bank indonesia, financial stability review i, june 2003
TRANSCRIPT
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Financial Stability Review
June 2003
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This Financial Stability Review(FSR) is one the reports Bank Indonesiaprovides 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.
Published by:
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 Indonesias 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
Fax: (+62-21) 2311 672
Email: [email protected]
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
a stable financial system
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fsrFinancial Stability Review
No. 1, June, 2003
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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 BANKS ROLE IN FINANCIAL SYSTEM
STABILITY, 5
CENTRAL BANKS ROLE IN FINANCIAL SYSTEM
STABILITY , 7
CONCLUSIONS , 8
Chapter 3 EXTERNAL FACTORS, 11
INTERNATIONAL ECONOMY, 11
DOMESTIC ECONOMY, 12
Monetary Conditions, 12
Governments 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
CONTENTS
Chapter 4 PERFORMANCE AND PROSPECT OF
INDONESIAS 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
Profile of Banks at Stock Exchanges , 36
Comparative Performance with Other Selected
Countries, 36
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Chapter 5 CAPITAL MARKET, 38
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
Chapter 7 CONCLUSION, 54
ARTICLES
1. Redesigning Indonesias 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
4. New Basel capital Accord : Its likely impacts on
the Indonesian banking industry Indra Gunawan,
Bambang Arianto, G.A. Indira & Imansyah
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Ta b le s
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
3.8. Maturity Profile of Government Bonds
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
4.15. Core & Non Core Deposit
4.16. Stock Liquid Ratio
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4.17. Maturity Profile of Time Deposit
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
Boxes
1. Causes and Process of Financial Crisis
2. Bank Indonesias Strategy in Maintaining
Financial Stability
3. Pulp and Paper Industry
4. Market Risks
5. Yield Curve of Government Bonds
6. Mutual Funds
7. Risks in Payment Systems
8. Failure to Settle Scheme
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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 Indonesias 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 Indonesias 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, Indonesias 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.
This FSR is addressed to all stakeholders, Bank Indonesia and relevant financial authorities in
particular, and the public in general. The review and recommendations offered in this FSR are hopefully
useful to the Government as well as all other relevant authorities in the efforts of maintaining stability of
national financial system. In addition, this review will encourage concerns of all stakeholders to the adverse
movements in the financial system within their jurisdictions so that proactive measures can be taken.
F O R E W O R D
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The Board of Governor must be grateful and give its appreciation to the DPNP, all relevant units and
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
Maman H. Somantri
Deputy Governor
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Indonesian financial system during the course of 2002 is stabilized. This is made possible by theeffective 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.
Indonesias 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.
Indonesias 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
with stable trend. The high credit risk is characterized by high percentage of non-performing loans,
EXECUTIVE SUMMARY
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its roles, especially in monitoring and evaluating potential risks that may adversely affect financial
stability. Bank Indonesia also has drafted a blue print on Indonesias 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
will be maintained and in order to encourage faster economic growth in Indonesia.
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Introduction
INTRODUCTION1CHAPTER
The financial crisis that swept over Southeast Asia,
Indonesia included, in 1997 has taught us a very
valuable 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.
3. FSAP is a concerted effort of IMF and World Bank which is introduced in
May 1999. This program is intended to increase effectiveness in the
efforts of improving soundness of financial system in member countries.
For further details visit http://www.imf.org/external/np/fsap/
fsap.asp.
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Chapter 2
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 andmonitoring 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 indicators 4. 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 linewith 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
market issues. Chapter 6 identifies recent developments4 Based on such indicators developed by IMF (Evans et al., 2002)
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Introduction
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 articleis entitled Redesigning Indonesias 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 Indonesias 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 Indonesias
banks in terms of their capital condition. A significant
decline of capital would adversely affect the stability
of Indonesias financial system. This review will give
some pictures of how far banks would benefit from
lower capital charge if internal model is applied. Thisreview 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 banks
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 Indonesias
exchange rate and interest rate are relatively lower.
The third article, Empirical Analysis on Loan
Migrations in Indonesias 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 Indonesias Banking Sector (by Indra
Gunawan, Bambang Arianto, Indira & Imansyah),
explores the New Basel Accord and its implications on
Indonesian banking sector.
