Banking Challenges in 2021

KOMPAS/FERGANATA INDRA RIATMOKO

Several  vehicle passes in front of the BNI Bank office which is closed at Zero Point, Yogyakarta, Friday (11/9/2020).

The COVID-19 pandemic, which as has burdened Indonesia since March, has caused banking to collapse. As a result, credit growth is slow. What will the banking challenges be in 2021?

How will credit growth be in 2020? The Financial Services Authority (OJK) predicted that credit would grow 10 to 12 percent and third party funds (DPK) by 7 to 9 percent. Bank Indonesia (BI) predicted that credit would grow by 10 to 12 percent and DPK by 8 to 10 percent. Will that prediction be reached? No! Because COVID-19 has destroyed almost all sectors of the economy, so bank customers have fallen apart.

Finally, the OJK required not only banks, but also finance companies to restructure their credit. As a consequence, the banks\' interest income fell drastically while the costs of operation and health protocols rose. Given the shaky production capacity, demand for credit has also dropped significantly.

Also read: Looking at the Digital Economy in 2021

The monetary stimulus, in the form of a reduction in the benchmark BI seven-day reverse repo rate from 6 percent to 3.75 percent, has not been able to stimulate the real sector. The credit that has been approved (undisbursed loans) increased by 2.87 percent from Rp 1,609.63 trillion by September 2019 to Rp 1,655.81 trillion by September 2020, or 31.30 percent of total credit. This is the result.

According to Indonesian Banking Statistics, credit fell from Rp 5,306.14 trillion in September 2019 to Rp 5,290.09 trillion in September of this year, or a decrease of 0.30 percent, falling thinly from 0.66 percent in August of this year. DPK grew from Rp 5,624.58 trillion to Rp 6,338.77 trillion, an increase of 12.70 percent from 11.61 percent in the previous month.

Only joint venture banks were able to increase profit before tax by 7.29 percent. That was a glimpse of the performance of commercial banks as of September.

Profit before tax fell 24.28 percent from Rp 193.68 trillion to Rp 146.65 trillion. How about profit before tax? Five groups of banks experienced a decline in profit before tax: regional development banks (BPD) with a 6.43 percent decline, foreign banks with a 14.08 percent decline, national private commercial banks (BUSN) with foreign exchange with a 15.62 percent decline, state banks with a 37.60 percent decline and non-BUSN with no foreign exchange with a 39.88 percent decline. Only joint venture banks were able to increase profit before tax by 7.29 percent. That was a glimpse of the performance of commercial banks as of September.

Key success factors

What are the challenges of the banks and the key success factors in addressing the challenges? First, economic growth will depend heavily on eradicating COVID-19 with vaccination and health protocols. However, it is predicted that vaccination will only take place by January 2021.

Second, economic recovery is highly dependent on the success of vaccination. What is the prediction of world economic growth in 2021? BI data predicted world economic growth of 5 percent in 2021. In detail, developed countries with 4 percent growth, the US with 4.3 percent, the euro area with 5 percent and Japan with 2.5 percent. Developing countries are expected to grow 5.6 percent, China 7.8 percent, India 8.2 percent and Latin America 3.1 percent.

How will Indonesia\'s economy grow in 2021? In the 2021 state budget, which amounted to Rp 2,750 trillion, 0.4 percent larger than the 2020 state budget, the government projected economic growth of 4.5 to 5.5 percent. However, BI estimated economic growth of 4.8 to 5.8 percent.

Also read: Digital Economy Blueprint

Third, in banking, the growth of DPK, which rose by 12.70 percent, was good news. This is an indicator of banking liquidity which is showing an increase.

This growth rate also indicates that people are preferring to save rather than consume for household needs. In fact, household consumption expenditure forms the backbone of the nation’s GDP, around 57 percent. The contributions are followed by investment at 30 percent and exports at 17 percent.

Kompas

A BNI Bank employee works at his home in South Tangerang, Banten, Tuesday (17/3/2020).

In this regard, the government is obliged to immediately disburse government spending. It is hoped that this effort can encourage the wheels of the real sector to start running slowly. Therefore, President Joko “Jokowi” Widodo emphasized that the project auctions would start in December of this year. Moreover, the budget implementation checklists (DIPA) and the 2021 transfer allocation lists to the regions and village funds (TKDD), the basis for the auctions, have been distributed to all ministries, state institutions and regional governments (Kompas, 2/12/2020). The result is that the absorption of the budget will run faster.

Expectations for an economic revival have appeared, which was implied on an increase in monthly inflation of 0.28 percent in November 2020, higher than 0.07 percent in October 2020. Previously, there was deflation of 0.1 percent in July and 0.05 percent in August and September, according to Statistics Indonesia (BPS). It is hoped that inflation will rise again ahead of and during Christmas and New Year.

