Financial System Stability and Deepening in Indonesia: challenges - PowerPoint PPT Presentation

Financial System Stability and Deepening in Indonesia: challenges amid regulatory capital reform under Basel III The Asian Banker Indonesia International Banking Convention Jakarta, February 2012 Djauhari Sitorus - World Bank* *The views and opinions expressed herein are those of the author, and do not necessarily reflect the views of the World Bank and its affiliated organizations, or those of the Executive Directors of The World Bank or the governments they represent 1

What do we mean by Financial System Stability and Financial Deepening?  There is no single definition of financial system stability nor financial deepening.  Financial system stability is a condition represented by a strong financial system capable of withstanding economic shocks, one that is able to ensure intermediary function, settlement of payments and diversification of risk.  Financial deepening, sometimes is known as financial development, refers to the increased provision of financial services with a wider choice of services in the economy or an increase in the size of the financial system and in its role and pervasiveness in the economy. 2

Financial Stability in Indonesia depends on financial soundness of the banking sector 2000 Rural Institutions Pawnshop • Highly concentrated - 2% 0% Mutual Funds 4% banking sector dominates , Finance Venture Capitals Companies recording stronger asset 0% 6% growth compared to that of the Insurer 5% non-bank financial institutions. Pension Funds 3% Banks (Comm & Sharia) 80% 2010 •The top three state-owned commercial banks account for Rural Institutions Pawnshop one third of all banking sector Mutual Funds 2% 0% 4% assets and deposits. Finance Companies Venture Capitals 6% 0% Insurer 5% Pension Funds Banks (Comm & 3% Sharia) 80% Source: BI, Bapepam LK, WB estimates 3

The economic cost of a failure to maintain financial soundness of banks is high  The 1997/1998 banking crisis was costly. It wiped off 50% Indonesia’s GDP.  Fiscal costs of the 1997-1998 crisis were the highest recorded.  Since then, serious reforms and efforts have been taken to restoring and maintaining financial system stability. I ndo ne sia 97 T ha ila nd 97 K o re a 97 Ve ne zue la 94 Me xic o 94 Ma la ysia 97 Philippine s 83 Cze c h 89 Hung a ry 91 Co lo mb ia 82 % o f GDP Swe de n 91 0 10 20 30 40 50 60 Source: Honohan and Klingebiel, 2000. 4

Sustained efforts for maintaining financial system stability have been paying off… •Banking sector NPL ratio CAR (L HS) L DR (L HS) BOPO (L HS) largely unaffected by 2008 NPL (RHS) ROA (RHS) NIM (RHS) crisis and continues to 120.00 7.00 improve. 5.84 105.00 6.00 •In 2011 NPL ratio 89.44 maintained low level of 90.00 2.7% (vs 2007 6%). 5.00 73.46 75.00 • CAR consistently strong 4.00 and 17.2% 2011, high level of 3.36 60.00 Tier 1 capital. 3.00 3.08 45.00 • ROA, ROE and NIM had increased to 3.1%, 18.8% 2.00 30.00 and 5.9% in 10/11 18.58 respectively compared to 1.00 15.00 2.9%, 19.2%, 5.7% 12/10. 0.00 0.00 • High level loan provision consistently over 100% minimum level required. As of 10/11, the ratio increased to 194% from 131% in 12/10. Source: Bank Indonesia 5

Banks Intermediary function has improved, with significant lending share to SMEs. •Maintained low operating efficiency Ag ric ulture , measured by the ratio of operating expenses mining , 3.7 5 to operating incomes - increased slightly ma nufa c turi from 85.9% in 10/2010 to 86.4% by 10/2011. ng , 15.5 Othe r, 34.6 e le c tric ity, •The deposit and lending rates stable at 2.3 6.5% and 12% over 2011. tra de , 18.2 c o nstruc tio n, 3.5 • Domestic credit to private sector slight increase 28.8% (v 25% 2006). so c ia l se rvic e s, 2.6 tra nspo rt, 4.3 L o a ns b y se c to r • Loan to deposit ratio increasing 81% 2011 b usine ss (% to ta l ne w se rvic e s, 10.4 2011 (75.2% 2010, following regulation on minimum LDR 75%). •Loans increased 20% with SME lending 60 Pe rc e nta g e Ne w le nding Wo rking c a pita l increasingly prominent - o utstanding SME lo a ns 50 lending i ncreased to 53% (52.4% 2010, I nve stme nt 40 50% 2008). lo a ns 30 Co nsumptio n •Majority bank lending for working capital 20 (48%) but over past five years shifting to 10 investment loans (21%) and consumption (31%), the latter also capturing MSME 0 2007 2008 2009 2010 2011 lending. 6