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Chapter 2
4
THE IMPORTANCE OF MAINTAININGFINANCIAL SYSTEM STABILITY2
LESSONS LEARNT FROM THE 1997 CRISIS
There are two most important lessons learned from
the 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. Indonesias crisis is the second worst, afterArgentina 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 Indonesias 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 potentialproductivity 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
1 Adverse selection takes place prior to the choosing of a transaction
when a bank would select a potential borrower with greater chances
that the loan is going to become non-performing. Since adverse selection
factor has great potential of becoming non-performing loans, lenders
would not lend to potential borrowers which have low risks. Moral hazard
occurs after the transaction, where lender will be potentially injured
by borrowers which tend not to pay their obligations. Moral hazard
occurs as the result of asymmetrical information in which lenders do
not know much the activities of the borrowers which will allow borrowers
to give rise to moral hazard. Conflicts of interest between borrower
and the lender due to the moral hazard (agency problem) indicate that
most lenders decide not to lend, so that lending and investment
activities fail to be optimized, thus resulting in credit crunch.
CHAPTER
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The Importance of Maintaining Financial System Stability
5
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 BANKS 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
stability. Firstly, reliance on market forces and market
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Chapter 2
8
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
and the general public to play their roles responsibly.
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9
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 INDONESIAS 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 andstable 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.
ImplementingRegulation &
Standards
IntensifyingResearch &Surveillance
ImprovingCoordination &
Surveillance
Regulation &Standard e.gBasle principles,CPSIP, IAS,ISA, dsb.
Market Discipline
Early WarningSystems
Macro prudentialIndicators
Micro-PrudentialIndicators(aggregate)
- InternalCoordination
ExternalCoordination&Cooperation
Lender of lastresort
- Normal- Systemic Crisis
Crisis Resolution- Safety Nets
Establishing FinancialSafety Nets & Crises
Resolution
Instruments
FSS Objective
BI s Mission
FSS Strategies
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10
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
established.
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External Factors
EXTERNAL FACTORS3
INTERNATIONAL ECONOMY
Along with globalization in economics,
Indonesias 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
Indonesias financial system considering that the United
States and Japan are the largest markets for Indonesias
exports. Indonesias 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
48
(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
U S Japan
CHAPTER
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Chapter 3
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 Indonesias
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 banks 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 Japans
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 Indonesias exports to decrease. This
adversely affect borrowers 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
Direc t I nves tment P or tf oli o I nves tment
-5000
-4000
-3000
-2000
-1000
0
1000
2000
3000
4000
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External Factors
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, Indonesias
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), Indonesias 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 (%) Credi t /GDP Rat io (%)
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
Governments Finance
Bank Indonesias 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 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20202004
0
10
20
30
40
50
60
70
80
90
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Chapter 3
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 governments 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
Indonesias 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 governments 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.Instal lments of Overseas Loan Principal -0.76 -0.89 -2.10
Financing (A+B+C) 1.77 -1.97
% of GDP
2002 2003 2004
APBN RAPBN RAPBN
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External Factors
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 Governments 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 Indonesias
economy. This situation will damage Indonesias 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$-denominated deposits
at local banks will be rushed. Such situation will surely
adversely affect financial system stability, similar to
that which swept throughout Asia and in Argentina.
Market Confidence
The confidence level of investors and rating
companies on Indonesias financial solvability remains
low, as shown by the rating made by Standards & Poor.
Foreign investors perception on Indonesias financial
condition is still risky. Yield spread between Indonesian
governments Yankee bonds and US treasury bonds as
of December 2002 is relatively wide, namely 266.07
base points. Such condition results in relatively higher
risk premium for Indonesias government as well as
private foreign borrowings. In addition, (lower) rating
and (higher) risk premium may result in reduced
demands for Indonesian Rupiah, thus adversely affect
Rupiah exchange rate which will eventually increase
market risk.
Debt Service Ratio and total debt ratio against
GDP as of December 2002 are relatively high,
respectively at 30.8% and 70.4%. Despite their
decreasing trend, such rates are still above the normal
levels, namely 20% and 50-80%. Such condition will
indirectly adversely affect financial system stability in
the event of substantial depreciation of the IDR.
