As an economic unit, banks can have their own profit-seeking motives and risk preferences that affect the allocation of funds that have been collected. This motive can cause the performance of the real sector to be less than optimal.
The modern economy is basically a circular flow of income. In this circle there are always parties who have excess funds. On the other hand there are those who need funds, both for consumption and investment.
Without an intermediary, the excess funds will flow under the pillow or to investments that do not add valuable capacity such as jewelry, land, and others. Banking has the function of connecting or integrating between parties who are excess funds and who need them.
As an economic unit, banks can have their own profit-seeking motives and risk preferences that affect the allocation of funds that have been collected. This motive can cause the performance of the real sector to be less than optimal.
Banking can also be too conservative to avoid risk. In this context, banks only follow economic or procyclical cycles so that they cannot play a role in compensating for the economic cycle (counter cyclical).
The conservative nature of the banking system can be seen from the gross domestic product (GDP) data for the 1984-2018 period. The data showed that economic growth moved slightly ahead of banks, at least with a quarterly lag.
Thus, the economic outlook is a reference for lending and not vice versa. This property is called prosiklis. The impact of the Bank Indonesia (BI) benchmark interest rate on the economy moves indirectly to a decrease in credit interest. For the business world, the shifting of funds from deposits to demand deposits indicates a desire to increase production and / or investment to increase production capacity.
Counter cycle
Two weeks ago, as a counter-cycle to the impact of the new corona virus (Covid-19) on the economy, BI had lowered its benchmark interest rate to 4.75 percent. A decrease in the BI benchmark rate is usually followed immediately by a decrease in deposit rates. This decline in deposit interest rates drives the shift in funds from deposits to savings and does not necessarily reduce credit interest.
It is this savings which then increases people’s consumption which drives growth. For banks, this shift reduces the cost of funds (cost of funds) thereby increasing the net interest margin (NIM).
The increase in NIMs will cause banks to channel more credit, which in turn will enable banks to reduce credit interest. Banks can do that because the risk is already divided in an increasingly broad credit portfolio (Freixas and Rochet, 2008). Another factor causing the decline in lending rates is competition with other banks.
What is slightly different is that banks with transaction types that are able to collect third party funds (DPK) are cheaper because they do not always rely on interest instruments to attract funds (price competition). What the bank relies on is service, convenience because its branches are spread, user-friendly online transactions, and payroll services for institutional customers (non-price competition).
Banks of this type are usually more agile in lending and have the potential to fight the business cycle to obtain a greater number of customers and deposits.
From the data of Book 4 banks that are compared with the industry, there are always banks that individually conduct counter cycles in a situation of economic slowdown. This strategy is carried out to expand customers and deposits in the hope that the economic situation will soon improve.
However, if in the midst of this slowdown, banks will see the quality of the loan portfolio decline or not. This can be seen from the debtor’s downgrade, from “smooth” to “special attention” and from “special attention” to “loss”.
If this happens, the bank will put the brakes on credit expansion in order to keep credit at risk loans from continuing to swell. As such, banking is instinctively procyclical.
From the experience of the 2015-2019 period, the distribution of people’s business credit (KUR) through banks has the effect of shifting risk appetite to not be too conservative because of the guaranteed remuneration element. This KUR policy includes many informal sector businesses that have so far been outside the main stream of national income. So far they have never been touched by a bank.
For MSME entrepreneurs, this policy overcomes the constraints of business capital, both for working capital and for business expansion (borrowing constraints), which so far have prevented them from getting a grade.
For banks, this is also a potential mobilization of DPK now and in the future. For the economy, the KUR policy also contributed to maintaining post-bonanza commodity growth momentum in the corridor of 5 percent per year.
On the demand side, the counter-cycle strategy to compensate for the slowdown in the tourism-trade sector due to Covid-19 was carried out in combination with stimuli. The steps taken are reallocating government spending and shifting expenditure (expenditure switching) of public consumption, from all walks of life, especially for travel, hotels and restaurants (leisure), and daily consumption of goods to regions, especially those that become tourist destinations.
The government can actually shift the expenditure of official travel from abroad to domestic to compensate for the decline in foreign tourists. From the community side, a shift in lifestyle towards consuming experience raises the demand for cheap class accommodation.
To deal with this potential shift in demand, production capacities in areas, such as quality and lodging services, culinary attractions and agility, garment products and handicrafts, must be increased. One of them is by extending credit to MSMEs without abandoning the precautionary principle.
In addition to loans for working capital and business expansion, banks can also help with financial planning using simple accounting methods. Higher education can also help in terms of financial training assistance for SMEs, improving product quality, marketing through e-commerce pages.
Upgrading for SMEs is not an easy matter because it involves the risk of getting out of the comfort zone. In reality, a supply chain does not require all to go up in class because it adheres to the flying goose pattern. Not all business units must be at the forefront, which is important as a formation, this flying goose group must move towards the destination of migration.
A supply chain does not require all to go up in class because it adheres to the flying goose pattern. Not all business units must be at the forefront, which is important as a formation, this flying goose group must move towards the destination of migration.
Through its experience in providing credit for years, banks can select business actors who will become agents of change. For example, going up to the business of lodging, culinary famous in the world through marketing efforts through associations, international conferences, and e-commerce platforms.
The targeting process can be facilitated by cooperating with banks that are experienced in providing micro credit, pawnshops, and micro data on poverty reduction programs in the Central Statistics Agency, the Social Security Organizing Agency, the National Team for the Acceleration of Poverty Reduction, and pawnshops. Thus, the principle of prudence in lending is maintained.
(Chancellor of the University of Indonesia)
Source: Kompas Daily, March 3, 2020