RI banks lag behind ASEAN rivals

Esther Samboh, The Jakarta Post, Jakarta | Mon, 01/24/2011

Bank Indonesia (BI) is calling on local banks to improve their efficiency so they can benefit from the growth of Asia’s banking industry.

BI Governor Darmin Nasution said Friday that in terms of efficiency, asset quality and capitalization, Indonesian banks still lagged behind their peers in other Association of Southeast Asian Nations (ASEAN) member countries.

Darmin said the average operating cost to operating income ratio (operating ratio) and net interest margin (NIM) of Indonesian banks was 82 percent and 6 percent, respectively.

These figures were much higher than banks in Singapore, Malaysia and the Philippines. According to Darmin, the operating ratio and NIM of banks in neighboring countries were between 33 and 73 percent and 2 to 5 percent, respectively.

“Indonesian banks have the lowest efficiency rate in the ASEAN-5,” he said, referring to the banks of ASEAN’s relatively more developed members, the Philippines, Indonesia, Malaysia, Singapore and Thailand.

“This is ironic considering the fact that Indonesia’s average increase of banking shares has been fantastic. I urge banks to increase their efforts to alleviate the lag in efficiency,” Darmin said to over a hundred bankers at the annual banker’s dinner hosted by BI in Jakarta.

High lending rates due to banking inefficiencies have hampered credit growth in the country. The central bank estimated loan growth would slow to 19 percent this year, from 23 percent in 2010.

“We could not regulate the minimum NIM for banks. Later, we will combine the prime lending rate ruling with other steps in order to lower the NIM,” Darmin said.

A lower NIM means lower lending rates, which will in turn trigger more business expansion and consumption to spur economic growth in Southeast Asia’s biggest economy. Indonesia’s economy is expected to expand by 6.4 percent this year.

“A lower NIM will create a more efficient and conducive environment for enterprises, especially micro, small and medium enterprises [MSME]. Lending rates for the [MSME] sector are still relatively high compared with other sectors. It’s a challenge for us all to lower the rates further so that the economy will benefit,” Darmin said.

MSME loans accounted for 53 percent of overall loan disbursements in 2010, therefore growing 25 percent and surpassing the usual growth for loans.

Bankers have said that loans for the MSME sector have higher risks of bad debt compared with the non-MSME sector, but BI data showed that in 2010, the non-performing loans (NPL) rate for MSMEs was 2.65 percent, lower than that of the non-MSME sector at 3.51 percent.

Other than lowering the NIM to help businesses grow, the central bank will also focus on increasing bank capitalization to boost competitiveness ahead of the “ASEAN Economic Society”, providing more access for “unfinanced” and “unbanked” people as well as strengthening banking management to prevent excessive risk-taking by executives.

BI will also focus on strengthening the regional economy through the Regional Development Bank (BPD), strengthening the competitiveness of the Rural Credit Bank (BPR) and increasing the role of the sharia banking industry, Darmin said.

He said 2011 policies will revolve around increasing banking intermediary functions, banking supervision and banking stability in order to boost growth, and strengthening rural lenders.