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Indonesian banks bog down businesses
By Tony Sitathan
Benny
Winoto Salim was a businessman dealing with palm oil and
its by-products in Medan, Sumatra. In 1997, he set up a
chemical trading and distribution company in Jakarta
dealing mainly with asphalt and later the supply of an
oil-based additive from overseas. He saw Indonesia as a
potential market for the chemical trading business and
opened more than 40 distribution outlets throughout the
archipelago.
Then came the economic crisis of
1997-98, after which Indonesia was forced into a painful
process of restructuring its economy, tightening its
money supply and reorganizing its banking system. "The
carnage of closing more than 90 banks that failed to
meet their capital-adequacy ratio and the realignment of
smaller but profitable banks into larger banking
entities was necessary under the Indonesian Banking
Restructuring Agency [IBRA] and the central Bank of
Indonesia had to enforce the strict lending policies of
international bodies like the World Bank and the
International Monetary Fund [IMF]," said Sutu Widayo, an
economic adviser and financial consultant to state-owned
Bank Mandiri.
He said corporate lending policies
were scrutinized and lending policies tightened -
especially for small and medium companies. "The risk of
again collapsing in a sea of debt is too much for
Indonesia to bear. Going by estimates, more than US$55
billion was erased off as bad debts by these
conglomerates and IBRA is currently struggling to
recapitalize Indonesia's reserves."
But
businesspersons like Benny were caught flat-footed. He
could not expand his business at a time when the banks
were tightening their purse strings. Although he had a
good business relationship with several of the leading
banks in Indonesia, he was unable to arrange any
commercial loans for his company, just when he needed it
most.
He claims that the commercial banks are
only interested in providing consumer retail credit by
increasing credit-card limits and making it easier to
get personal overdraft facilities. Banks are looking at
easier options of getting higher returns on their
interests by extending personal or consumer linked
loans. "They are providing limits of up to Rp100 million
[$11,100], which is hardly sufficient to run a
medium-sized trading and distribution company like ours
and they are not willing to issue letters of credit
[LCs] without a 110 percent bank guarantee or collateral
as security," he complained.
At the leading
locally based and multinational banks operating in
Indonesia, getting approval for corporate loans has
become an uphill task. "Its not impossible, but we are
more stringent in our requirements and need full and
proper authentication of documents and company assets
before we lend any monies to corporate entities," said
Immanuel Hutagalong, a senior officer at HSBC. "We have
become stickier with our credit policies, which follow
the guidelines set by the central bank."
The
credit-card business has heated up in Indonesia, with
several local and international banks increasing their
advertising and promotional budgets in snagging new
clients and increasing credit limits for existing
customers. Tri Indra, the head of advertising and media
agency PT SITA Parameswara, says the advertising and
promotional budget for credit cards has increased by
more than 20 percent since the first two quarters of
2002. "In nearly every major mall you visit, you see the
sales promotions girls and bank representatives hawking
credit cards," she said.
Osman bin Saleh, who
works as an international marketing director for a
coal-mining company in Indonesia, complains about the
inability of the local banks to provide working capital
for his operations. "Although we have done business with
some of the reputable local banks in Indonesia, we are
unable to get a revolving line of credit with them.
Previously we were able to even execute red-clause LCs,
from our clients, which means we get a partial draw-down
of the face value of the LC even before the full
settlement of the contract. Now it's very difficult to
do so, without providing collateral or additional
guarantees," he said.
Tired of dealing with the
local banks, he has decided to venture into Singapore to
get the banks there to issue LCs based on the suppliers
and clients requirements. There is also less money to be
paid in the form of taxes, banking interest and charges
when dealing with Singapore-based banks compared with
their Indonesian counterparts.
If the
inflexibility of the Indonesian banking system is
driving away business, it is an indication that changes
are needed. And doing something now instead of later
seems to be the best remedy, since foreign direct
investment (FDI) has started to dry up as an alternative
source of investments. FDI has contributed less than
$1.7 billion so far this year compared with $4 billion
last year.
There is currently a retail consumer
boom in Indonesia. Several analysts have predicted
Indonesia's economic growth to exceed 4.5 percent in
2003, while inflation levels are set to remain lower
than in 2002, as the rupiah strengthens against the US
dollar. Also IBRA has released information that money is
coming back from overseas to Indonesia. So far it has
calculated some $300 million a week making its way back
to the bank coffers.
That is good news indeed
for those in retail businesses. Imports are beginning to
compete with locally produced goods, while luxury cars
such as Ferraris and Harley-Davidson motorcycles are
seeing faster sales growth in Jakarta than in any other
major metropolitan city in Asia. With the
consumer-driven economy, and the increased credit
facilities given by finance houses and banks, the retail
economy is heating up.
However, Indonesia's
foreign exports and its manufacturing and industrial
sectors seem to be lagging behind. "On average
Indonesia's manufacturing sector and foreign exports are
finding difficulties competing with products from other
parts of Asia, notably China, especially in terms of
price and product parity performance," said Samuel
Hawthorne, an economist with Axiom Consulting, based in
Hong Kong.
The lack of corporate funds and bank
loans for small and medium corporations has turned into
a handicap for genuine businesspersons. They are looking
toward foreign investments and foreign credit
facilitation in order to jump-start their businesses,
which is not always an easy solution.
"Given
Indonesia's current investment climate, foreign
investors are risk-averse and wary about taking
Indonesian assets and property as collateral for
investment purposes," said Michael Sim, a private funder
based in Singapore. "Indonesians are so used to the old
management style of running companies that it makes it
harder for foreign funders to appraise their business
operations and make a value-based judgment on them."
So what is the solution for serious
businesspersons such as Benny and Osman? There have to
be reforms at the banking sector, complained Mickey
Effendi, a private businessman who runs a tuna trading
company.
"There should be greater transparency
and accountability in awarding loans to companies
running a feasible business with a sound business plan,
instead of going only by strong references or the old
way of doing business. Unless that happens, small and
medium businesses would find it increasing difficult to
operate and remain profitable in Indonesia," he said.
(©2002 Asia Times Online Co, Ltd. All rights
reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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