Tuesday, June 09, 2009

Consumer loans become engine that drives bank credit

THE global economic downturn was previously unimaginable, and uncertainties are still haunting businesspeople throughout the world, including in Indonesia. It is not surprising, therefore, that Bank Indonesia (BI) quickly lowered the forecasted growth rate of bank loans that were set early this year, because the business plans submitted by banks indicated lower credit targets than those set by BI. Earlier, BI expected credit growth of between 18 and 20 percent this year. "I am sure such a target cannot be achieved," said former BI Governor Boediono.

BI realizes that banks will not increase the credit flow because they are being cautious in this time of crisis, for fear of being saddled with more non-performing loans. That is why BI is not trying to persuade banks to fully open the credit tap like two years ago.

In view of the business plans submitted by banks, BI has revised this year's credit target. The banks' version set the target growth at 15.6 percent, which fully supports BI's assumption for Indonesia's economic growth at between 4 and 5 percent.

As loans will not total as much as the earlier target, BI expects growth from other sectors, such as government and public spending so that economic growth expectations can be achieved. In a survey of 41 banks, BI concluded that in the first quarter of 2009 there was 1 to 5 percent growth of new credit, which is lower than the 4 to 7 percent growth in the fourth quarter of 2008.

However, quite a number of businesspeople are optimistic that if inflation drastically drops at the end of second quarter of 2009, the flow of bank credit will be back to normal. Indeed, consumer loans account for a major part of new banks loans this year. "The demand for consumer loans will remain high as the loans are mostly from small and medium businesses that are relatively more resistant to crisis," said the head of the Stability Bureau for Financial Policy of Bank Indonesia, Wimboh Santoso, recently.

Consumer loans and home loans are still in high demand, but since they pose a larger risk for banks than business loans, they carry a higher interest rate. Last year, the growth of consumer loans reached 52 percent, which was much higher than investment and business loans. However, Wimboh predicted that in the first quarter of 2009 it would be lower than in the last quarter of 2008. "That is the normal cycle. It usually goes up in the second quarter and reaches a peak in the third quarter," he said, adding that last year a large amount -- some Rp 230 trillion - remained to be loaned out.

He also said that after the 1997 financial crisis, banks prefer to give out consumer loans rather than corporate credit even though the competition is tight in this sector, where there are lots of consumer banking products that are continuously and regularly being launched by banks.

This is one of the reasons why consumer loans keep growing despite the increasing interest rate, which does not deter people. While the business climate is unfavorable, consumer loans on the other hand keep growing, which is dangerous. "If it is not balanced with the quality of loans then it can create economic instability," said senior economist Faisal Basri.

The situation is made worse by many banks that aggressively promote consumer loans as the real sector is not giving much business to them. If things get out of control, the crisis that is plaguing the US can spread to here, he said. "If banks do not take control there will be a possibility of nonperforming loans as consumerism growth is not balanced with the consumers' purchasing power," he said. (Burhanuddin Abe)

The Jakarta Post, June 09, 2009

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