This
Financial Stability Review
(FSR)
is one the reports Bank Indonesia provides to public in order to achieve its mission “to achieve and maintain stability of the Indonesian Rupiah through maintaining monetary stability and promoting financial system stability for safeguarding long-term and sustainable national development.”Financial System Stability Bureau
Directorate of Banking Research and Regulation Bank Indonesia
Jl. MH Thamrin No.2, Jakarta 10010 Indonesia
Information and Order:
This FSR document is also made in pdf format and is accessible at Bank Indonesia’s website at http://www.bi.go.id
All inquiries, comments and advice may be addressed to:
Bank Indonesia
Directorate for Banking Research and Regulation Financial System Stability Bureau
Jl. MH Thamrin No. 2, Jakarta, Indonesia Tel: (+62-21) 381 7990, 7353
FSR is issued biannually and has the following objectives:
• To foster public vision on financial system stability issues, both
domestically and internationally;
• To analyze potential risks to financial system stability; and
• To recommend policies to relevant financial authorities for promoting
FOREWORD, vii
EXECUTIVE SUMMARY, ix
Chapter 1 INTRODUCTION, 1
Chapter 2 THE IMPORTANCE OF MAINTAINING FINANCIAL SYSTEM STABILITY, 4
LESSONS LEARNT FROM THE 1997 CRISIS, 4
FINANCIAL SYSTEM STABILITY: WHAT AND WHY IS IT IMPORTANT?, 4
CORE COMPONENTS OF A STABLE FINANCIAL SYSTEM,5 CENTRAL BANK’S ROLE IN FINANCIAL SYSTEM STABILITY, 5
CENTRAL BANK’S ROLE IN FINANCIAL SYSTEM STABILITY , 7
CONCLUSIONS , 8
Chapter 3 EXTERNAL FACTORS, 11 INTERNATIONAL ECONOMY, 11 DOMESTIC ECONOMY, 12 Monetary Conditions, 12 Government’s Finance , 13 Government Bonds, 14 Foreign Debts, 15 Market Confidence, 15 Maturity Profile, 16
REAL SECTOR CONDITION, 17 Small and Medium Enterprises , 17 Pulp and Paper Industry, 19
Chapter 4 PERFORMANCE AND PROSPECT OF INDONESIA’S BANKING INDUSTRY, 21
THE STRUCTURE OF BANKING INDUSTRY, 21 ASSETS STRUCTURE, 21
CREDIT RISK, 22
Non-Performing Loans (NPLs) , 23 Loan Restructuring, 25
Lending Growth , 25 LIQUIDITY RISK, 27 Liquidity Assets, 28 Exchange Offer, 29 Core Deposit, 29
Interbank Call Money, 29
Liquid Assets to Cash Outflow (COF) , 30 Corporate Funds , 30
Household Savings Pattern, 30 Maturity Profile, 31
MARKET RISK, 31
Capital Charge for Market Risk, 32 CAPITAL, 32
BANKS’ PERFORMANCE , 34
CONFIDENCE TO CAPITAL MARKET, 38 Mutual Funds, 39
Impacts on Financial System Stability, 42 Bond Market, 46
Stocks Market, 46
Chapter 6 PAYMENT SYSTEMS IN INDONESIA, 51 RISKS IN PAYMENT SYSTEMS, 48
Clearing System, 49
Realtime Gross Settlement (RTGS), 49
ROLE OF PAYMENT SYSTEMS IN THE STABILITY OF FINANCIAL SYSTEM, 49
Payment Systems Oversight, 50 Risks in Clearing System, 50 Risks in RTGS, 50
ARTICLES
1. Redesigning Indonesia’s Crisis Management – S. Batunanggar
2. Market Risk in Indonesia Banks – Wimboh Santoso & Enrico Hariantoro
3. An Empirical Analysis of Credit Migration In Indonesian Banking – Dadang Muljawan
3.1. Stress Test on Goverment budget (APBN) 2003-04
3.2. Foreign Debt Indicators
3.3. Indonesia Corporate yankee Bonds (Dec 2002) 4.1. Selected Items of Banks Balance Sheets 4.2 Details of Loan
4.3. NPL Stress Test
4.4. Distribution of Loans by Sector 4.5. 14 Large Banks’ Liquidity
4.6. Maturity Profile of Assets and Liabilites of 13 large Banks, December 2002
4.7. Large Exchange Rate Stress Test of Large Bank to CAR
4.8 Interest Rates Stress Test of large of Large Bank to CAR
F i g u r e s
3.1. Non-oil and Gas exports by Country Destination 3.2. US and JAPAN : GDP-Inflation
3.3 US and JAPAN : Current Account
3.4. US and Japan : Discount interest Rate and DJIA & NIKKEI Indices
3.5. Direct and Portfolio Investments 3.6. Domestic Economic Indicators
3.7. Jakarta Composite and Property Sector Indices
3.9. Fixed Rate Government Bond vs SBI
3.10. Indonesia Government Bonds Rating and Yields 3.11. Maturity Profile of Corporate Foreign Debt 3.12. Loans to SME and Non-SME
3.13. Lending growth to SME By Type of Banks 3.14. SME Loans by Type of Business Uses 3.15. GDP by Sectors to Total GDP 3.16. NPL by Sector
4.1. Total Bank and Asset 4.2 Bank Securities and Loans 4.3. Total Loans and NPL
4.4. NPL and Provisions for Loan Losses 4.5. Non Performing Loan
4.6. NPL Stress Test 4.7. Loan Restructuring 4.8 Loan to Deposit Ratio
4.9. Trends of IDR and Foreign Exchange Loans 4.10. New Lending
4.11. Loans by Business Uses 4.12. Property Loan
4.13. Deposit Growth 4.14. Liquid Assets
4.18. Stress Test Exchange Rate 4.19. Interest Rates Stress Test 4.20. Capital ratios
4.21. CAR Evolution
4.22. Source of Interest Income 4.23. Net Earnings and ROA 4.24. Paid-up Capital and ROE 4.25. Interest Income
4.26. Asian Banks’ ROA 4.27. Asian Banks’ NPL 4.28. Asian Banks’ CAR
5.1. Market Liquidity and Jakarta Composite Index 5.2. Development of Mutual Funds and Bank Deposit 5.3. Mutual Funds Growth
5.4. Development of Deposit vs Public Funds in Mutual Funds
5.5 Development of YTM of Some Fixed-Rate Bonds and SBI rate
5.6. Government Bonds by Portfolio 5.7. Financial Sector Stock Index
6.1 Real Time Gross Settlements, Clearing and Non-cash Transactions
1. Causes and Process of Financial Crisis
2. Bank Indonesia’s Strategy in Maintaining Financial Stability
3. Pulp and Paper Industry 4. Market Risks
5. Yield Curve of Government Bonds 6. Mutual Funds
The financial crises that took place in almost all corners of the world, Indonesia included, have
driven growing awareness on the importance of financial system stability. Instability in a financial system
brings in adverse implications such as lower economic growth, loss of domestic productivity and gigantic
fiscal cost. Based on these adverse experiences, it is imperative that financial system stability is maintained
for the interests of the public.