Stress Testing and Vulnerability: Lessons from FSAP  From October 2009 until March 2010, a joint IMF-WB team conducted the Financial Sector Assessment Program (FSAP) for Indonesia. As part of the FSAP, a bank stress testing was conducted.  The stress test involved scenario analysis and sensitivity analysis. The scenario analysis was used to infer banks’ vulnerability to credit risk, while the sensitivity analysis focused on banks’ vulnerability to a range of market risk shocks. Both top down and bottom up methodologies were used.  Key findings:  Credit risk is the main source of risk facing the Indonesian banks.  Indonesian bank are relatively resilient to market shock. They are most sensitivity to interest rate shock on their banking book but can withstand other type of market risk.  Banks have limited exposure to interest rate on their trading book. 7

Stress Testing and Vulnerability: Lessons from FSAP  Key findings (continued):  Smaller sized banks are most vulnerable to liquidity risk whilst the largest banks are vulnerable to concentration risk.  Contagion risks through the interbank market are not significant due to small size of the interbank exposures.  There is a wide diversity of stress testing capacities among the participating banks (12 banks). Most were able to undertake meaningful sensitivity analysis. They were able to also assess their exposures to concentration risk arising from the failure of their largest borrowers.  However, a few banks were able to fully evaluate the adverse macro-economic scenario that was chose for the FSAP. In particular, there were significant shortcomings in the methodologies used by many of these banks to assess credit risk regardless whether these were models based on/or incorporated expert judgment. 8

However, financial deepening appears to be a challenge…  Bank’s size to GDP is low compared to Thailand 97%, Malaysia 129%, Philippine 54%. Ba nk De po sits/ GDP 50 44 43 45 42 41 39 40 38 36 36 35 35 35 30 % 25 20 15 10 5 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 No v-11 9

NBFIs are growing strongly but still small.. (1) Insurance Mutual Fund 356.7 315.6 313.6 NAV E q uity (L HS) I HSG (RHS) 400.0 273.5 350.0 243.6 50 3500 228.8 211.5 300.0 45 202.2 3000 rillion 174.9 40 250.0 152.9 2500 139.4 35 illion 119.9 119.6 200.0 103.2 100.7 30 IDR T 2000 90.3 r 25 77.8 IDR T 150.0 60.9 55.6 1500 48.1 20 41.4 100.0 15 1000 10 50.0 500 5 0.0 0 0 Jun-05 e b -06 Jun-06 e b -07 Jun-07 e b -08 Jun-08 e b -09 Jun-09 e b -10 Jun-10 Oc t-05 Oc t-06 Oc t-07 Oc t-08 Oc t-09 Oc t-10 2004 2005 2006 2007 2008 2009 Se p-10 T o ta l Asse ts T o ta l Inve stme nt T o ta l Pre mium F F F F F Multifinance Pension Fund T otal Inve stme nts T o ta l Asse t (IDR T r illion) 200 T o ta l F ina nc ing 174.4 180 168.5 14.85 T o ta l Bo rro wing 160 E PF -De fine d Be ne fit E PF -De fine d Co ntrib utio n F IPF 142.5 137.2 9.08 140 127.3 9.29 11.13 rillion 6.82 109.9 120 108.9 107.7 6.86 7.5 102.5 101.9 96.5 5.34 92.8 100 5.85 IDR T 3.94 76.8 80 84.13 55 60 49.2 71.82 68.56 62.12 52.3 40 20 0 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 Source: Infobank, BapepamLK 10

NBFIs are growing strongly but still small… (2)  Stock market capitalization trending up, hovering around 48% GDP.  Low compared to region- Thailand 74%, Malaysia 139%, Vietnam 35%. Sto c k Ca pita liza tio n/ GDP 60.00 250 249 Va lue T ra de d Ca pita liza tio n/ GDP 248 T urno ve r Ra tio (RHS) 50.00 247 247 247 50.55 50.24 246 246 246 246 47.63 245 245 40.00 244 243 37.40 35.97 35.80 242 242 242 ime s % 30.00 241 241 29.91 28.77 T 240 240 26.54 239 22.50 21.73 21.49 20.00 238 20.42 18.68 18.31 17.37 16.47 14.78 14.58 236 14.33 14.21 14.16 13.35 12.76 11.75 10.00 10.87 8.83 8.64 234 7.58 5.79 6.36 6.13 0.00 232 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 11

NBFIs are growing strongly but still small… (3)  Bond market capitalization is small though growing: Approx. 13.4% of GDP (2011) compared to 12% (2010).  One of the lowest in the EAP region: Thailand 65% GDP. Co rpo ra te Bo nd Ca pita liza tio n/ GDP Go ve rnme nt Bo nd Ca pita liza tio n/ GDP 25 21.0 19.1 20 17.6 14.4 15 12.5 12.0 10.6 % 10.2 10.0 9.2 10 3.8 5 2.7 2.2 2.3 2.0 2.1 2.3 1.8 1.7 1.6 1.4 1.5 1.1 1.1 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 12

Access to financial services is limited for a significant portion of population… Share of the population with formal financial access % 100 80 60 40 20 0 Source: World Bank 2010 13