Banks suffer liquidity problem as infrastructure projects soak up fund

Posted by on 07 November 2019


Many banks, especially small and mid-sized ones, are suffering a liquidity problem as a large part of the funds in the banking system are being used to finance infrastructure projects such as toll roads, an Indonesian Chamber of Commerce and Industry (Kadin) official has said.

Kadin’s deputy chairman for monetary, fiscal and public policy, Raden Pardede, said that the country’s massive infrastructure projects use a large amount of the money in the banking system instead of raising funds by issuing bonds, as has usually been done in the past.

"The sources of funding for infrastructure projects should normally come from the capital market, not banks," he stated during a forum on bank liquidity challenges in Jakarta on Monday.

Raden explained that the funding for infrastructure projects should ideally come from the capital market, such as through debt papers or bonds issuance as those instruments provide long-term maturity.

However, due to the country's shallow financial market, construction firms instead turned to banks to seek financing for their projects, which then created a maturity mismatch as a larger part of the banks’ money came from short-term funds such as savings and deposits.

The maturity mismatch caused the banks’ liquidity to tighten and limited their ability to disburse fresh loans to customers.

Deposit Insurance Corporation (LPS) executive director Fauzi Ichsan agreed that infrastructure financing had caused some banks, especially midsized ones of the BUKU III category with core capital of between Rp 5 trillion (US$357.14 million) and Rp 30 trillion, to be in a tight squeeze, but he also argued that most infrastructure projects were financed by foreign loans.

“If we’re talking capital-intensive projects like infrastructure, most of the funding is in foreign currencies that are sourced from abroad,” he said, without elaborating on the impact on bank liquidity.

Bank Permata economist Josua Pardede told The Jakarta Post on Tuesday he agreed that the maturity mismatch in infrastructure financing caused many banks to suffer liquidity problems.

“The increase in the issuance of government’s bonds this year causes banks to struggle to find sources of funds,” he said.

The government plans to issue 10 retail government bonds into the market this year in a bid to help finance the state budget deficit. The issuance of the bonds, which is intended to reduce dependency on foreign funds, caused a crowding-out in the banking system, as a large amount of funds in the market went into the state’s coffers.

The latest retail green sukuk series of ST006, for example, offer a return of 6.75 percent per year, higher than the banks’ time deposit interest rates of between 6.25 percent and 6.5 percent per annum.

However, the situation has since improved as the latest data from the Financial Services Authority (OJK) showed that the loan-to-deposit ratio (LDR) in September 2019 was 92.2 percent, lower than the figure in September 2018 of 94 percent.

Fauzi of LPS said the improving LDR figure next year would depend on the banks’ loans disbursement, but he expected the banks’ overall liquidity pressure would decrease in 2020 as the low interest rate trend would persist for the next 12 to 18 months.

“This will make global investors seek to invest in countries with higher yields like Indonesia and we can expect the banks’ overall liquidity to loosen next year,” he said.

Josua shared a similar forecast, saying that he hoped the liquidity situation would improve next year as the banks’ lending growth had slowed in the past few months. According to the OJK, lending growth fell to 7.89 percent as of September from 8.6 percent in August.

Most importantly, Josua said he also hoped the country’s financial literacy rate would increase so that more people would be aware of the importance of saving their money in banks, which could help the banks pool more third-party funds without worrying that the money would be moved into government retail bonds.

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