Consumer cravings for durable goods – motor vehicles in this case – are poised to register an incremental grow over the long term, notwithstanding the soaring interest rate and recent fuel price hike. And consumer-financing companies are poised to be at the forefront to fill that demand.

That is, according to a slew of practitioners from the financial industry.

By the way, the number of motorcycles out of the assembly line in September declined by 7.7 percent month to month – according to Asosiasi Industri Sepeda Motor Indonesia. The industry group also foresees a 20-percent decline in motorcycles sales for the fourth quarter of 2005,

blaming weakened purchasing power as an adverse effect of higher interest rate. And with soaring expenses to be incurred o­n the eve of Idul Fitri and Christmas celebrations, such bleak premonition is even closer to becoming a reality.

As stated by Dennis Firmansjah, Secretary General of APPI who is also the President Director of Saseka Gelora Finance, ‘consumers – both first-time and experienced buyers – won’t budge by the hike in fuel price and interest rate, that new vehicles will continue to roll out of the showroom. “Sure, we’re going to see some bumps along the up trend line, but historically this is entirely normal and to be expected when a sudden jolt hits the economy. In the long run, a robust growth will be maintained,” he says.

Similarly, o­ngki Dana, Managing Director of Bank Permata and T. Herman Dinijanto, General Manager of BCA Finance respectively, suggest an upbeat sentiment of the buying binge in a market where soaring cost of living and fuel have always been a sensitive issue.

“Growth in sales of new and used motorcycles is especially the o­ne to watch for the next few months. Likewise, new car financing will go up more in line with affordable cars within 100 million-plus price range,” Dana stress out.

At the very basic, the reason for this optimism is far less complicated than comprehending the rationale for fuel price hike: Poor public transportation, which is the main problem; and proliferation of quality but affordable and stylish city cars. “Anyone can ride a new wheel with less than Rp. 200 million these days,” adds Firmansjah.

As if downplaying the in-progress constructions of monorail and private-lane bus to connect major hubs across Jakarta, Firmansjah further emphasizes his prosperous outlook by stressing how, ‘with new-car price a fraction it used to be not long ago, people would for the first time be liberated from the jam-packed, and unsanitary buses o­n their way to the office’.

For Dana, the reasons lean more o­n number crunching aspects in motor-vehicle loan (or any other type of small loans, for that matter): “Obviously, consumer lending is much less risky compared to its corporate counterpart. First of all, the magnitude is smaller individually, hence the smaller ratio of loan amount to number of borrowers. As a result, credit risk is diversified evenly across a very large area, that default of o­ne account would be automatically offset by the rest. Secondly, the higher spread delivers more profits.”

“By contrast, corporate lending – channeled to a handful of big companies in billions of rupiahs – is more fatal in terms of risk profile. Aside from credit default, the odds of these big borrowers to collapse in a volatile economy, is a market risk every bank should be prepared to endure.”

Joint financing as the way to go

But for this outlook to materialize to a transcendental reality, multi-finance companies must first be backed with strong capital structure. “Insufficiently funded players will either be forced to shut down or be acquired by bigger counterparts,” predicts Firmansjah.

Currently, there are 3 schemes widely accepted by banks that aim to expand their portfolio in no time: Asset purchase/ acquisition, lending to a multi-finance company, and joint financing or syndicated loan. Each has its own benefits and drawbacks.

Of the three, joint financing has won the heart of the movers and shakers of the banking world, thanks to the ability to manage risks and independence from the performance of the consumer-finance partner. “Roughly speaking,

banks regard end users as the way out in an event of financial distress, commanding full detail of their information and control over collection process,” says Dana.

“Normally joint financing calls for 90-10 ratio of proportion between bank and consumer finance company, with the bank takes up the former. Contrary to popular belief, such arrangement is not like 2-step loan in which a bank indirectly channels loan to end users through an intermediary corporation. It is actually a form of syndication,” explains Dana.

The relative risk born by both partners is assumed o­n the basis of the percentage of money allocated. A simple scenario goes like this: If o­nly 50 million of a 100 million-rupiah loan is recoverable, the bank will be entitled for 90 percent of that amount or Rp. 45 million. The other 10 percent is the share of the consumer-finance company.

BCA Finance, whose majority of portfolio is funded through joint financing with parent company BCA (Bank Central Asia), maintains a 95-5 percent ratio. “For us joint financing is a practical and fast route to level our competitors almost effortlessly. It comes at the right time just when other fund sources like the bond market, goes under an unfavorable climate,” praises Dinijanto.

As said by Dana, there are fundamentals for a joint financing deal to register success: Being prepared with credit acceptance system, loan automation system for handling financial and non financial information, strong relationship with reliable partners, and dedicated workforce.

Risk protection measure needed

With demand for new loans continues to rise, banks as the major source of fund are expected to roll out an effective

protection system to fend off credit risks, and to avoid 1997 financial distress from repeating itself.

Setting aside the constant, rave reviews of the near future market and relative advantages of joint financing, it should be noted that such robust outlook nevertheless can not escape the possibility of default as a result of higher interest rates. Complicating the matter is the fact that rarely does our salary goes in line with the rise in living costs.

A list of names with delinquent payment history has long been used to thwart unsavory would-be borrowers, but apparently the so-called black list cannot be relied o­n in an industry whose growth and role as driver of the economy have in many ways, leveled those of banks. What then?

“I strongly believe that a credit bureau is the number-one urgency that should be prioritized by the government,” says Firmansjah. “We, the movers of multi-financing, have sounded this off long time ago but unfortunately things haven’t been moving in harmony with reality in the credit market.”

“We want to be able to satisfy the demand for new cars and motorcycles but we cannot do so effectively and securely without being supported by strong reference of those we are going to lend to.”

That explains the reason behind a breakthrough framework for managing risks – dubbed mirroring – currently under scrutiny by Bank Indonesia to save banks the troubles during hard times. Such aptly named system – reportedly invented by Bank Permata – calls for banks to be backed by a ‘carbon-copy’ database of customers managed by the consumer-finance partner.

“When mirroring has been put into practice, the bank will be fully informed of the detailed activities of every account – able to analyze the ups and downs in payment progress, identify delinquent borrowers and incomplete documents, as well as prepare against likely payment failure,” says Dana.

Definitely, it provides real-time information that reflects the dynamics of the customers including the most critical of all – assumed and potential risks.

Looking back, several years ago banks failed to recognize the imperative for mirroring that in the wake of 1997 economic crisis, the collapse were in part blamed o­n the lack of this sort of replicated database.

Complicating the situation was a major portion of the portfolio were corporate financing, channeled in billions of rupiahs (or millions of dollars) to much smaller number of debtor- companies. With the banks automatically exposed to higher credit risk, the entire financial industry nosedived to a prolonged financial slump.

In summary, consumer-financing may be the antidote for the series of events disfiguring Indonesia’s economy – just when the country is back o­n its feet again after a prolonged crisis that wreaked havoc throughout the Far East.