Financial stability is basically avoidance of financial crisis. Maintaining financial system stability
is one of the primary functions of Bank Indonesia, which is not less important compared to maintaining
monetary stability. Financial system stability is a prerequisite for monetary stability. This issue is in line
with Bank Indonesia’s mission “to attain and maintain stability of Rupiah by maintaining monetary stability
and promoting financial system stability to secure sustainable long-term national development.” However,
maintaining financial system stability is not the sole responsibility of a central bank. Rather it is also
mutual responsibility of relevant government authorities including Ministry of Finance, Financial
Supervisory Authorities, Deposit Insurance Corporation beside the central bank.
In accordance with the above, Bank Indonesia assesses and monitors trends and issues surrounding
stability of Indonesia’s financial system and provides recommendations to maintain stability of the financial
system. Results of such assessments and monitoring is laid down in a regularly updated “Financial Stability
Review” (the FSR). Unlike such other reports issued by Bank Indonesia, the FSR focuses on such potential
risks which may weaken stability of national financial system, and is more forward-looking orientation.
Every section of this report also describes the prospects of national financial system.
During the course of 2002, Indonesia’s financial system is relatively stable and is expected to remain
so in the years to come. However, alert needs to be maintained particularly on some pertinent issues
including delays in the recovery of loan quality and performance of the banking sector, as well as external
issues such as low growth in the global economy and the government budget deficit due to the huge
obligations from domestic as well as overseas borrowings.
personnel for their dedications, contributions and collaboration for the completion of this first edition of
Financial Stability Review. Finally, we will appreciate all advice, commentaries as well as critics from any
and all parties for further improvements of this review in the future.
Jakarta, April 2003
Indonesian financial system during the course of 2002 is stabilized. This is made possible by the
effective policies in stabilizing exchange rates and controlling inflation as well as the progress made
through the micro-prudential policies covering restructuring program of the banking sector as well as
improvement in banking supervisory and regulatory frameworks. However, certain aspects, the endogenous
and exogenous risks, need to be closely observed as they can potentially disturb financial system stability.
The weakening economy of the major trade partners of Indonesia is one of the driving factors
contributing to the slower growth of exports. As the results, exporting companies, particularly those
whose activities are financed by banks confront augmenting financial risks reducing their capacity to
pay their obligations in timely manner. Such condition is the major driving factor leading to decreasing
a quality of earning assets of banks.
Meanwhile, huge domestic fiscal obligations and international debts have prevented higher economic
and real sector growth. The yet to complete corporate debt restructuring also impedes domestic
corporations to expand their businesses and has brought in adverse impacts to the balance of payment
which may potentially prompt debt crisis and eventually jeopardizing stability of financial system.
Indonesia’s banking structure has not yet changed as the results of the banking crisis back in 1997
that led to the recapitalization of hard-hit banks, all of which have significant impacts to the economy.
Indonesia’s banking system is very much concentrated on the 13 large banks with combined assets of
74.9% from the total assets in banking system.
In general, the condition of the banking industry has been improving following the recap program
introduced since 1999. Aggregate ROE stays at 14.8% and CAR at 21.7%. However, the capitalization
capacity of the banks, particularly the recap banks, remains weak as the results of the low loan growth.
Main revenues of the 13 large banks are from bond coupons since their assets are mostly in the form of
recap bonds. Moreover, increased capital at some banks has not been able to absorb the potential
losses, particularly those arising from credit, market and operational risks. With the introduction of the
market risk capital charge, a number of banks will notice a slight capital decrease, although it will
remain above the minimum Capital Adequacy Ratio (8%).
In the course of 2002, the risks surrounding the banking system remain high and with stable trend.
Bank credit risks are high but decreasing. Meanwhile, market risks and banks’ liquidity risks are moderate
during the outbreak of the crisis in 1997, is mainly attributable to the assignment of such non-performing
loans to IBRA, while others are restructured and written off. The primary constraints in lending are: (i)
loan restructuring has been delayed due to non-conducive economic environment; (ii) low absorption by
real sector, particularly corporations, since most of them are still being restructured; (iii) low growth in
new lending, dominated only by small and consumers loans. Monitoring shall be focus on the increasing
possibility that restructured loans as well as non-restructured loans, sold by IBRA to banks, will new
non-performing loans. Stress test indicates that when NPL stays as high as 23.8%, the conditions that
will lead to solvability constraints in some large banks.
The market risks encountered by banking system during 2002 is relatively moderate with stable
trends. This is the result of IDR appreciation against the United States Dollar and the decreasing trend
of interest rates. In general the net open position of 14 large banks is in short position (up to 3 months)
such that the USD depreciation and the lower interest rates have brought positive impacts to their
capital. The short positions reflect bank expectations of declining trends in the interest rate. Banks may
conduct repricing strategy due to the macroeconomic changes. However, future exposure of market
risks, resulting from pressures against the Indonesian Rupiah due to market volatility and political
instability, must be watched.
Indonesian banks have adequate liquidity. This condition is reflected in the sufficiency of liquidity
of the 13 large banks and their independence from interbank call money. However, the funding structure
of some large banks, particularly state-owned banks is mostly in the form of corporate deposits (owned
by state-owned and large companies). In order to address such liquidity risk, the 13 large banks need to
balance their funding structure in terms of concentration type as well as maturities.
Meanwhile, there has been improved efficiency in national payment system, particularly
attributable to the successful implementation of Real Time Gross Settlement (RTGS). Under RTGS, risks
associated to settlement, liquidity and operations have been mitigated and are monitored in compliance
with international standards, i.e. Core Principles For Systematically Important Payment System. In
order to further improve efficiency and security of national payment system, future efforts shall be
focused on two primary strategies, namely: (i) minimizing moral hazards and (ii) optimizing policies
between security and efficiency considerations. Therefore, it is necessary to review the roles of Bank
Indonesia in the operations of the payment system and as lender of last resort. In addition, there are
needs for failure-to-settle mechanism in order to reduce systemic risks.
stability. Bank Indonesia also has drafted a blue print on Indonesia’s financial system stability including
policies and framework for Crisis Resolution, which is a prerequisite for the future financial stability.
Now that more defined and comprehensive policies are in place and with the effective coordination
between Bank Indonesia, Government and all stakeholders, a sound and more stable financial system
INTRODUCTION
1
T
he financial crisis that swept over Southeast Asia, Indonesia included, in 1997 has taught us a veryvaluable lesson concerning the importance of
maintaining stability of financial system. During the
past few years, financial system stability has always
been the primary agenda at national and international
levels. The year 1999 saw the establishment of an
international institute and an international forum,
namely the Financial Stability Institute1 and Financial
Stability Forum (FSF)2, intended to assist central banks
and other supervisory authority in strengthening their
financial system. Similar concerns have also been
indicated by IMF and World Bank, who then introduced
a Financial System Assessment Program (FSAP) in order
to strengthen the financial system of the country being
assessed.3
Meanwhile, there has been increasing number
of publications in the forms of books, articles and papers
as well as seminars and conventions discussing financial
crisis and financial system stability. In addition, there
is growing number of central banks creating a unit or
even groups dedicated to addressing financial system
stability issues and financial stability reviews.
