisit its target for full year.

Indonesia Financial Services Authority (FSA) now forecasts that growth of bank credit until the end of this year is likely to miss an earlier target set, due to recent consolidation in channeling and overcoming the persistent Non Performing Loan (NPL) ratios. The FSA had previously set a loan target of 11-13 per cent growth for 2017.

“It’s little tough to us to reach the target. We see the (loan) growth reaching 10 percent this year,” said Wimboh Santoso, Chairman of FSA, on Tuesday 31 October.

Despite the central bank’s easing monetary policy, Indonesia’s credit growth has remained lackluster. Bank lending grew by 7.86 per cent as of September from a year earlier, according to FSA data, compared to an average growth rate of more than 10 per cent two years ago for the same period.

Property loans expanded by 13.5 per cent — compared to 17 per cent in 2016 — to Rp762.1 trillion, with weak demand observed across construction and mortgage debtors.

Weakening loan demand from the trader hotel and restaurant sectors also revealed subdued working capital loan performance, which only grew by 6.9 per cent to Rp2,119.2 trillion, a figure lower than the growth of 8 per cent set in 2016.

On the bright side, the growth of loans for investment accelerated by 15 per cent, to Rp 1,025 trillion, on the back of investments in trade, hotel and restaurant businesses as well as the manufacturing sector.

Local lenders also managed to maintain small and medium enterprise loan growth at 10 per cent, with outstanding loans growing to Rp740 trillion by the end of last year.

The rebound in commodity prices has given the banks the opportunity to write down bad loans and allow companies to seek new ones. The recent NPL rate for Indonesian banks reached 2.9 per cent in September, lower than August’s 3.1 per cent.

Meanwhile, the central bank, Bank Indonesia, is targeting loans to grow by between 8 and 10 per cent, due to lower interest rates this year, and estimating loans to grow between 11 per cent and 12 per cent in 2018, supported by better consolidation.

Bank Indonesia Governor Agus D.W Martowardojo said Indonesia’s economy may expand by only 5.17 percent in 2017, amid the recent sluggish Chinese economy and North Korea’s reckless missile trials.

In 2018, however, the pressure on Indonesia’s economy will most likely come from global risks, such as the rise in US Federal Reserve interest rates and the forthcoming change of the US central bank’s officials.

Subdued inflation has allowed Bank Indonesia to cut its benchmark rate eight times since the beginning of last year, including for a second month in a row in September.

But more easing, combined with the prospect of higher rates in the US, may pose a risk to the currency, which has weakened in the past month. Indonesia’s economy is growing at about 5 per cent, lower than the 7 per cent goal that President Joko Widodo set when he came into office three years ago.

Inflation remains low, with consumer prices rising 3.7 per cent in September from a year earlier, and within the bank’s 3 per cent to 5 per cent target for this year.

Written by Elisa Valenta, email: saevalenta@gmail.com