Policy Review: Bank Loans Growing at Slower Pace, Who’s to Blame?

President Joko Widodo (center) met with bankers at the State Palace. (Image credit : Special)

JAKARTA (TheInsiderStories) – President Joko Widodo on Thursday (15/3) held a gathering with the country’s top banking officials at the State Palace. The President called on the bankers to be more aggressive in providing loans as a move to help accelerate the country’s economic growth, which has been growing below expectation in the past three years, despite efforts undertaken by the government to improve the investment climate.

The President made the call given the fact that the banking loan growth has been slow, despite easing policies applied by the central bank by reducing Bank Indonesia’s benchmark rate.

The country’s benchmark interest rate has averaged 7.23 per cent from 2005 until February 2018, reaching an all-time high of 12.75 percent in December of 2005 and a record low of 4.25 percent in September of 2017.

The central bank, Bank Indonesia, has kept the benchmark BI 7-Day Repo rate at 4.25 per cent since September last year. The lending and the deposit facility rates have also left steady at 5 per cent and 3. 5 per cent respectively.

Indonesia Loan Growth on monthly basis in 2017 (source: Trending Economics)

The central bank has said the easing policy stance is aimed at maintaining macroeconomic and financial stability as well as supporting the domestic economic recovery.

Last year, Indonesia’s gross domestic product (GDP) only reached 5.07 per cent or slightly higher than the previous year of 5.02 per cent,  Statistics Indonesia revealed in early February. The growth was mainly driven by household consumption and investment. Indonesia’s achievement is far from its target 5.2 per cent in the State Budget for 2017

Despite positive signals from the central bank to push down the interest rates, the policy was not followed by a rise in banking loan. This has raised questions among the country’s policymakers as well as the President.

“If I was given a target of 9-12 per cent, I would go for the 12 per cent target. Again, the biggest risk is if we are not taking a bold step to take risk,” President Widodo told the bankers.

The President realized that banks are required to be operating prudently. However, it does not mean that banks just stay in the comfort zone.

“Banking is a business. Making a decision means taking a risk. Certainly, this (principle) applies in any situation, in business and as well as politics,” he added.

(Infographic by: The Insider Stories)

As stated by the Chairman of the Financial Services Authority (FSA) Wimboh Santoso, the loan growth last year, reached 8.24 per cent, lower than the authority’s projection of 9-12 per cent.

As for 2018, the FSA targets the banking sector loans to grow by 12 per cent. The FSA Chairman is upbeat that the growth is within reach because there are signs of recovery in the country’s industry as well as the global economy.

Chief Economist of KH Institute for Global Competitiveness (SIGC) Eric Alexander Sugandi shared the President’s view. He said the slow loan growth was attributable to banks prudent policy in providing loans. Banks are reluctant to provide loans aggressively on concerns of rising non-performing loans (NPL).

However, the country’s banking sector cannot solely be blamed for the slow loan growth, because banks are not operating by itself. Banks need the productive sector of the economy to allocate the loans. If the loan demand is high, the loan could also increase, if loan demand is low, loan volume would also stay low. Thus, it is a two-way street.

The central bank data showed that the loan demand has been slow over the past two years, especially loan demand for working capital and investments. This indicates that the productive sector or borrowers are reluctant to seek a loan to expand their business.

As stated by the Head of Communication Department of Bank Indonesia Agusman in November 2017 alone, the loan for working capital grew by only 7.3 per cent, while investment loan grew by 4.6 per cent. This trend remained the same throughout the year.

The other reason for slow loan growth is that the source of funding is not only from the banking sector. Companies have also in the past two years or so have increasingly utilized the capital market to find fresh funds through issuing bonds, rights issue as well as medium-term notes due to favorable lending rates.

Loan growth is about supply and demand. Banks will increase the loans if there is an ample demand. Therefore, banks cannot solely be blamed for the slow loan growth. The government must also stimulate the productive sector to expand their business. More works are also needed to improve the whole business and investment climate.

President Joko Widodo has said earlier that the country’s economy should further improve to 5.3-5.4 per cent in 2018, buoyed by investment in ongoing infrastructure projects coupled with increasing non-building investment, including private investment, specifically machinery and equipment.

For this reason, he wants the banking industry to play a part in helping boost the country’s economy. Banks should also be more aggressive in channeling loans to the prospective sector of the economy, without having to forget the prudential principle.

Written by Roffie Kurniawan, email: roffien@theinsiderstories.com