Therefore, there shall be concrete efforts to boost
exports by among others securing financing facility from
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Chapter 3
FIGURE 3.10:
Indonesia Government Bonds Rating and Yields
banks, advancing technology in production and focusing
on productive investments particularly on export-
oriented activities. Approval given to the proposed
rescheduling of Indonesias debts in the amount of US$
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 9 7 98 9 8 9 8 9 8 99 99 9 9 0 0 0 0 01 0 1 0 2 02 0 2
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 Indonesias 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
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
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External Factors
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 currencydenominated
bonds issued, must be monitored, such as (1)
uncertainty of international economic condition; (2)
the relatively low international confidence level on
Indonesias 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 Intl B+ 100 766
Indofood B 280 791
Bank Mandiri CCC 125 703
Telkomsel B+ 150 615Source: 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
SepDec Mar Jun
2 0 0 2
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Chapter 3
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 banks 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.
SMEs 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 BankForex Private
Bank
RegionalDevelopment 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
46%
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External Factors
fact that the figure was still higher than those of other
sectors. At the end of 2002, non agriculture and mining
sectors 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
1996 1997 1998 1999 2000 2001 2002
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Performance and Prospect of Indonesias BankingPERFORMANCE AND PROSPECT OFINDONESIAS BANKING INDUSTRY4
THE STRUCTURE OF BANKING INDUSTRY
Indonesias 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 AssetNumber 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
AssetsBank Indonesia 153.8 103.5 67.3 134.3 94.0 70.0Inter-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 60.4Non-performing loans 33.2 19.7 59.3 43.4 22.2 51.1Total Assets 1112.2 830.6 74.7 1099.7 822.4 74.8
LiabilitiesDeposits 835.8 634.2 75.9 797.4 606.9 76.1Inter bank borrowing 81.3 60.4 74.2 93.6 70.7 75.5Provision for Loan Losses (39.1) (26.4) 67.5 (44.8) (26.7) 59.6Paid-Up Capital 96.4 71.7 74.4 88.1 66.8 75.8Donated 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 (%)
BALANCE SHEET
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Chapter 4
Figure 4.3.
Total Loan and NPL
L o a nNPL
0
100
200
300
400
500
600
700
800
1996 1997 1998 1999 2000 2001 2002
Trillion Rp
years maturity. The changed maturities of bonds, forces
banks to adjust their portfolio and lending strategies.
If interest rate decrease to below 12% it will
adversely affect the prices of floating-rate bonds.
Thereby, banks holding floating-rate bonds will have
to reduce their deposit rate in order to adjust their
cost and income structure. As impact they may lose
some of their deposit base, which in turn will hurt their
liquidity due to the migration of funds from these large
banks to such other banks offering higher interest rates
or to other type of investments such as mutual funds.
This will further give pressure to those banks to sell
their floating-rate bonds at big discount rate. However,
such problem can be avoided if the market of recap
bonds is more liquid, so that the trading portfolio bonds
may become an alternative reserves for banks.
CREDIT RISK
During 2002, non-performing loans (NPLs) tend to
decrease, which is mainly attributable to the transfer
of NPLs to the Indonesian Banks Restructuring Agency
[IBRA]. However, there is a potential of increasing NPLs
Thus, the primary source of income of these banks
is interest from recap bonds accounted for 39.0% of
total interest income. Consequently, the fluctuation
of interest rate will pose a high interest rate risk to
the large banks.
Most or 88.5% of total recap bonds held by the
large banks is kept in the investment portfolio, while
the rest is put in the trading portfolio. This strategy is
adopted by banks to minimize market risk.
Prior to reprofiling, most of the recap bonds are
fixed rate at 4 recap banks. Income from fixed rate
bonds, prior to reprofiling, was relatively low due to
low interest rate. Average income from fixed-rate bonds
is at 12.8%, while the average cost of fund of banks is
14.7%. In addition, fixed-rate bonds are traded at quite
huge discount rate. However, after reprofiling of bonds
(November 2002) the average rate for fixed rate bonds
is increased from 12% to 14%.
