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Do
you know that our banks are among the most inefficient yet the most
profitable in the ASEAN region?
Perusing the financial reports of the publicly-traded banks, one would see
banks in Indonesia enjoying an average net interest margin of 5.53 percent
or nearly twice that of their peers in other ASEAN countries.
What is strange is that their cost to income ratio stood at almost 80
percent as of January, compared to 40 to 60 percent in neighboring ASEAN
countries, indicating operational inefficiency.
But how could such an anomaly have occurred, while the market is crowded
with more than 120 city-based banks, not to mention hundreds of secondary
banks in the rural areas? Oligopoly, says the government anti-monopoly
watchdog (KPPU).
The KPPU told a hearing with the House of Representatives on Wednesday it
had found strong indications of oligopolistic practices in the banking
industry whereby the top 10 largest banks control almost 80 percent of the
market, leaving the other 110 banks with the remaining 20 percent.
Further analysis reveals that the five largest banks, of which four are
state owned, control more than 60 percent of the banking market.
It was this oligopoly that had enabled the largest banks to control lending
rates and keep their net interest margin — the difference between the
lending rates banks charge to borrowers and the interest paid by banks to
depositors — unusually high, according to KPPU chairman Nawir Messi.
The five largest banks, as the market leaders, control the deposit market
and set the trends in lending rates, but the other 115 banks, due to their
negligible market share and their small deposit base cannot do much to
challenge the market leaders.
So the mid- and small-sized banks simply follow the leaders.
Leaders of the banks association (Perbanas), who also attended the hearing
with the House, certainly rejected the observations of the KPPU, blaming
the high lending rates in Indonesia on high inflation (5 percent a year),
the vast areas across the world’s largest archipelago that have to be
served with branches or ATM networks and high business risks.
The central bank’s benchmark interest rate currently stands at a historic
low of 5.75 percent, but data at Bank Indonesia (BI) shows that the average
interest rates for working capital, investment and consumer credit currently
stand at 11.5 percent, 11.3 percent and 14.3 percent, respectively.
These rates are charged only on the prime customers. The interest burdens
could exceed 30 percent for high-risk borrowers such as credit card holders
and small- and medium-scale businesses.
Another glaring shortcoming is the fact that only about 4 percent of banks’
third-party funds are placed in the interbank market, while only the 10
largest banks enjoy excess liquidity.
This not only causes oligopoly in the market but also forces the other 110
banks to compete fiercely for deposits, offering depositors rates higher
than the 5.5 interest ceiling set by the Deposit Insurance Corporation
(DIC), thereby further contributing to raising interest rates.
BI deputy governor Halim Alamsyah has confirmed that competition to raise
deposits has been so fierce lately that several banks have been luring
depositors with interest rates higher than the ceiling of 5.5 percent set
by the DIC, putting depositors at risk of losing their money.
The Deposit Insurance Law stipulates that any bank with savings or time
deposit accounts offering interest rates higher than the maximum rate set
by DIC would not be refunded if the bank went bust.
Extremely high lending rates, acutely inadequate infrastructure and grossly
inefficient logistics systems have become a big disadvantage for businesses
in Indonesia.
The interest costs Indonesian businesses have to pay are twice as high as
those charged on their counterparts in Malaysia, Thailand, Singapore and
China. These high capital costs have deterred new investments because new
businesses have to generate unusually high returns.
It is simply unfair and economically unwise to allow commercial banks to
continue to enjoy net interest rate margins of 5 to 6 percent while a large
chunk of their funds have been ploughed into the financial market. The
government, if necessary, should pressure state banks, which still account
for around 40 percent of the industry’s total assets, to act as the trend
setters, leading credit expansion at reasonably low rates to the
government-selected priority sectors.
Seen from their multiplier impact on the economy, it is much better for the
state banks to significantly expand lending to the real sector at
relatively low credit interest rates, rather than booking high profits but
at the expense of economic growth.
The government therefore should inject more competition into the banking
industry by allowing mergers between mid-size banks to build up strong
competitors to the five largest banks.
One way of doing this is by approving the planned merger between
Singapore’s Bank DBS and Bank Danamon and the planned acquisition by Bank
of Tokyo-Mitsubishi UFJ, the largest bank in Japan, of Bank Tabungan
Pensiunan Nasional to build strong contenders to the top five players.
However, only jawboning banks to lower lending rates may compromise the
quality of their risk management.
It is also imperative for the government to reduce the persistently high
business risks by accelerating reform measures in the civil service,
taxation, customs and legal sectors. Adverse business condition would
expose businesses to high risks of debt default.
It would be better for banks’ credit risk management if BI kept improving
the capacity of its credit bureau to provide lenders with more reliable,
comprehensive information on debtors. ●
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