Banking Sector: Steps toward SMEs

Yesterday PT Bank Danamon Indonesia, Tbk (Danamon) and PT Asuransi Jiwa Manulife Indonesia (Manulife Indonesia) launched a partnership that provides insurance solutions to small and medium enterprises (SME). This is yet another effort by the commercial banks in Indonesia to provide better / more services to SMEs.

MSMEs are very important to Indonesian Economy

BPS estimates that in 2006 they constituted 99 percent of all businesses in the country, employed 97 percent of the work force, and accounted for 54 percent of that year’s GDP. 

The great majority of all Indonesian firms are micro enterprises—about 82 percent. Small and medium firms account for a significant but much smaller share of all firms, 15.8 and 0.6 percent, respectively.

Though SMEs are extremely important and is also recognized by the commercial banks still there exists a big gap due to which SMEs are still facing constraints in terms of financing. Very detailed report on this subject by IFC is a good read. Some of the highlights are as follows:

The key factors small-medium businesses gave for developing their businesses are financial: 

the need for more capital (59 percent) and, closely related, gaining access to loans (19 percent). The main constraints they face were again dominated by financial considerations: insufficient finance (26 percent) and, closely connected, financial management (9 percent). 

Loan Experience

Only 30 percent of small-medium firms have ever tried to obtain a loan from a licensed lender; of these 77 percent were successful. 

For the specific loan transactions, commercial banks are the most frequent credit source for small-medium firms, accounting for 76 percent of the loans issued. Cooperatives are in second position (11 percent) followed by Sharia banks (3.1 percent). Informal lenders were not asked about in this question. 

Factors determining the choice of lender are convenience of location, ease of the application process, and a relationship with the financial institution or a particular bank officer. 

Loan amounts are modest, averaging IDR 354 million for loans issued. About a quarter (24 percent) are under IDR 15 million; only 21 percent are over IDR 200 million. Loan terms are short, with over 39 percent being for a single year and 50 percent being for 2-3 years. 

Three-fourths of loans issued had flat interest contracts – a particularly striking finding.

Internet Banking

Only about 17 percent of firms currently use computers and the internet (59 percent of medium versus only 10 percent of small firms). Only 3.5 percent engage in internet banking, suggesting that this should be a service ripe for expansion. 

When respondents who now use computers and the internet were asked if they would be interested in purchasing an internet-based tool for purchasing and payment management, a surprisingly large share (23 percent) said they already do (18 percent of small, 29 percent of medium firms). Another 4 percent said they were “very interested” and 25 percent expressed some interest in acquiring such a tool. Some said they would even pay small amounts to do so.

What do these firms want in financial services providers? Of ten characteristics listed in the survey, four got a positive response from 55 percent or more of the owners/managers interviewed: 

•  low fees,

•  speed in making loan decisions,

•  flexible lending policies,

•  limited documentation requirements.

Definition of SME 

There is no commonly agreed definition across institutions and countries of what is a small firm

Ministry of SMEs and Co-operatives and Bank Indonesia. Micro firms are defined as enterprises with net assets less than IDR 50 million (land and buildings excluded) or enterprises which have less than IDR 300 million total annual sales. Small firms are enterprises with net assets from IDR 50 million to IDR 500 million (land and buildings excluded) or with total annual sales from IDR 300 million to IDR 2.5 billion. Medium-sized firms are those with net assets from IDR 500 million to IDR 10 billion (land and buildings excluded) or with total annual sales from IDR 2.5 to 50 billion.
As per World Bank Enterprise Survey. Size is defined by the number of employees: from 5-19 the firm is small, and from 20-99 it is a medium-sized firm. The survey covers only the formal sector and firms with more than 5 employees

Employment Numbers:

Estimated employment numbers (following numbers do not have any source) 

Micro - 89 million 

Small and Medium - 15 million

Large - 4 million

Banking Sector: Excellent year but consensus on slowdown in next year

Increase in Net profit by 15-25 per cent

Bank Mandiri (State controlled, largest bank in terms of assets of around USD 60 bn, currently trading at price to book of 2.6x) - profit increased by 15 per cent y-o-y to 12.8 trillion rupiah ($1.2 billion)

BCA (Privately owned, largest bank in terms of market cap of around USD 24 bn, total assets of around USD 45 bn, trading at a price to book of 4.5x) - net profit increased by 25 per cent y-o-y to Rp 10.4 trillion ($1 billion). 

PT Bank Permata (privately owned by Indonesian conglomerate Astra International (44.5%) and Standard Chartered Bank (44.5%), with total assets of around USD 13 billion, trading at a price to book of 1.14x) - third-quarter net profit rose 21 percent to 1.32 trillion rupiah ($118 million).

(Reuters)

Slowdown expectations

The central bank is already indicating that it expects loan growth to slow down, at rate of 14 to 15 percent

Bank Mandiri: also expected a credit growth slowdown next year to between 15 and 20 percent. It also expects net interest margin to decline to 6.8 percent by the end of this year from 7.0 percent in the second quarter.

Most of the banks' profitability increased by around 25-30%

Bank Mayapada Internasional posted 25 percent growth in net income to Rp 352.42 billion ($32 million) in the January-September period from a year earlier.

Bank Jatim, regional development bank for East Java, booked a 29 percent increase in profit to Rp 681.07 billion , while its net interest income increased 22 percent to Rp 1.77 trillion.

Bank Mestika Dharma, a Medan-based lender that is reported to be the target of an acquisition by a Malaysian lender, posted a 14 percent rise in profit to Rp 259.02 billion in the period.

Higher profit at Mayapada and Bank Jatim followed similar reports from other lenders. Bank Negara Indonesia, Bank Rakyat Indonesia and Bank Danamon Indonesia last week also announced profit increases in their nine-month statements.

