Banks expected to follow BI's lead, lower interest rates

The Jakarta Post ,  Jakarta   |  Thu, 10/26/2006 9:21 AM  |  Business

The Jakarta Post, Jakarta

Indonesia's banks may soon follow the central bank's lead by lowering their lending rates, according to an industry player.

According to the senior banker, the country's lenders are likely to trim their lending rates to between 14 and 15 percent within the next two months from their current range of between 16 and 17 percent.

""The banks will only be able to expand lending if they lower their lending rates, which at present are still too high,"" Bank Mega's retail banking director, Kostaman Thayib, was quoted by Antara as saying last week.

The lingering high inflation and interest-rate environment was still hurting people's purchasing power, Kostaman explained, and this, in turn, had sapped the demand for loans.

The banking industry's total outstanding loans as of September stood at Rp 758.4 trillion (US$82.4 billion), an increase of only 0.1 percent from the previous month. And with the industry's average non-performing-loan (NPL) ratio still at a relatively high 8.8 percent, the banks themselves consider it too risky to increase lending.

All this has led to many banks preferring to play it safe by making their profits from central bank bills and government bonds, as well as their fee-based services.

Many of the country's major banks have reported unimpressive third-quarter results, showing falling profits on slower lending, with only state lender Bank Rakyat Indonesia (BRI), the country's fourth largest bank by assets, bucking the trend.

If Bank Indonesia cut its key rate to between 8.5 and 9 percent, Kostaman said, the situation might improve as the banks would be able to lower their own lending rates to between 12 and 13 percent.

Such lending-rate levels last prevailed when the BI rate stood at 8.5 percent in July 2005. However, last year's fuel price hikes pushed on-year inflation up to 17 percent, forcing BI to increase its key rate to 12.75 percent.

The central bank recently cut its rate to 10.75 percent after last month's inflation came in at 14.55 percent. It will hold its next monthly policy meeting on Nov. 7, when it is likely to cut rates again.

The government, keen on boosting growth through more investment and business expansion, has called on the banking sector to lower lending rates. The country's powerful business lobby group, the Indonesian Chamber of Trade and Industry (Kadin), has also urged the banks to bring their lending rates down to 12 percent, which it says would be a reasonable level for spurring the real sector.

BI Governor Burhanuddin Abdullah has said the banking sector may miss its credit-growth target of 15 percent this year if the banks continue to operate inefficiently, resulting in the need to maintain a costly spread of over 3 percent between lending rates and the BI rate.

However, the major banks have yet to announce any plans to lower their lending rates, saying that up to three months may be needed for this to happen.

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