Central banks need to maintain financial system
stability based on three primary reasons. Firstly,
financial institutions particularly banks have important
roles -as financial intermediaries and as a transmission
means of monetary policies- in the economy. These
institutions are significantly exposed to high risks
inherent in their operations. Therefore, financial
institutions constitute one of the instability factors most
harmful to the financial system. Secondly, all financial
crises have brought in catastrophic implications to the
economy, lowering economic growth and income. These
eventually create negative impacts to social and
political life if prompt measures fail to address the
crisis rapidly and effectively. Thirdly, financial
instability brings in very expensive fiscal cost in the
course of mitigating the crisis.
In this extent, Bank Indonesia has designated
financial system stability as a complimentary objective
to achieve price stability. Considering the importance
of financial system stability in the course of achieving
the primary objectives, Bank Indonesia is to give more
priority and attention to addressing this issue. In order
to achieve financial system stability, Bank Indonesia
has adopted four major strategies: (i) fostering effective
coordination and cooperation with others; (ii) improving
research and surveillance; (iii) strengthening regulations
and market discipline; and iv) establishing crisis
resolutions and financial safety net. These will be 1. FSI is established by Basel Committee on banking Supervision (BCBS) to
assist supervisory authorities in strengthening their financial system. For further details visit http://www.bis.org/fsi/index.htm. 2. FSF is meant to improve stability of international financial system
through exchange of information and international cooperation in the area of research and surveillance. FSF is composed of such members from relevant authorities (finance ministries, central banks, financial supervisory authorities) from 11 countries, as well as international organizations (such as IMF, World Bank, BIS, OECD), international committees and associations (Basel Committee on Banking Supervision / BCBS), International Accounting Standard Board (IASB), International Association of Insurance Supervisors (IAIS), International Organization of Securities Commissions (IOSCO), Committee on Payment and Settlement System (CPSS), Committee on Global Financial System (CGFS) and European Central Bank. For further details please visit http:// www.fsforum.org/home/home.html.
described in details in Chapter 2.
Furthermore, the function of maintaining
financial system stability is conducted by Bank Indonesia
through two major activities. First, by assessing and
monitoring any and all aspects affecting financial system
stability. The activities under this category are
attributable to crisis prevention. Second, by coordinating
and cooperating with relevant supervisory authorities,
particularly when dealing with crisis resolution.
Assessment of the financial system stability is
conducted by incorporating an early warning system to
monitor and analyze trends in the macro-prudential
and micro-prudential indicators4. The economic
macro-prudential indicators include figures associated with
economic growth, balance of payment, inflation,
interest rate and exchange rate ; the contagion effects,
and all other relevant factors. The micro-prudential
indicators include financial indicators such as Capital
Adequacy, Asset Quality, Management, Earnings,
Liquidity and Sensitivity to Market Risk (CAMELS). The
assessment basically contains identification and
evaluation of risks that may adversely affect financial
system stability and recommendations made to the
government and relevant authorities to carry out
actions necessary to address the matter. The analysis
and recommendations are documented and publicized
on regular basis by Bank Indonesia in a “Financial
Stability Review” (FSR).
The FSR has three basic characteristics: (i)
assessment on conditions and current developments in
the financial system; (ii) reviews are based on risks
which may adversely affect financial system stability;
(iii) a more forward-looking approach by presenting
assessments on the prospects of the financial system
for the year to come. With regard to these
characteristics, the format and focus of analysis of this
FSR may change from one edition to the next in line
with the prevailing conditions, issues, and trends
affecting the economic and financial system.
In general, this first edition of the FSR contains
three primary subjects as described below. Firstly, the
concept and practice at maintaining financial system
stability as presented in a short article entitled “The
Importance Of Maintaining Financial System Stability”
in Chapter 2. This concise article discusses the definition
and the importance of achieving and maintaining
financial system stability, prerequisites for stable
financial system, and the role of Bank Indonesia in
promoting financial system stability.
Secondly, external and internal factors that
adversely affect Indonesian financial system stability
are presented in Chapters 3 and 4. Chapter 3 contains
analysis on developments in the international and
national economies that may affect stability of national
financial system. This chapter also discusses in more
detail domestic financial issues covering foreign debts
and fiscal sustainability. Chapter 4 discusses in detail
the conditions, constraints and risks confronting the
banking system in Indonesia. This issue is very important
considering that the banking sector is the dominant
player – with 75% market segment – in national financial
system. This chapter also discusses structural issues
confronting the banking system including the remaining
high credit risks due to the slow pace of loan
restructuring programs, the low lending growth,
liquidity and market risks, and the performance of the
banking industry. Chapter 5 discusses in detail capital
and risks in payment system with focus on Real Time
Gross Settlement [RTGS] and clearing system. Chapter
7 provides the conclusion.
Thirdly, it contains four articles. The first article
is entitled “Redesigning Indonesia’s Crisis Management:
Lender of Last Resort and Deposit Insurance” (S.
Batunanggar). This article argues fundamental issues
on crisis management: (i) absence of comprehensive
and clearly defined crisis management policies; (ii) the
weakness of the blanket guarantee creating moral
hazards and adding potential to future financial crises;
and (iii) the obscure function of Bank Indonesia as
Lender of Last Resort in the events of systemic crisis.
To redefine Indonesia’s crisis management, two primary
steps are proposed: (i) to gradually replace the blanket
program to limited explicit deposit insurance; and (ii)
to put in place a more transparent policy regarding
lender of last resort for both normal conditions as well
as during systemic crisis. A more transparent LLR policy
will not only function as a more effective instrument
in addressing crisis management but will also put in
place more defined accountability thereby increasing
credibility of central bank, reducing political
interventions and moral hazards, and encouraging
market discipline in order to eventually encouraging
financial system stability.
The second article, “Market Risks In Indonesian
Banks” (by Wimboh Santoso and Enrico Hariantoro)
compares the results of CAR calculation to market risk
between the standard model BIS and the alternative
models, which uses the Exponential Weighted Moving
Average (EMWA) both have been widely used by banking
practitioners. This review is intended to measure as to
how far market risk will adversely affect Indonesia’s
banks in terms of their capital condition. A significant
decline of capital would adversely affect the stability
of Indonesia’s financial system. This review will give
some pictures of how far banks would benefit from
lower capital charge if internal model is applied. This
review proves that the incentive obtained by banks will
be very much dependent on the volatility of the risk
factors. The higher the volatility, the higher capital
charge is. Based on data on volatility of exchange rate
and interest rate, this review concludes that
incorporation of market risk will not reduce a bank’s
CAR to a level below the minimum threshold and
therefore will not create distortions which would
otherwise impair financial system stability. In addition,
application of internal model will generate lower capital
charge considering that volatility of Indonesia’s
exchange rate and interest rate are relatively lower.
The third article, “Empirical Analysis on Loan
Migrations in Indonesia’s Banking Sector” (by Dadang
Muljawan), looks into the relations between industries’
performance and the dynamic lending at certain banks.