(The Jakarta Globe)

Banking: M-banking outpacing I-banking in Indonesia

Most of the banks have recorded increased fee income derived from M-banking, which is growing faster than Internet banking. Examples include:

BCA: 30-40 per cent growth of m-banking volume and value (Total 4.3 million m-banking users generating transactions worth IDR 90 trillion ~ $ 9 billion) 

Bank Permata: 30 per cent growth in value and volume

Bank Mandiri: 50-60 per cent growth in value and volume (Total 700,000 users of m-banking as compared to 600,000 users of Internet banking) 

BRI: Expects 50 per cent growth in m-banking next year. (Total 4.28 million users of SMS banking as compared to 640,000 Internet banking users) 

(Source: Jakarta Post)

Forecast: Lending growth to slowdown in 2014

Lending has been growing at around 22%+ over the last three years in Indonesia vis-a-vis around 13% growth in the deposits. This has led to an increase in the average Loan to Deposit ratio, which is a cause of worry for the banks in Indonesia. Lending growth is expected to result in an excellent year for the banks as can be seen from the 9 months results. BRI's nine-month earnings rose by 17 per cent in spite of marginal drop in the Net Interest Margin (NIM) from 8.43 to 8.25 per cent mainly due to the growth in lending (The Jakarta Globe).

However, as per Bank of Indonesia (BI) the lending growth is expected to slow down significantly in 2014 to 15.3 to 16.6 per cent on the back of slowing economy and recent hike in the interest rate (Reuters).

Forecast: Slower Lending on the back of slowdown in economy

Gatot Suwondo, president director of Bank Negara Indonesia, the country’s fourth-largest lender by assets, said he expected a slowdown in lending.

“We are seeing a lot less companies coming to us seeking financing for new projects,” Gatot told reporters on the sidelines of the Asia-Pacific Economic Cooperation CEO Summit in Nusa Dua, Bali, earlier this week.

Meanwhile, consumer demand, which accounts for half of gross domestic product, slowed in August, according to BI’s Retail Sales Survey.

Growth in the retail sales index slowed to 1.3 percent year-on-year, according to the survey published on Thursday, below the 15.2 percent growth posted in July.

On a month-by-month basis, retail sales shrank by 3.2 percent in August from the preceding month, in line with demand returning to normal after the Islamic holiday of Idul Fitri.

The slowdown in retail sales affected all commodity groups, with clothing posting the biggest decline, the central bank said in the survey report.

BI says it expects retail sales to decline further — dropping 14.3 percent in September compared to August — as consumers cut back on expenses after the high-spending month of Ramadan and Idul Fitri.

Consumers also felt less optimistic about the economy, with the Consumer Confidence Index falling in September to 107.1 from 107.8 in August, the central bank reported. An index reading above 100 suggests optimism.

(Source: The Jakarta Globe) 

Slowdown in Real Estate Demand

Following is the forecast by Indonesia Property Watch for the real estate sector in Indonesia:  

"Indonesia Property Watch (IPW) has taken into account the possibility of a decline in demand for real estate by at least 20 per cent in 2014, besides the slowing growth of property prices," said IPW Executive Director Ali Tranghanda. Ali noted that the drop in demand is caused by a variety of factors such as the increase in mortgage interest rates, the slowdown in purchasing power, and the Central Bank's new regulation being implemented in the property financing sector.These issues impact property growth, which is expected to continue to slow down, with growth estimated at 25 per cent in 2014. (Source: Bernama) 

It is worthwhile to note that the growth is still expected to to 25% per annum, though lower than around 35% expected in 2013. Property prices have been increasing at the rate of 50-60% per year and still the rental yields are higher than most of the countries. 

Urban Java - SES classification and expenditure allocation

Around 55% of the Urban Population of Indonesia spends more than IDR 300 000 (or USD 30) per month (Bureau of Statistics). Using the same % for Java translates to around 44 million consumers spending more than USD 30 per month.


Following is the SES classification by Nielson:

From the chart below it can be seen that in Jakarta around 47% and in all of Java around 25% of population are in SES segment of B and above i.e. monthly household expense of more than IDR 800 000 (or USD 80) per month.

How do Indonesians spend money? The allocation between food and non-food item is around 50:50 in Indonesia. Though this would vary based on the SES classification, following is the national average:

Expenditure on non-food items such as housing, clothes, transport, entertainment, and education of 50% is in line with expenditure in a developing country. This number could be 5-7% higher for Urban population. However, as the economy of the country continues to grow the % allocation towards non-food item will continue to increase. For an example in the US even the 'poor' segment spends more than 80% on non-food items (Daily Mail):

Urban Java - Per capita expenditure

In this note my objective is to arrive at the per capita spend in Urban Java. I have tried to arrive at this number following two different methods:

1) GDP = around $900 billion
Household expenses (i.e. private consumption excluding purchases of dwellings) = 60% of GDP i.e. around $ 500 billion. (World Bank). i.e. around $2100 per capita.
GDP generated by the urban areas = 74% (expected to grow to 86% by 2030 as per MGI)
This means of consumer spending of $500 billion, roughly $400 billion is by urban areas, assuming same % of consumer spend in urban and rural.
Urban population is of around 120 million + out of which around 80 million + are in Java. Thus, of $400 billion, Java accounts for around $270 billion.

So the target market of Urban Java has a population of 80 million with a market size of $270 billion i.e. per capita spend of around $3400.

2) Java contributes to around 58% of the total GDP (Central Board of Statistics) i.e. around $520 billion. Urban Java's consumption expenditure is higher at 70% (Credit Suisse). Thus, total consumption in Java is around $365 million i.e. per capita spend of around $4500.

Thus, the per capita spend in Urban Java is between $3400 - $4500.