Tight liquidity chokes small banks, says BI

Concerns are growing among bankers over tight liquidity in the banking sector, with more local lenders, notably small ones, opting to reject new credit applications over fears of a liquidity mismatch or default.

The percentage of rejections for new credit applications in local banks rose to 12.9 percent in the second quarter this year, compared to 12.1 percent in the previous quarter, according to Bank Indonesia’s (BI) latest banking survey.

The survey questioned 42 Jakarta-based commercial banks that controlled more than 80 percent of total outstanding credit nationwide.

Most rejections of new credit came from small banks that opted to hold back on disbursing lending over fears of insufficient liquidity, BI executive director for statistics Hendy Sulistiowaty said.

“The percentage of big banks refusing new credit applications is declining, while the trend in mid-size banks is stable. The ones refusing credit applications are the small banks,” she told reporters during the release of the survey on Thursday.

“Small banks are beginning to reject new credit applications due to liquidity problems, as their LDR [loan-to-deposit] level has hit the maximum ceiling allowed,” Hendy noted.

LDR, a measurement of liquidity and banks’ capacity to expand their credit business, stood at 90.8 percent as of April 2014, up from 84 percent at the end of 2012, according to the latest banking statistics published by the Financial Services Authority (OJK).

That is already near the maximum safe level as seen by BI, the central bank, of 92 percent.

BI has attempted to tighten the country’s liquidity climate by jacking up its benchmark interest rate by a cumulative 175 basis points since June last year to the present level of 7.5 percent, in its bid to put the brakes on speedy economic growth, which poses the risk of overheating.

However, in a country that possesses 120 banks with diverse liquidity conditions, the impact of BI’s monetary tightening had been felt unevenly, as small lenders suffered most from the higher interest rate environment, local bankers said.

“Big banks may still prove to be resilient in the face of the BI rate hike, but for small banks, the liquidity issue is a major problem. They are now really gasping for breath,” said a president director with a major bank in Jakarta who requested anonymity due to the sensitivity of the issue.

Despite this, the executives of small banks have relatively upbeat views on competition to collect deposits in the coming months, the BI survey revealed.

For small banks, the optimism ratio for deposit growth stands at 100, compared to 86.1 for midsize banks and 91.0 for big banks. A higher ratio means a banker is more upbeat about recording higher deposit growth in the future.

Still, the survey says bankers are expecting slower lending growth, which they predict will hit only at 18.2 percent throughout this year, compared to 21.8 percent last year.

In a report released earlier this month, ratings agency Moody’s Investors’ Service warned tight liquidity in Indonesia could cause “credit differentiation” between large and small banks.

“We expect banks’ funding pressure will lead to greater credit differentiation between larger and smaller banks, because it will lower profitability more severely for smaller banks, as they cannot fully pass on extra funding costs to borrowers,” Moody’s analyst Alka Anbarasu said in a statement.