From the statistics, two interesting phenomena were
found. Firstly, industrial performance significantly
affects credit migration process. Secondly, there is an
irreversible process in credit migration. This analysis
will provide more analytical information for the
supervisory authority in evaluating banking risks and
efficacy of external oversight.
The last article “New Basel Capital Accord: What
And How It Affects Indonesia’s Banking Sector” (by Indra
Gunawan, Bambang Arianto, Indira & Imansyah),
explores the New Basel Accord and its implications on
FINANCIAL SYSTEM STABILITY
2
LESSONS LEARNT FROM THE 1997 CRISIS
T
here are two most important lessons learned fromthe 1997 crisis. Firstly, the crisis was very
complicated to resolve. And secondly, it was very costly.
The fiscal costs borne by the government for
restructuring problem banks is huge, at 51% of annual
GDP. Indonesia’s crisis is the second worst, after
Argentina crisis (1980-1982), which is 55% of annual
GDP. The crisis not only devastated the national
economy but also affected social and political stability
in Indonesia. However, the crisis has also fostered a
realization of the importance of maintaining a sound
financial institutions and a stable financial market.
Basically, the crisis was caused by two factors.
Firstly, the weak fundamentals of Indonesia’s economy
coupled with inconsistent policies (internal factors).
Secondly, the contagion effects of the financial crisis
started in Thailand on July 1997 (external factors). In
general, the financial system fragility was initiated by
huge un-hedged foreign debts by corporations,
imprudent lending activities, violation of the legal
lending limit to affiliated parties, poor risk management
and governance, and weak bank supervision.
FINANCIAL SYSTEM STABILITY: WHAT AND WHY IS IT IMPORTANT?
Basically, the term financial system stability or
financial stability pertains to the avoidance of financial
crisis (MacFarlane [1999] and Sinclair [2001]). To be
more specific, financial system stability means the
stability of financial institutions and financial markets
in the financial system (Crockett, 1997). Mishkin (1991)
defines financial crisis as disruption to financial markets
where adverse selection and moral hazards worsen so
that financial market is unable to channel funds
efficiently to parties having the best potential
productivity to invest1. From these definitions, it can
be concluded that a stable financial system will create
stable financial institutions and financial markets
capable of avoiding a financial crisis that may adversely
affect national economic infrastructure.
There are three main reasons as to why this
financial system stability [FSS] is important. Firstly, a
stable financial system will create trusting and enabling
environment favorable to depositors and investors in
investing their money in financial institutions as well
as to secure interests of small depositors. Secondly, a
stable financial system will encourage efficient financial
intermediation which will eventually promote
investment and economic growth. Thirdly, a stable
financial system will encourage an effective operation
of markets and improve distribution of resources in the
economy.
On the contrary, an unstable financial system
will bring in harmful implications, such as higher fiscal
cost to resolve troubled financial institutions and
decreasing of gross domestic product due to currency
and banking crisis.
A series of developments which took place in the
past few years have placed maintenance of financial
system stability as a top agenda of the central bank,
supervisory authorities as well as the government,
namely: (i) significant growth in financial transactions;
(ii) growing number of non-bank financial institutions
including the products and services they offer; (iii)
increased complexity and risks in banking activities; and
(iv) huge fiscal cost required to remedy the banking crisis.
In addition, there are other constraints such as
changes of policies, financial instruments and others
faced by banking sector as well as real sector, all of
which will make the duty of maintaining financial
system stability to be complicated.
CORE COMPONENTS OF A STABLE FINANCIAL SYSTEM
The stability of financial system depends on five
components which are associated one with another,
namely: (i) a stable macroeconomic environment; (ii)
well governed financial institutions; (iii) efficient
financial market; (iv) sound prudential oversights; and
(v) safe and reliable payment system (MacFarlane,
1999).
Crisis may be prompted by various risks originating
from the elements in the financial system. The process
leading to a financial crisis is described in Box 1.
Financial system stability can be maintained by
improving resilience of financial institutions and money
market against external volatility. A number of
measures may be taken, such as by applying prudential
standards and good corporate governance within
financial institutions and capital markets, conducive
monetary and fiscal policies, and real sector capable
of promoting economic growth.
Considering that internal weakness within
financial institutions and fragility in capital market,
crisis management policy needs to be put in place.
Therefore, a safety net mechanism and contingency
plan are required to address crisis. For this purpose,
central banks play a very important role in maintaining
stability of financial system, as well as in taking
preventive and corrective actions against crisis. This is
due to the fact that powers to regulate and supervise
as well as to enforce policies of financial institutions
are held by central bank.
CENTRAL BANK’S ROLE IN FINANCIAL SYSTEM STABILITY
Safeguarding financial stability is a core function
of the modern central bank, no less important than
maintaining monetary stability (Sinclair, 2001). Both
are closely correlated and affected one another.
Effectiveness of financial policies will only manifest
itself in an environment in which there is sound financial
system because financial institutions serve as medium
for monetary policy transmission.
There are two major approaches generally
adopted by central bank in maintaining financial system
Real Sector
Monetary Fiscal
International Economy
Financial Institutions, Markets and Financial Infrastructure
Figure:
INTERACTIONS WITHIN A FINANCIAL SYSTEM
Financial crisis may originate from problems
existing within any of the various correlating
components within the financial system such as
financial institutions, banks, non-bank financial
institutions or capital market (first ring); or may
be caused by one or a combination of problems
within the real sector, fiscal or in the payment
system (second ring). Nevertheless, a crisis may also
be spark by some external factor with its contagion
effect that spillover Asia in 1997 (third ring).
Learning from the Asian and Indonesia crisis in
1997, instability of financial system may be occurred
through three major phases (Mishkin, 2001).
Firstly, impaired public confidence in the
financial system. This may be caused by various
problems in the economy or in financial system
Box 1.
CAUSES AND PROCESS OF FINANCIAL CRISIS
such as worsening financial condition of banks,
increased interest rate, decreased share prices and
increased uncertainty.
Then in the second phase, impaired confidence
of customers and investors toward the economy and
the IDR result in the depreciation of the IDR which
then prompts currency crisis.
And finally, such currency crisis would entail
crises of the banking sector prompted by depositors
drawing up their deposits (systemic bank run) which
results in liquidity problem to banks. In addition,
banks would sustain losses from non-performing
loans particularly those of corporations with
un-hedged overseas borrowings. The cost of overseas
loans borne by corporations will skyrocket due to
the depreciation of the IDR against the USD.
The twin crisis (currency and banking crisis) if
not effectively addressed, will result in even wider
complications, as well as social and political
instability.
Consequently, the Government will have to pay
huge of fiscal cost (in the case of Indonesia, 51% of
its Gross Domestic Product) in order to rescue its
banking system. The huge fiscal cost will eventually
be borne by the public, the taxpayers. In addition,
the prolonged financial crisis will bring in adversely
impacts to national economy, such as lower
economic growth and output aggravated by financial
discipline similar to that adopted by Reserve Bank of
New Zealand. Secondly, reliance on regulations. The
latter approach is adopted by wider supervisory
authorities or central banks in both developed and
developing countries. During the past few years, there
has been growing awareness that both approaches need
to be applied more consistently in order to achieve a
better stability in the financial system.