The government is obliged to continue disbursing fiscal stimulus in the form of tax cuts for the business world and the elimination of taxes, such as the Luxury Goods Sales Tax (PPnBM) for electronic and automotive devices. Likewise, social assistance will increase people\'s purchasing power, thereby encouraging an increase in household consumption. High consumption will support the increase in products and services in the business world.

Also read: Digital Economy

How about the monetary side? Apart from continuing to control the stability of the rupiah exchange rate and inflation, BI also needs to inject liquidity into the banking and financial markets.

Fourth, credit growth depends on economic recovery. The OJK now predicts that credit growth in 2021 will be 5 to 6 percent, in line with the GDP projection of 5 percent growth. According to BI, credit will grow 7 to 9 percent.

In fact, the actual disbursement of the national economic recovery (PEN) fund was only Rp 361.50 trillion (51.9 percent) as of Oct. 26. Therefore, the remaining PEN fund of Rp 333.7 trillion of the total Rp 695.2 trillion is expected to stimulate the real sector.

In 2021, the government will allocate funds for MSMEs amounting to Rp 48.8 trillion, or 13.11 percent of the PEN budget of Rp 372.3 trillion, and business incentives of Rp 20.4 trillion (5.48 percent).

Therefore, incentives for MSMEs need to be enhanced through top banks, especially government banks. Currently the realization is only Rp 99.51 trillion (80.6 percent) of the MSME support post in PEN with a ceiling of Rp 123.46 trillion. In 2021, the government will allocate funds for MSMEs amounting to Rp 48.8 trillion, or 13.11 percent of the PEN budget of Rp 372.3 trillion, and business incentives of Rp 20.4 trillion (5.48 percent).

The allocation for MSMEs needs to be increased because this segment can employ more than 100 million workers. This could simultaneously reduce the open unemployment rate, which was 7.07 percent in August, up from 5.23 percent in the same month last year.

Fifth, the election of Joe Biden and Kamala Harris in the US presidential elections is expected to boost trade between the US and Indonesia. The improvement of US trade with China is a business chain that will benefit the Indonesian economy. At the very least, Indonesia\'s exports, both to the US and China, will experience an increase.

KOMPAS/YUNIADHI AGUNG

A Bank employee works at his house in South Tangerang, Banten, Tuesday (17/3/2020). A number of offices and companies have implemented a work from home system to minimize transmission of the Covid-19 virus.

According to BPS data, the US is the country’s fourth national export destination after China, Japan and Singapore, above India. The value of trade with China was US$72.8 billion, Japan US$31.6 billion, Singapore US$30.4 billion, the US US$27 billion and India US$16.1 billion in the first half of this year. During the last five years, Indonesia has experienced a trade surplus with the US of US$8.6 billion, US$8.8 billion, US$9.7 billion, US$8.3 billion, US$8.5 billion and US$4.76 billion in 2015, 2016, 2017, 2018, 2019 and the first half of 2020 respectively.

Sixth, the growth in national exports will lead to an increase in international banking transactions. These transactions include exports, imports, bank guarantees and other derivative transactions (trade finance).

Trade finance and treasury transactions, such as placement, foreign exchange and money market exchanges on the interbank market, both national and international, are fee-based sources of income. Both type of transaction are able to provide high contributions.

Seventh, banks must boost credit quality because nonperforming loans (NPLs) jumped from 2.53 percent in December 2019 to 3.11 percent, 3.31 percent, 3.35 percent, 3.40 percent, respectively, in June, July, August and September.

Neo-banking

Eighth, banks are required to provide a variety of technology-based banking services to compete with financial technology (fintech) companies that have emerged in the last four years, especially the peer-to-peer lending model. If they are not yet able, banks can partner with fintech to serve MSMEs. This effort aims to be able to capture a wider market because Indonesia\'s population is spread across thousands of islands. By having its own satellite, Bank BRI is the leading bank to reach a very wide market potential.

As a result, BRI will harvest noncredit income to support declining credit interest income.

This is a golden opportunity for BRI to lease the satellite network to other banks. As a result, BRI will harvest noncredit income to support declining credit interest income.

Ninth, in the future neo-banking will be born in Indonesia, such as in the US, Canada, Britain, Germany, France, Russia, the Netherlands, Switzerland, Japan, Australia, Brazil and Argentina. Neo-banking is a form of banking that provides online services without a physical network. It is a challenge for the OJK to prepare regulations to protect customer interests. The millennial group will be a promising market target.

PERSONAL ARCHIVE

Paul Sutaryono

Tenth, according to Bill Gates, banking is necessary, banks are not. Does that mean the banks will disappear? Wait a minute. Banks do not only serve payments and credit like fintech firms. The function of banks is not only as a financial intermediary, namely collecting public funds and disbursing credit. It also serves treasury transactions, trade finance and much more. Banks are even able to become business partners and provide financial advice to their customers in various sectors.

Paul Sutaryono, Expert staff member at the Center for State-Owned Enterprises (SOE) Studies, banking observer and former assistant vice president of Bank Negara Indonesia (BNI).