After reprofiling, bond composition is 35.8% fixed-
rate and 57.1% variable rate. The average market price
for fixed-rate bonds increases and bonds are transacted
at higher prices, particularly bonds with less than three
FIGURE 4.2
BANK SECURITIES and LOANS
Trillion Rp
Total Asset L o an Securities
0
200
400
600
800
1000
1200
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
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Performance and Prospect of Indonesias Banking
Total Asset (trillion Rp) 1,112 831 74.7
IDR (%) 81.2 85.0 78.2
Forex (%) 18.8 14.9 59.2
Loan (trillion Rp) 371 241 65.0
IDR (%) 73.6 76.3 67.3
Forex (%) 26.4 23.7 58.2
NPL (trillion Rp) 33 20 60.6NPL Gross (%) 8.1 7.1 53.1
Provisions for Earning
Assets Losses (trillion Rp) 31 19 61.3
Loan Restructuring
(trillion Rp) n.a 48
NPL (%) n.a 9
Nominal % of Total Bank
Table 4.2 :
Details of Loan
13 Large BankTotalBank
from restructured and un-restructured loans purchased
by banks from IBRA.
The 1997 financial crisis has been so damaging to
banking industry, causing NPLs to soar to 54%. Quality
of bank loans then gradually improves in line with the
banking restructuring program. The gross NPLs
decreased to 8.1% and net NPLs reached 2.1% as of
December 2002 (see Figure 4.3). Meanwhile the NPL of
the 13 large banks is 7.1% (gross) or 1.6% (net). The
decrease in NPLs is mostly attributable to the transfer
of the NPLs to IBRA, while the rest are either
restructured or written off.
average Loan to Deposit Ratio is below 35% since
2000). New loans are mostly extended to small-
scale and consumers loans which explain why bank
lending portfolio is not growing fast.
iv. There are potentials for NPLs to increase out of
those restructured and un-restructured loans
purchased by banks from IBRA. Total ex-IBRA un-
restructured loans as of December 2002 were
approximately 6 trillion or 2.2% of the total lending
of large banks.
Non-Performing Loans (NPLs)As of December 2002, gross NPLs of banks is 8.1%
(gross), and 4.3% of which are qualified as loss. Most of
them are NPLs from large banks. Total gross NPL at
large banks is at 7.1% of total their loans. Banks and
large banks have provided adequate amount of
provisions for earning assets losses, so that the net NPL
of banks and large banks is 2.1% and 1.6% respectively.
However, four of the large banks have net NPL ratio
higher than 5%.
In order to assess the ability of large banks to
bear such NPL, a more conservative NPLEquity ratio
Some primary constraints faced by banks in
improving its credit risks are:
i. There are constraints in the process of
restructuring loans due to unfavorable economic
conditions.
ii. The capacity of real sector and corporations to
use credit is relatively low considering the fact
that most of them are still being restructured by
IBRA. New loans is relatively small (indicated by
Figure 4.4. NPL and PROVISIONS
FOR LOAN LOSSES
NPLProvisions for Loan Losses
0
50
100
150
200
250
300
350
1996 1997 1998 1999 2000 2001 2002
Trillion Rp
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Chapter 4
> 8% 9 7 7 6 7 6 5
0% - 8% 4 5 5 4 1 1 2
< 0% 0 1 1 2 5 6 6
5% 8% 10% 12% 15% 18% 20%
Tabel 4.3.
NPL Stress Test
Scenario of Increased NPLC A R
Figure 4.5.
Non Performing Loan
1997 1998 1999 2001 20022000
Mar Jun SepJun Sep Dec Dec Mar Jun Sep Dec Jun Sep Dec Jun Jul Sep Dec Mar Apr MayJun Jul Aug Oct Nov DecMar Jan Feb SepMar
Gross NPLs
Net NPLs
0
10
20
30
40
50
60
Percent
is used. As of December 2002, the ratio indicates that
29.6% of banks capital is to offset the provisions for
earning assets loss, so that the CAR of large banks might
fall from 22.0% to 15.6%. In aggregate this ratio is
adequate for banking industry. Under an even more
conservative measure, i.e. NPL to core equity, indicates
that 39.8% of the banks tier one capital will exhaust
to offset losses from NPLs.
Under the scenario that all the NPL are written
off, there will be four of the large banks with CAR less
than 8%, and even 2 of them have their CAR below zero.
As of December 2002, there were un-restructured
loans purchased by large banks from IBRA, which we
projected amounting to 2.2% of their total lending. In
fact this seems returning the problem loans back to
banks. Conditions might even get worse since there
are legal problems associated with the restructuring of
certain large debtors.
large banks is to increase from 7.05% to 9.2%. Such
increase in NPL is relatively high and therefore this
will adversely affect the capital of the 13 large banks.
