Indonesia Advisory

Urip Hudiono, The Jakarta Post, Jakarta

The central bank will limit the type and amount of corporate bonds eligible for its new regulation, which will allow banks to account for such investment holdings as loans, following growing criticism over the plan.

With the revision, only ""investment grade"" corporate bond holdings of banks could be categorized as loans and used to account for their loan to deposit ratio (LDR), Bank Indonesia (BI) deputy governor Siti C. Fadjrijah told reporters Tuesday.

""The corporate bond must also be marked to market,"" Siti said, asking banks to adjust the value of such holdings to their fair market prices.

Siti further said BI would still assess the details of the planned regulation, including the proportion of corporate bond holdings that banks can claim as part of their lending.

The central bank recently unveiled a plan to issue a new regulation which will allow banks to regard their corporate bond holdings as lending so that the banks will be able to raise their LDR.
The banks have had difficulties matching their LDRs to the central bank's standards due to the low growth of lending.

The BI has argued that such holdings could be categorized as loans, as the issuing company would in the end also use the funds raised for expanding its business and contributing to the total economic growth.

The central bank is targeting 20 percent lending growth for this year, after last year's slump to 14 percent. Bank lending added another Rp 38.5 trillion (US$4.27 billion)in June to reach Rp 854.9 trillion, or growth of 19.4 percent compared to the same first six-month period last year.

Industry analysts have, however, already criticized the plan, saying it may only improve the on-paper performance of banks in terms of their LDR, but not actual lending for the better of the economy.

They suggested BI instead require banks to allocate a greater proportion for productive lending such as to small businesses, and limit less productive ones such as consumer loans, if it really wanted to support growth through lending.

Banks have lately been in something of a dilemma -- while on one hand, demand for new loans is actually still slow, they have been under criticism for opting to invest their excess liquidity in market investments such as central bank bills rather than productive lending.

Further criticism over BI's latest plan came from tax office chief Darmin Nasution, who said that with the new regulation, the level of banks' LDR would be misleading because they did not represent the actual increase in their lending.

He also feared that with the new regulation, his office's plan to give incentives to encourage bank mergers could go to the wrong banks, because the planned tax breaks would be given only to those with high LDRs.

A 50 percent minimum LDR level is among the requirements for the so-called anchor banks, which will lead the BI's consolidation of the industry through mergers and acquisitions by 2010.
Siti has, however, maintained BI's argument that such ""indirect lending"" from the new regulation will have a positive effect on the economy, and on efforts to deepen Indonesia's financial market, once it has ironed out the details