Measuring the Prospects and Challenges of Banking in 2024
This article has been translated and summarized by CORIM Indonesia as part of our highlights of services. We has not completely checked the accuracy and admits no responsibility for the content.
By infobanknews.com
News | January 17, 2024
The International Monetary Fund (IMF) has warned of risks in global banking due to higher and longer interest rates. This has exposed vulnerabilities in some banks and could weaken others due to a prolonged period of tight monetary policy. Central banks may keep interest rates higher for longer to curb inflation, even if it slows their own economies. This dynamic environment has not been faced by world financial markets in a generation, requiring financial sector authorities to sharpen analytical tools and policy responses to address emerging threats. Risks include high benchmark interest rates, geopolitical tensions, oil price spikes, a cost of living crisis, and world economic fragmentation.
The existence of a political agenda in 2024 in several countries related to the presidential election (pilpres) - for example in the United States (US) and Indonesia - must also be a concern because the electoral results may change the economic constellation in the future related to "adjusting" various policies in economics.
High interest rates will persist until the end of 2024 due to tight monetary policy. Banks face risks from increased benchmark interest rates, but many benefit from collecting higher rates from borrowers while keeping deposit rates low. Loan losses may increase due to higher borrowing costs and increased investment in bonds and debt securities. The global banking system appears resilient, but severe stagflation and higher central bank interest rates could lead to greater losses. The number of weak financial institutions will increase to 153, accounting for over a third of total global bank assets.
The Indonesian banking sector is thriving despite high global interest rates, with a capital adequacy ratio (CAR) of 27.41%, which is above the average of other countries. Credit growth in the sector was 8.96% YoY to IDR 6,837.30 trillion in September 2023, with the domestic private commercial bank group being the largest contributor. Public savings or third-party funds (DPK) also saw growth, with current accounts contributing the most. The banking industry's liquidity is well above the required supervision thresholds, with ratios of 115.37% and 25.83%. Credit quality is also strong, with net NPL of 0.77% and gross NPL of 2.43%. The value of loans affected by COVID-19 restructured consistently decreased by IDR 9.17 trillion to IDR 316.98 trillion. The decrease in restructuring credit has reduced the loan at risk (LAR) ratio to 12.07%. Despite the high yield on US debt securities, market risks related to the SBN portfolio have been mitigated due to banks adjusting the duration and rebalancing portfolio types. The banking Net Open Position (NOP) remains stable at 1.76%, below the 20% threshold.
The Indonesian banking industry has shown resilience in absorbing risks amidst global economic changes. However, banks must continue stress tests to test capital resilience, liquidity, and profitability, adhering to risk management principles. Despite optimism about 2024, they must remain vigilant to ensure the industry's well-being.
By Ryan Kiryanto, Senior Economist & Associate Faculty at the Indonesian Banking Development Institute