In order to assess the impacts of lower credit
quality of large banks to their equity, stress test has
been conducted using a number of hypothetical
scenarios, i.e. NPL increase from 5% to 20%. The stress
test results indicate that some of large banks are very
sensitive to changes in NPL such that their equity would
fall down below the minimum capital adequacy. (see
Table 4.3.).
Efforts to restructure such debtors should be
placed as one of top agenda in the banks business plan.
Under worst case scenario, where all the loans
purchased from IBRA fail to be restructured or becoming
non-performing, there are potentials that NPL ratio at
Under 5% scenario, there are 4 banks with CAR
falling to 8%, 2 of such banks are stated-owned banks.
If NPL increases by 16%, the CAR of large banks fall
below 8%. However, it should be noted that capital
adequacy of each individual bank is differs.
Figure 4.6.
NPL Stress Test
NPL Delta (%)
CAR (Percent)
A B D K Average
-40.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
0 5 8 10 12 15 18 20
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Performance and Prospect of Indonesias Banking
Loan Restructuring
Total restructures loans of large banks as of
December 2002 is IDR 44.4 trillion, therein inclusive of
IDR 4.1 trillion NPL (9.4%). Internal restructure of NPL
conducted by large banks yields in positive results in
the course of 2001 and 2002. However, there are
chances that such restructured loans would get worse
considering the fact that the real sector and the
economic condition is not yet conducive.
Under worst-case scenario, in which all of pass
and special mentioned restructured loans and deposits
in the amount of IDR 40.2 trillion becoming non-
performing, the NPL of these large banks will get
worsened to 21.5%. The implication is that the banks
need to put aside a provisions for earning assets losses
to cover the potential NPL, and consequently large
banks CAR would plunge very significantly from an
average 22.0% to as low as 8.7%, and 3 of such large
banks will have their CAR to fall to below 8%. These
means that the restructured loans carry the potential
of disrupting financial system stability.
In connection with this, there has to be efforts to
closely monitor such restructured loans and there is
urgency for lending expansion. For that matter the
Government needs to create an enabling environment
such as deregulation of the real sector, privatization,
creating more conducive investment climate, good
corporate governance and rule of law. In addition, small
and medium enterprises need to be developed in order
to enable them to absorb more loans. To realize all
that, all relevant parties and stakeholders must give
their commitment to the efforts.
From the above analysis, we can sum up that
banks credit risks remain high but stable. However, in
the future there are chances that lending risks will rise
again. This will manifest particularly if there are further
delays for the recovery of the real sector and due
completion of loan restructuring program.
Lending Growth
Banks lending has not grown much during the
post-crisis period. Foreign currency denominated loans
as well as corporate loans tend to decrease. However,
retail loans is increase.
Lending growth after the crisis is relatively low.
During 20002002, average Loan to Deposit Ratio of
Figure 4.8.
Loan to Deposit Ratio
Trillion Rp
0
100
200
300
400
500
600
700
800
900
0
10
20
30
40
50
60
70
80
90
100
Percent
L o a n Deposit LDR
1996 1997 1998 1999 2000 2001 2002 2003
Figure 4.7
Loan Restructuring
Apr
Loan Restructuring (LHS)
NPL Restructuring (RHS) NPL (RHS)0
10
20
30
40
50
60
70
80
0
0.5
1
1.5
2
2.5
3
3.5
4
May Jun Jul Aug Sep Oct Nov Dec
2 0 0 2
Trillion Rp Percent
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Chapter 4
banks stay at a level below 35% compared to that before
the crisis, which is at 72%. In general, the condition is
attributable to lower economic growth and some large
loans portfolios were transferred to IBRA. On one side it
causes lower demand for loans and on the other side
there is increase in deposits. As the results, banks tend
to put their funds in Bank Indonesia Certificates (SBI) as
their source of income. In addition, placements in fixed-
rate recap bonds is also interesting to banks, considering
that this portfolio is exempted from capital charge (zero
risk in calculating risk weighted assets). The falling trend
of SBI interest rate forces banks to extend more loans.
In this regards, attention should be given to avoid lending
to borrowers with high credit risks.
