ADB warns Indonesia against over-reliance on banks for financing

Urges development of local bond market instead.

The Asian Development Bank said developing the bond market will avoid liquidity mismatches in developing long-term infrastructure projects.

ADB vice president of finance and risk management Thierry de Longuemar said one of the things that is criticized with regard to bank lending is that it does not offer the longer maturity that is required, particularly for infrastructure financing.

He noted that an over-reliance on loans to finance infrastructure would lead to liquidity mismatch, as banks normally finance long-term projects with short-term deposits.

De Longuemar said a well-developed bond market will provide a less-expensive alternative source of funds for local corporations, most of which still depend on bank loans to support expansion.

Executives, however, frequently complain of the high cost of loans since local banks charge higher interest rates than their peers in Southeast Asia. Indonesian banks are Asia’s most profitable.

They have an aggregate net interest margin (NIM) of 5.53%, making them twice as profitable as other ASEAN banks, and even more profitable than banks in China and India whose NIMs are between 2% to 3.5%.

This huge disparity prompted an investigation by the Business Competition Supervisory Commission that alleges that large Indonesian banks were operating as an oligopoly to fix interest rates.