Which Indonesian Banks Are Ready for Lower Net Interest Margin (NIM)?
In anticipation of the Financial Services Authority's new policy, Indonesian banks categorized under BUKU III claim to be ready for a lower net interest margin (NIM). NIM is the difference between interest income generated by banks and the amount of interest paid out to the lenders. BUKU (Bank Umum Kelompok Usaha) is a categorization system, designed by Bank Indonesia, that divides Indonesian banks into four categories based on the banks' capital. Banks categorized under BUKU III have capital between IDR 5 trillion (approx. USD $373 million) and IDR 30 trillion (approx. USD $2.2 billion).
Last month Indonesia's Financial Services Authority (OJK) unveiled its plan to lower state-owned banks' NIM to the range of 3 - 4 percent in a bid to push the country's lending rates down, hence boosting credit growth and economic activity. Compared to its regional peers, Indonesia's NIM is high. On average the NIM of Indonesian banks stands at 5.39 percent, considerably higher than average NIMs in Thailand, Malaysia and the Philippines (see table below). When the new regulation will be implemented remains unknown.
Opinions are still somewhat mixed about the OJK's plan to cut the country's NIM. When the plan was revealed in mid-February 2016 shares of Indonesia's listed banks on the Indonesia Stock Exchange (particularly state-controlled ones as these are impacted directly by the new regulation) experienced sharp declines. A lower NIM implies banks are less profitable and this also means lower dividend payouts for shareholders. While, in theory, a lower NIM should encourage a larger customer base due to lower borrowing costs, there may be limited room to increase Indonesian banks' customer base as a relatively large portion of the Indonesian population (especially the rural population) is still financially illiterate, living without banking services.
The OJK said it plans to provide stimulus for those banks that manage to curtail their NIM. The type of stimulus provided by the OJK will vary on the needs of the specific bank. For example, some banks may request an incentive that makes it easier to open new branches. Others may request stimulus to offer new products to customers.
Profile Banking Industry Indonesia & Regional Peers:
| Indonesia |
Thailand |
Malaysia |
Philippines |
|
| Risk Free Rate | 7.25% | 1.50% | 3.25% | 4.00% |
| Inflation | 3.35% | -0.90% | 2.70% | 1.50% |
| Credit Interest Rate | 12.86% | 7.10% | 6.85% | 6.86% |
| Net Interest Margin | 5.39% | 2.60% | 2.35% | 3.35% |
Source: Bisnis Indonesia
Steffano Ridwan, Director Small and Medium Enterprise of Bank DBS Indonesia, says the lower NIM policy will have positive consequences for Indonesian banks classified under the BUKU III system because, on average, these BUKU III type banks already have a NIM close to 4 percent (in 2015 Bank DBS Indonesia's NIM was recorded at 4.5 percent). According to Ridwan, the new policy will have the most negative impact on BUKU IV banks - those banks with a capital of at least IDR 30 trillion - as some of these banks have NIMs up to 8 percent.
BUKU System Indonesia:
| Category | Core Capital | Number of Banks |
Average NIM |
| BUKU I | < IDR 1 trillion | 40 | 5.89% |
| BUKU II | IDR 1 trillion - IDR 5 trillion | 42 | 4.71% |
| BUKU III | IDR 5 trillion - IDR 30 trillion | 20 | 4.49% |
| BUKU IV | > IDR 30 trillion | 4 | 6.36% |
| Banking Sector Indonesia |
IDR 872.31 trillion | 118¹ | 5.39% |
¹ including 12 sharia banks
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