In practice, the definition of financial system
stability [FSS] varies among central banks. Most central
banks state it explicitly in their statutory regulations.
But some rely on joint arrangements such as those
among Bank of England, Financial Services Authority
and HM Treasury.
In general, the role of central banks in stabilizing
financial system covers three primary activities:
a. Research and surveillance
Trends and risks, both internal and external,
affecting the financial system need to be closely
assessed and monitored. Research and surveillance
activity are intended to produce a policy
recommendation for maintaining financial system
stability.
b. Payment systems oversight
Regulation and oversight are required to ensure a
safe and reliable payment systems. The adverse
risks to the payment system, which may lead to
systemic failure and financial crisis, may be
avoided.
c. Crisis resolution
While the latter two activities are related to crisis
prevention, the third activity is taken by the
central bank to address crisis when it actually
occurs. Usually two instruments are used: (i)
providing lending facility to the financial
institutions by the central bank as the lender of
the last resort (LLR); and (ii) to provide deposit
insurance. LLR facilities by central bank may be
given either during normal situation as well as
during systemic crisis. During normal situation,
such facility is provided only to address liquidity
problem for illiquid but solvent banks, and with
sufficient collateral. During systemic crisis, LLR
facility is provided to restructure the banking
system.
CENTRAL BANK’S ROLE IN FINANCIAL SYSTEM STABILITY
Currently, there is no formal legal basis stating
about Bank Indonesia’s function in maintaining
financial system stability. The function, in fact, is
performed simultaneously with its core tasks of
performing monetary policy, bank supervision and
payment system.
Following the 1997 crisis, there has been growing
awareness in the importance of maintaining financial
system stability. In line with the introduction of Law
No. 23 of 1999, Bank Indonesia incorporates the
financial system stability aspect in its mission: “to
achieve and maintain stability of the Indonesian rupiah
through maintaining financial stability and promoting
of financial system stability for sustainable national
development.” In line with its mission and vision, Bank
Indonesia has formulated a framework that contains
the goals, strategy and instruments required for
maintaining the financial system stability.
The roles of maintaining monetary stability and
Both roles are aiming at the same objectives which is
price stability.
In order to achieve a stable financial system,
Bank Indonesia adopts four strategies, namely: (i)
implementing regulation and standards to foster market
discipline; (ii) intensifying research and surveillance;
(iii) improving coordination and cooperation; and (iv)
establishing safety net and crisis resolution framework
(see Box 2).
CONCLUSIONS
Stability of financial system much depends on the
soundness of financial institutions, particularly banks
that dominate the financial system. This will also rely
on the effectiveness bank supervision. Therefore, it is
imperative to have an independent and competent bank
supervisor capable of assessing bank risks and taking
preventive and corrective actions on the problems faced
by banks effectively.
To achieve a stable financial system, effective
coordination must be in place among relevant
authorities. Therefore, there must be a clear division
of roles and responsibilities of each authority. More
importantly is the commitment of the stakeholders to
cooperate in achieving and maintaining financial system
stability. In addition, effective supervision and
consistent law enforcement will foster market players
In order to achieve financial system stability,
Bank Indonesia adopts four strategies:
(1) Implementing regulations and
standards. Consistent implementation of
international prudential regulations and standards
are required as a sound basis for both regulator
and the market players in conducting their
business. In addition, consistent discipline of the
market players need to be fostered.
(2) Intensifying research and surveillance.
Development of financial system the relevant
aspects affecting its stability should be assessed
and monitored. Risks which may endanger
Box 2.
BANK INDONESIA’S STRATEGY IN MAINTAINING
FINANCIAL SYSTEM STABILITY
financial system stability are measured and
monitored by incorporating an early warning system
which is composed of micro-prudential and
macro-prudential indicators. Research and surveillance are
aimed at producing a policy recommendation for
maintaining financial system stability.
(3) Establishing safety net and crisis
resolutions framework. Safety net and crisis
resolutions framework and mechanism are required
for resolving financial crisis, once it occurs. These
include policy and procedures of the lender of the
last resort, and the deposit insurance which will
replace the blanket guarantee. Currently, there is no
An active involvement in creating and maintaining a sound and stable national financial system.
Financial System Stability (FSS) Framework
Achieving and maintaining the stability of Rupiah value by maintaining monetary stability and promoting financial system
stability for sustainable national development.
Implementing Regulation & Standards Intensifying Research & Surveillance Improving Coordination & Surveillance
•Regulation & Standard e.g
Basle principles, CPSIP, IAS, ISA, dsb.
• Market Discipline
• Early Warning Systems
• Macro prudential Indicators • Micro-Prudential Indicators (aggregate) -Internal Coordination – External Coordination & Cooperation
• Lender of last resort
- Normal - Systemic Crisis • Crisis Resolution
- Safety Nets
Establishing Financial Safety Nets & Crises
Resolution
Instruments FSS Objective BI ’s Mission
a clear legal framework for crisis resolution.
According to Law No. 23/1999, Bank Indonesia is
only allowed to provide lending to address liquidity
problem faced by banks during normal times, but
not for systemic crisis situation. Therefore, there is
an urgent need to formulate this policy in the law
which clearly stipulates the roles of Bank Indonesia
as the lender of the last resort in the events of crisis.
(4) Improving coordination and cooperation.
Coordination and cooperation with related gencies
is very crucial especially in crisis times. Usually, the
coordination was formed in a national committee
which is composed of the Bank Indonesia Governor,
Finance Minister and related agencies including the
Head of Deposit Insurance Agencies to be
EXTERNAL FACTORS
3
INTERNATIONAL ECONOMY
A
long with globalization in economics, Indonesia’s financial system will be affected by instability in regional and global economies. It occurs through international trade and money market channels.During the last few years, global economy tends toward a downturn condition. This is provoked by decreasing economic performances of the industrial countries in the world, namely the United States and Japan. Ultimately, this situation will influence Indonesia’s financial system considering that the United States and Japan are the largest markets for Indonesia’s exports. Indonesia’s trade account states with the United States and Japan reach 17.44% and 22.99% respectively of total exports. In addition, both countries are also primary lenders. The slowdown condition of those industrial countries is expected to continue
following terrorists’ attacks at some places within the United States in 2001.
The declining economic conditions of these two major economies was indicated by decreasing Gross Domestic Products (GDP), increasing in inflation, and the current account deficit.
FIGURE 3.1:
NON-OIL AND GAS EXPORTS By COUNTRY OF DESTINATION
FIGURE 3.2:
US and JAPAN : GDP-INFLATION
FIGURE 3.3:
US andJAPAN : CURRENT ACCOUNT
-10 20 30 40 50 60 70 Percent
U S ASEAN Japan
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Inflation (Percent) GDP (Percent)
1995 1996 1997 1998 1999 2000 2001 2002 (2) (1) -1 2 3 4 8 (6) -(4) (2) 2 4 6
GDP-US GDP-Japan Inflation-US Inflation-Japan
Miliar USD (140) (120) (100) (80) (60) (40) (20) -20 40 60
1995 1996 1997 1998 1999 2000 2001 2002
The continuing recession in United States and Japan also affects their capital markets adversely. This was illustrated by the fall in composite indices of the Dow Jones and Nikkei. In fact, such conditions should have encouraged capital inflows to Indonesia. Unfortunately, it is not the case, since Indonesia’s investment environment is not yet conducive, as evidence by a decision of a restructured corporation in Japan to close their factories in Indonesia. Such policies
truly bring negative impacts to the money market due to the decreasing of bank’s lending portfolio in respect to Japanese corporations.
