Interview: Asmawi Syam
How would you assess the Indonesian banking sector’s potential for growth?
ASMAWI SYAM: In general, the banking industry in Indonesia is running well. The non-performing loans (NPL) ratio is at a good level (2.71%) and the capital adequacy ratio (CAR) is 19.26 % (all year end 2015). Intermediation has been successful and the loan-to-deposit ratio is at 85.63%. In general, the banking industry is also able to manage business properly so that it can record profits. In addition, the level of efficiency is illustrated by the cost-to-income ratio, which is at 81.49%. Micro, small and medium-sized enterprises (MSMEs) are still appealing to the banking sector, and there is great potential. Many MSMEs are not yet served by banking. Based on data from Otoritas Jasa Keuangan, there are 56.53m MSMEs – or 99.99% of total businesses in Indonesia – but only 18.07% are obtaining bank credit.
Therefore, potential distribution of approximately 45m MSMEs, most of which are in the micro segment, could be supported by Kredit Usaha Rakyat (government-subsidised loans). However, consumers also need attention considering that the growing middle class requires banking facilities, such as payment systems, consumer credit, investment instruments and wealth management, and other products. There is also potential in the corporate segment, as loans could be distributed for various infrastructure projects in accordance with the government’s development agenda.
What effects has the economic slow down had on NPL ratios in the domestic banking sector?
SYAM: The rise in NPLs and credit costs has a strong correlation with GDP growth. A decline in economic activities depresses demand for goods and services, which reduces sales. Lower sales then hit companies’ cash flow, which in turn reduces the repayment capacity of debtors. This relationship is illustrated by the decline in the economic growth rate from 5.21% at the end of 2014 to 4.76% at year end of 2015, which has caused the NPL ratio to increase from 2.16% at the end of 2014 to 2.71% at year end of 2015. However, professional regulatory institutions now supervise the banking industry, resulting in good corporate governance and reliable risk management. Moreover, the banking industry currently has a good level of capital adequacy: the overall CAR ratio has reached 20.62%, far above the minimum requirement of 8%.
What are the competitive advantages of domestic banks versus foreign ones?
SYAM: Several banks in ASEAN have contributed to increased banking penetration in Indonesia by opening branch offices forming joint ventures and establishing private national banks. However, domestic banks still exist, and even surpass the performance of foreign banks. This is because they have a better understanding of the characteristics of the domestic market. However, in welcoming the ASEAN Economic Community, domestic banks have had to become more competitive, especially in terms of human resources, technology and innovation. Human resources are one of the most valuable assets for banks in addition to improving technology to promote a company’s productivity.
How can advances in financial technology help increase the sector’s competitiveness?
SYAM: Financial technology developments create challenges for the banking sector, particularly with the entry of new players who have alternative banking products. However, financial technology developments also open and create new opportunities. Advances in technology are able to simplify procedures for customers and improve both the productivity and efficiency of the banking system.
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