Indonesia’s debt problem? There’s not enough of it

By Andy Mukherjee / BLOOMBERG

INDONESIA’S problem with leverage is the exact opposite of what emerging markets usually face. There’s too little debt in the banking system and too much equity.

Indonesian lenders such as PT Bank Mandiri Tbk, the country’s largest lender by assets, as well as rivals PT Bank Central Asia Tbk and PT Bank Rakyat Indonesia Tbk rank among the world’s best capitalised.

Financial leverage, which simply divides assets by equity, is between 5.5 and seven for all three.

For most Chinese, Indian, Brazilian and South African lenders, the figure ranges between 11 and 15.

There is such a thing as being too healthy. After all, when their leverage is too low, banks are unable to do the right thing by anyone.

They pay depositors less than they should; charge too high a premium before passing those funds on to borrowers; and then use their oversized margin to pay for everything from bad loans to bloated bureaucracies. Shareholders also lose.

Take Bank Mandiri. It garners a 2%-plus return on assets, double the global average for banks with market value of between US$20 billion (RM83 billion) and US$50 billion.

But its 13% return on equity (ROE) — return on assets multiplied by leverage — is unremarkable. That shuts off the option of raising capital from shareholders to expand its loan book.

But given the fluffy equity cushion, why don’t Indonesian banks borrow more heavily? The answer lies in the archipelago’s constrained funding market.

Bank Mandiri CEO Kartika Wirjoatmodjo said credit growth of more than 13% to 15% would cause loan to-deposit ratios to spike.

Getting that metric back in line would require paying more to depositors, which in turn would mean sacrificing a juicy 5.5% net interest margin.

Return on assets would drop, and even with higher leverage, the ROE would remain unappetising. Things would be back to square one.

To loosen the funding constraint, the authorities need to suppress volatility of the rupiah exchange rate and develop a swap market so banks like Bank Mandiri can borrow long-term funds overseas and hedge their currency risk at a reasonable price. Lenders have a role to play, too.

Large firms’ credit demands (usually for capacity expansion) are already about 39% of Bank Mandiri’s total loan book — the potential for further growth from this category looks exhausted.

So, the bank is now trying to persuade major corporate borrowers to put their payroll accounts on its balance sheet and refer some of its more creditworthy suppliers and distributors to increase its exposure to small and medium enterprises.

Meanwhile, financial technology (fintech) firms are moving aggressively to profit from banks’ outdated payment systems. A customer of a ride-hailing app like Grab can pay 50,000 rupiah (RM14.53) for a 15,000 rupiah ride, and instantly receive from the driver the balance of 35,000 rupiah as credit on her e-wallet.

When the customer wants to spend this money on popular websites like Tokopedia and Bukalapak, Bank Mandiri wants to entice them to pricier purchases with consumer loans.

Competition between banks and fintech for retail clients and small businesses would mean narrower net interest margins, which would force banks to cut some flab.

Once they are more efficient, large Indonesian lenders could easily leverage up to 10 times or more and deliver a 15%-plus ROE with 1.5% return on assets, or even less. It will be a win for borrowers, for savers, as well as for bank shareholders.

After all, if overextended banks cause 2008-type financial crises, overcapitalised ones stymie economic growth.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its