DOMESTIC ECONOMY
Monetary Conditions
During 2002, monetary condition is quite conducive as reflected by lower interest rate and stability of exchange rates. Hopefully, such condition will prevail so as to stimulate economic growth in 2003. Unlike the condition in 2000 and 2001, the SBI interest rate tends to decrease in 2002. This condition indicates that Bank Indonesia has started to ease its monetary policy as inflation rate is still in control, while the rupiah exchange rate remains relatively stable. However, the lower trend of SBI interest rate is not immediately followed by a reduction in lending rates. The declining trend of SBI interest rate will hopefully encourage more lending to real sectors. In spite of such increase in lending, the amount is relatively small and is mostly given to small and medium enterprises. This reflects banks’ caution in lending and At the end of 2002, United States and Japan’s
GDP slightly increased by 2.1% and 0.5% respectively. This was mainly due to the lower discount rate policies introduced by monetary authorities of both countries. Compared to 1999-2000, their GDP in 2002 has not fully recovered and monetary authorities continue their low interest policies.
The fact that both economies were not improved in 2002 caused Indonesia’s exports to decrease. This adversely affect borrower’s financial performance which will eventually cause a negative impact on banks’ assets quality.
Figure 3.4:
US and Japan : Discount interest Rate and DJIA & NIKKEI Indices
FIGURE 3.5:
DIRECT AND PORTFOLIO INVESTMENTS
Percent 10,000 -5,000 15,000 20,000 25,000
1999 2000 2001 2002
U S Japan DJIA NIKKEI
-1 2 3 4 5 6 7 2003
Million USD Million USD
0 500 1000 1500 2000 2500 3000
1998 1999 2000 2001 2002
the low level of absorption by corporations due to ongoing restructurings.
The lower interest rate in fact is not followed with migration of third party capital to capital market or property sector. However, there are indications that banks’ third party funds have migrated to mutual funds.
relatively secure.6 However, we can expect to see
further pressures in fiscal during 2003 and 2004, particularly in connection with budget deficits. Debt to GDP ratio decreased from 88.4% as of June 2002 to 70.4% as of December 2002. However, Indonesia’s debt ratio was much lower than that of other countries such as Argentina (49.4%), Mexico (69.1%) and Turkey (54.2%) before these countries descended to financial crisis.
If the debt is not carefully managed, debt crisis will adversely affect balance of payment and financial performance of the Government. Eventually the condition will also adversely affect financial system stability. One potential issue for the government is refinancing of government bonds (refinancing risks), considering the huge amount of the bonds to mature within a few years (IDR 36.3 trillion in 2004 and IDR 45.8 trillion in 2007). Maturity dates of government bonds prior to and after re-profiling is shown in Figure 3.8.
FIGURE 3.6:
DOMESTIC ECONOMIC INDICATORS
FIGURE 3.7: JAKARTA COMPOSITE and PROPERTY SECTOR INDICES
6 Policy Analysis and Planning Division (2002), “Indonesia’s Medium-Term Fiscal Sustainability.” Rp/USD Percent -2,000 6,000 8,000 10,000 12,000 14,000 4,000 0 10 20 30 40 50 60 70 80
1998 1999 2000 2001 2002
Exchange Rate SBI (%) Interbank (%) Credit /GDP Ratio (%)
2003 0 100 200 300 400 500 600 700 800 0 20 40 60 80 100 120 140 160 180 200
1996 1997 1998 1999 2000 2001 2002
J C S I P S I
2003
Jakarta Composite Stock Index Property Stock Index
Government’s Finance
Bank Indonesia’s review on medium term fiscal resilience indicates that fiscal condition is
FIGURE 3.8:
MATURITY PROFILE OF GOVERNMENT BONDS
Before Reprofiling After Reprofiling Trillion Rp
2002 200320042005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Government Bonds
From the Government Budget [APBN] simple stress test, re-profiling of Government bonds has not fully taken pressure off the government financial condition. There are potentials for budget deficit which will eventually adversely affect the government’s ability in paying principal and interests of government bonds.
In order to address the obligation to pay principal and interest of maturing government bonds, issued in connection with banks re-capitalization program, the Government restructure of maturities and interest rates of the government bonds. As for an initial step, the government re-profile the government bond in 4 State-Owned Banks portfolio involving a sum of IDR 22.8 trillion.
By considering the process and other fiscal assumptions, the stress test shows a negative difference between new debt and maturing debts at 1.37% of GDP or amounting to around IDR 29 trillion in 2004. The condition needs to be resolved with another re-profiling and other strategy such as conducting buy back, boosting additional income from selling assets etc. On the other hand, re-capitalization banks should work in efficient manner and also improve their capital by this means reducing dependence on government financial support.
A developed and efficient government bond market will encourage liquidity. The liquidity is needed to further improve market confidence and capability reduce risks if there is negative shock to the market. Otherwise, market participants will rely on Bank Indonesia’s liquidity support when crisis occurs. The role of Bank Indonesia should be limited only in crisis condition which have systemic impact to the financial
sectors and economy. Sound and liquid government bond market will help government in reducing refinancing risks and arranging bonds maturity profile.
Maintaining the government’s ability to pay recap bonds’ principal and interest at maturing date is critical. Bonds sold at high discount rate may reflect an overcrowded of bonds in similar maturity, investors’
FIGURE 3.9:
Fixed Rate GOVERNMENT BONDS vs SBI
0 20 40 60 80 100 120
Average Fixed-Rate SBI 1 month
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2 0 0 2
Government Bond Price S B I (%)
0 2 4 6 8 10 12 14 16 18 Table 3.1
Stress Test on Goverment budget (APBN) 2003-04
State Revenues 17.76 17.33 15.70
State Expenditures 20.11 19.10 15.10
Primary Balance 3.04 2.45 4.00
Surplus (+) / Deficit (-) -2.35 -1.77 0.60
A. Financing of Government Debentures
1. Maturing Government Debentures -1.18 -2.73
2. Reprofiling of Government Debentures
at 4 State-Owned Banks 0.00 1.06
Sub Total -1.67
B. Overseas Borrowings
a. Program Loans 0.54 0.53
b. Project Loans 1.16 0.97
Sub Total 1.70 1.50 1.80
C.Installments of Overseas Loan Principal -0.76 -0.89 -2.10
Financing (A+B+C) 1.77 -1.97
% of GDP
2002 2003 2004
choice and the issuer financial conditions. It is therefore necessary to maintain sound financial condition to ensure timely payment of bonds’ principal and interest. This will increase market confidence and maintain a more liquid market for government bonds.