New loans extended during 2002 amounted to IDR
79.4 trillion, of which 38% goes to small and medium
enterprises (see Figure 4.10). After the 1997 financial
crisis, banks tend to concentrate on retails lending
(small and medium enterprises) for the reasons that
they are more resilience to economic crisis and
unaffected by fluctuating exchange rate.
The change of focus from corporate lending to
retail lending gives rise to some implications. On one
side it provides banks with opportunity to diversify their
portfolio and risks. But on the other side, there are
chances for higher operating risk and strategic risk
attributable to insufficient knowledge and expertise
Agriculture 10.5% 7.2% 6.7% 6.1%
Mining 1.6% 1.7% 2.4% 1.7%
Industry 37.1% 39.4% 37.6% 33.1%
Trading 19.1% 16.3% 15.6% 18.1%
Services 19.0% 16.4% 15.8% 16.7%
Others 11.9% 18.3% 21.1% 24.4%
Table 4.4
DISTRIBUTION OF LOANS BY SECTOR
Sector 1999 2000 2001 2002
From demand side, the weak economy forces
borrowers and investors to delay their investments.
From the supply side, such situation forces banks to
behave more more conservative in their lending, and
thereby lending growth remains low.
In order the reduce loans concentration, banks
tend to reduce the corporate segment, while increasing
lending to retail segment. This is meant to diversify
their portfolio risks as well as supporting the
governments call for greater lending to micro and small
enterprises.
Figure 4.9.
TRENDS OF IDR & FOREIGN EXCHANGE LOANS
1996 1997 1998 1999 2000 2001 2002
Trillion Rp
IDR Forex
0
50
100
150
200
250
300
350
400
In addition, banks also tend to reduce foreign
currency denominated loans (see Figure 4.9). This is to
reduce exposure to bank credit risks. The crisis has taught
lesson that this type of loans was very risky, since the
foreign currency denominated loans was provided to
borrowers whose revenues are in Indonesian Rupiah.
When the financial crisis strikes, most of such foreign
currency denominated loans become non-performing.
This situation shall not be repeated in the future.
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Performance and Prospect of Indonesias Banking
Figure 4.10.
NEW LENDING
Trillion Rp
Total New Loan Small-medium Enterprise New Loan
0
4
8
12
16
20
24
28
32
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2 0 0 1 2 0 0 2
Figure 4.12.
PROPERTY LOANS
Trillion Rp
0
10
20
30
40
50
60
70
80
90
Property
Construction
Real Estate
Housing
1996 2001 20021997 1998 1999 2000 2003
of banks in managing retail lending for they have always
been focusing on corporate lending activities. If not
anticipated well, this will create new non-performing
loans.
The change of lending focus is also reflected in
the increase of consumers loans (see Figure 4.11).
Unlike other type of loans, consumers loans increase
in value even exceeding that during pre-crisis period.
The phenomenon is an indication that the risk of SME
loans is relatively lower than the risk in corporate loans.
One type of consumers loan which is most
attractive to the public is the housing loans (KPR) (see
Trillion Rp
Working Capital Loan
-
50
100
150
200
250
300
350
400
450
Investment Loan
Consumer Loan
1996 1997 1998 1999 2000 2001 2002
Figure 4.11.
LOANS BY BUSINESS USES
Figure 4.12). This type of mortgage loan carriesrelatively lower risk, since the borrowers are employees
whom have steady income.
KPR loans are mainly provided to finance purchase
of houses or real estates developed by realty companies
before the crisis. Since the beginning of 2001, KPR loans
tend to grow in value in line with the stable interest
rate and banks efforts to improve their performance
through, among others, diversifying their lending
portfolio.
Total property loans as of December 2002
amounted to IDR 35 trillion or 9.4% of the total loans
provided by banks. Amount and growth rate of property
loan (see Figure 4.12) indicates that property loans carry
relatively lower risks and insignificant to the aggregate
bank credit risks.
LIQUIDITY RISK
In general, Indonesias banks have adequate
liquidity. This is evident by the fact that banks liquid
assets account for a quarter of their total assets.
However, Indonesian banks still faces a moderate
liquidity risks due to dependence on short-term
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Performance and Prospect of Indonesias Banking
pledged as tertiary reserve reserves in the event of
emergency.
However, large banks have to manage their
liquidity prudently in order to prevent potential losses
from selling of recap bonds (tertiary reserve).
Exchange Offe