Indonesian Banks Profit: Out of Proportion?

Indonesian banks booked a stellar performance in 2010. The industry pocketed more than Rp.57 trillion of handsome profits last year, increased by 30% from Rp.45 trillion in 2009. This is remarkable given the global economy is still recovering. With the Indonesian economy is growing at about 6%, the industry is poised to grow further. Last year it grew by 26.74% and projected to grow by the same rate this year.

However, the above is not yet a perfect picture. One key issue is operational efficiency; Indonesian banks are still inefficient, in which operational cost increased from Rp.258 billion in 2009 to Rp.302 billion in 2010. Another issue volatility and profit sustainability. Half of the profits earned by the Indonesian banks is generated from transactions in highly volatile money market, principally SBI and forex markets. This is NOT sustainable and also selfish – when banks don’t lend, it is essentially an act of selfishness.

Nonetheless, the industry’s LDR has improved. The LDR has risen from 73% in 2009 to about 75% in 2010; while it was around 60% in 2005.

On the regulatory side, Bank Indonesia has done the right thing. It recently issued a regulation that requires all banks to maintain LDR ratio between 78%-102% starting March 1, 2011. This will certainly push banks to lend. A set of measures will be issued to ensure banks meet this regulation.

It is important for the banks to respond positively and follow Bank Indonesia’s direction. They need to do more in terms of lending and provide financial support to the struggling real sectors, especially manufacturing and agriculture. The banks has been concentrating measurably on the consumer lending segment, especially automotive financing, home loan, and credit card.

This needs to change; with so much liquidity, there is no reason for banking sector to shy away from the important sectors like manufacturing and agriculture, as they are very important for the future of the Indonesian economy. Recent increase in global and national food prices and increased imports of manufactured goods, mainly from China, are already very good reason to support the real sector. Banking profit, after all, comes from active lending and robust revenue from key economic sectors.***