Post-crisis financial condition of the Government is not quite promising. At the moment, the Government carries huge burden from both domestic and foreign borrowings. Such situation is worsened by the limited ability to boost revenues considering the non-conducive domestic and international economic environments. Therefore, the future prices of recap bonds will rely on the Government’s ability to improve its financial performance as well as performance of the economy as a whole.
The huge bonds’ principal and interest payment obligations which will prevail in 2004 through to 2008, coupled with budget deficits, may give probability of government debt crisis. The government needs to adopt more stricter fiscal discipline while striving to increase revenues. The re-capitalization banks also need to support government by operating in more sound governance and obtaining profitable financial condition to avoid another possibility of government debt and banking crisis.
Foreign Debts
Foreign debt crisis will adversely affect stability of financial system. Increasing commercial borrowings from overseas lenders under binding contracts without strong repayment capacity, and with uncertainties in social, political, economic and finance situations, may impairs international confidence toward Indonesia’s economy. This situation will damage Indonesia’s rating.
As the implications, lenders will demand higher interest rate as risk premium raising, thus requiring us to mobilize more and more US$ to repay the floating interest obligations as well as for securing new loan commitments. Consequently, there will be high demands for US$ funds and US$-denominated deposits at local banks will be rushed. Such situation will surely adversely affect financial system stability, similar to that which swept throughout Asia and in Argentina.
Market Confidence
The confidence level of investors and rating companies on Indonesia’s financial solvability remains low, as shown by the rating made by Standards & Poor. Foreign investors’ perception on Indonesia’s financial condition is still risky. Yield spread between Indonesian government’s Yankee bonds and US treasury bonds as of December 2002 is relatively wide, namely 266.07 base points. Such condition results in relatively higher risk premium for Indonesia’s government as well as private foreign borrowings. In addition, (lower) rating and (higher) risk premium may result in reduced demands for Indonesian Rupiah, thus adversely affect Rupiah exchange rate which will eventually increase market risk.
FIGURE 3.10:
Indonesia Government Bonds Rating and Yields
banks, advancing technology in production and focusing on productive investments particularly on export-oriented activities. Approval given to the proposed rescheduling of Indonesia’s debts in the amount of US$ 5.4 million during Paris Club III on 12th April 2002 is one
such effort to address the potential risk of debt crisis in Indonesia.
debts. Although, the private debts ratio to export account for 30.8% which exceeding the benchmark level of 20%. The amount of exposure has been decreasing since quarter 4 2002. Moreover, most of the debts have been restructured and anticipated. The projected debt repayment in 1st quarter of 2003 is to
be at US$ 3.4 billion. This will expectedly increase demand for United States Dollar. However, debt repayment realization is relatively small due to the fact that most borrowings have been estimated and the withdrawal will be made only to meet working capital needs of the corporations.
Source : Bloomberg
S&P rating convertion : 1=SD, 2=C-, 3=C, 4=C+ etc. 15=BB, 20=A- (under BB is speculative)
S&P Yield SD Yield A-CCC+ BB 0 2 4 6 8 10 12 14 16 18 20
Jul Apr Oct Dec Jan Jan Mar May Mar Mar Sep Apr Oct May Nov Apr Sep Dec 92 95 97 97 98 98 98 98 99 99 99 00 00 01 01 02 02 02 0 2 4 6 8 10 12 14 16
Debt Service Ratio
Government 15% 11% 10% 10% 7% 11% 11%
Private 21% 33% 48% 47% 34% 31% 20%
Indonesia 36% 45% 58% 57% 41% 41% 31% 20%
Total Debt to
GDP ratio 49% 62% 146% 105% 94% 91% 70% 50%-80%
Ratio 1996 1997 1998 1999 2000 2001 2002 Benchmark Table 3.2:
Foreign Debt Indicators
Maturity Profile
Maturity profile of foreign debts is not yet reasonable however it will not bring in significant adverse impacts to financial system stability since the corporate apply more prudential foreign borrowing activities. Most of private debts (88%) are corporate
As for Indonesia’s bank foreign borrowing, there are two banks issue bonds denominated in foreign currency during 2002. Proceed from such bond issue is primarily used to repay principal and interest of existing foreign borrowings (exchange offer). Generally, Indonesia banks adopt the refinancing pattern to repay their foreign currency borrowing e.g. issue other short-term bonds. Learning from 1997 crisis, although such bonds will not bring much problem in short-term period,
FIGURE 3.11: MATURITY PROFILE OF CORPORATE FOREIGN DEBT
2 0 0 2
Million USD Million USD
2 0 0 3
Bank NBFI Corporate 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 0 200 400 600 800 1000 1200
but in the long run they may adversely affect banking sector and financial systems.
With respect to that, some factors which might adversely affect such foreign currency—denominated bonds issued, must be monitored, such as (1) uncertainty of international economic condition; (2) the relatively low international confidence level on Indonesia’s economy as shown by the low rating; and (3) the relatively low profitability of banking sector. In addition, banks need to be cautious of their foreign currency borrowings by obtaining hedging instruments in order to reduce market risk, considering the fact that banks’ revenues are mostly in Indonesian Rupiah.
However, there are constraints such as insufficiency data regarding private foreign debts. Learning from 1997 crisis, the condition will result in ineffectiveness of monitoring activity such that the risks and instability factors against financial system stability, particularly from foreign debts, cannot be adequately and timely anticipated. Therefore, foreign debts need to be managed in prudential manner and monitored carefully.
REAL SECTOR CONDITION
Small and Medium Enterprises
Loan restructuring process faces with significant obstacles as real sector has not recovered yet. This condition will repress financial system stability.
After recapitalization process, Indonesian banks have not found difficulties in obtaining funds to finance their lending. This is reflected in the increased liquidity in primary reserve (cash, minimum demand deposit and SBI), secondary reserve (trade bonds, inter bank call money) and tertiary reserve (investment bonds).
In fact banks are still reluctant to lend due to the fact that banks are still facing some constraints, among
BNI Cayman Island B- 145
-BNI KP CCC 150 728
Medco Energy Int’l B+ 100 766
Indofood B 280 791
Bank Mandiri CCC 125 703
Telkomsel B+ 150 615
Source: Bloomberg
Rating O/S (Million US$) Yield Spread Table 3.3
Indonesia Corporate yankee Bonds (Dec 2002)
There is a significant risk in such corporate bonds issued overseas against financial stability, due to the volatility of the exchange rate. In addition, most of debts are not fully hedged. Such condition might trigger corporate debt crisis. Eventually, corporate crisis – most of them were financed by banks – will have contagious effect to the banking sector. This was what happen in some east Asia countries, including Indonesia, during the 1997 crisis.
In order to improve effectiveness in foreign debt monitoring, Bank Indonesia has put in place prudential policy and mechanism for monitoring foreign debts.
Figure 3.12
Loans to SME and Non-SME
Small - Scale Enterprise Loan Non Small - Scale Enterprise Loan Trillion Rp -50 100 150 200 250 300 350 400 450
2 0 0 1
Sep
Dec Mar Jun
7 IBRA Report, September 2002.
others, relatively higher non-performing loans, higher risks in real sector -particularly corporations with high debt to equity ratio- and limited information regarding potential borrowers. In addition, banks’ preference in portfolio investments has changed to less risky investment such as placements in SBI, Government Bonds and inter bank money market.
will adversely affect bank’s performance improvement. Therefore, providing loans to small and medium enterprises is one of the options to accelerate economic recovery and to improve banks’ lending portfolio.
In addition, new loans growth was still low because most of large companies restructuring at IBRA were incomplete. The process shows that out of the IDR 369.5 trillion of loans transferred to IBRA, only IDR 19.9 trillion have been restructured, while IDR 17.1 trillion have been fully settled.7
Significant growth in new loans may be expected to occur after completion of the restructuring such corporations. In fact, the restructuring has not gone very well and time consuming due to various constraints particularly uncertainty of business and legal process. Corporate loans dominate banks’ portfolio. Delays in the recovery of real sector particularly corporations
However, it must be noted that such strategy poses risks as banks have insufficient experience in providing loans to small and medium enterprises and time consuming.
As of the third quarter of 2002, lending to small and medium enterprises accounted for IDR 24.6 trillion, which was 41.8% of the total new lending. For the same period, private national forex banks were the biggest lenders to SME, followed by regional development banks and state owned Banks, contributing 12.9%, 10.1% and 6.2% respectively. This tendency needs to be monitored mainly because SME debtors need technical or management assistance as well as marketing training of which not all banks can provide.
SME’s non-performing loan was still low (4.5%). Consumption loan dominated SME lending, which might increase demands for goods and services at local as well as international market. On one side, increased demand would generate enlarged goods and services Q II 2002 Q III 2002
State Bank Forex Private Bank Regional Development Bank Joint-venture Bank Foreign Bank Percent -5 0 5 10 15 20 Non-Forex Private Bank Figure 3.13
LENDING GROWTH TO SME BY TYPE OF BANKS
Figure 3.14
SME LOANS BY TYPES OF BUSINESS USES
Working Capital Loan 43%
Investment Loan 11% Consumer Loan
fact that the figure was still higher than those of other sectors. At the end of 2002, non agriculture and mining sector’s performance showed some improvements. However, the improvement was still accompanied with high non-performing loans in non agriculture and mining sectors, particularly from manufacturing. Considering the importance of non agriculture and mining sectors role, particularly manufacturing sector in domestic economy, the following box 3 illustrates performance of pulp and paper industry.
inflows from international market which, if not properly managed, may adversely affect balance of payment. On the other side, increased demand created business opportunities for companies in order to improve their financial performance.
Pulp and Paper Industry
Due to the 1997 crisis, agriculture and mining sector contribution to GDP decreased, in spite of the
FIGURE 3.16 NPL by SECTOR
10
2001 2002
Agriculture Mining
Industry Electricity
Construction Trading
Transportation Business Services
Social Services Others
-20 30 40 50 60
Percent Figure 3.15
GDP BY SECTORS TO TOTAL GDP
Percent
-2 4 6 8 10 12 14
29 30 31 32 33 34 35 36
Mining & Agriculture Non Mining & Agriculture Percent
Pulp & paper industry was considered as a risky
business. Such that 7 out of 10 pulp & paper companies
are indebted to banks in the amount of IDR 4,136,577
million. In 2000, 97% of the total outstanding loans
given to this industry were restructured. Unfortunately
however, restructuring program is low because of the
following issues:
• Poor restructure analysis conducted by banks, such
failure to assess borrowers’ cash flow capacity,
individually or group.
• Lack of transparency nor cooperation in disclosing
of their financial conditions;
• Low productivity and decreasing revenues due to
lower prices of their products in markets,
accompanied by increasing cost of goods sold;
• Worsening financial condition due to huge
indebtedness, interest and other expenses caused by the Rupiah depreciation against the United
States Dollar.
Yet, in the future, pulp & paper industry will face other challenges, specially low paper consumptions in
Asia (other than Japan) compared to United States,
Box 3.
Pulp and Paper Industry
Japan and Europe. On the other hand, price of raw
material is gradually increase since their HPH (forest
exploration rights) cannot supply adequate raw
material. For illustration, in 1999 group’s own sources
fully supplied raw material requirements, but in 2000
they only contributed 40% of companies demand, and
this generate increases in the log prices.
From 1993 up to June 2002, the average gearing
ratio of 5 pulp & paper companies’ financial statements
had increased. Such increase indicates that this
industry depends more on third party financing instead
of self-financing. On the other side, the deteriorating
of pulp & paper market will weaken most pulp & paper
companies’ revenues.
3,000
2,000
1,000
-(1,000)
(2,000)
(3,000)
Total Debt/Equity Long Term Debt/Equity Total Debt/Total Asset
Dec Dec Dec Dec Dec Dec Dec Dec Dec Jun
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Percent Percent
120
100
80
40
-(20) 60
INDONESIA’S BANKING INDUSTRY
4
THE STRUCTURE OF BANKING INDUSTRY
Indonesia’s financial system stability relies heavily on
the banking industry covering of about 90% of total asset
of financial system. Similarly, the banking system is
dominated by 13 large banks, including 10 recap banks,
represent 74.8% of the total assets of banking industry.
(see Table 4.1)
Therefore, ensuring soundness of these large
banks is the key in maintaining stability of banking
system and financial system. The analysis in this report
is focused on the large banks using data as of December
2002.
ASSETS STRUCTURE
Assets of large banks is largely dominated by
marketable securities accounting for 45.1% while
portion of loans is only 29.1% of total assets of the
large banks as of December 2002. The biggest part
(95.7%) of such marketable securities is recap bonds
(see Figure 4.2). Figure 4.1.
TOTAL BANKS & ASSETS
Trillion Rp
-50 100 150 200 250 300
Number of Bank
Total Asset Number of Bank
0 200 400 600 800 1,000 1,200
1995 1996 1997 1998 1999 2000 2001 2002
SELECTED ITEMS
Table 4.1.
SELECTED ITEMS OF BANKS BALANCE SHEET
Assets
Bank Indonesia 153.8 103.5 67.3 134.3 94.0 70.0
Inter-bank Placement 124.6 55.8 44.8 149.4 63.9 42.8
Marketable Securities 395.4 374.6 94.8 425.7 406.2 95.4
Loans 371.1 241.5 65.1 316.0 190.8 60.4
Non-performing loans 33.2 19.7 59.3 43.4 22.2 51.1
Total Assets 1112.2 830.6 74.7 1099.7 822.4 74.8
Liabilities
Deposits 835.8 634.2 75.9 797.4 606.9 76.1
Inter bank borrowing 81.360.4 74.2 93.6 70.7 75.5
Provision for Loan Losses (39.1) (26.4) 67.5 (44.8) (26.7) 59.6
Paid-Up Capital 96.4 71.7 74.4 88.1 66.8 75.8
Donated Capital 188.9 188.8 99.9 188.9 188.9 100.0
2 0 0 2 2 0 0 1
Total Bank Large Bank Share Large Bank Total Bank Large Bank Share Large Bank
(Trillion Rp) (Trillion Rp) to Total Bank (%) (Trillion Rp) (Trillion Rp) to Total Bank (%)
Figure 4.3. To
