Extremely high lending rates, next to the acutely inadequate and crumbling basic infrastructure, have now become the second biggest disadvantage affecting businesses in Indonesia in facing foreign competition, and a big barrier to new investment.
The cut in Bank Indonesia’s benchmark interest rate from 9.5 percent in December 2008 to 6.5 percent last August failed to make a dent on bank lending rates, even though inflation was checked at the historical level of less than 3 percent throughout last year. The interest costs Indonesian businesses have to pay remained at an average of 14 percent, more than twice as much as those paid by their counterparts in Malaysia, Thailand, Singapore and China.
These high capital costs, in addition to grossly inefficient logistics caused by poor basic infrastructure, have deterred new investment because new businesses have to generate unusually high returns. The central bank’s policy support and prodding of state banks since the middle of last year to gradually reduce their credit rates in a stronger bid to bolster economic growth remained unheeded.
Bank Indonesia made another strong argument on the vital importance of lower interest rates during the annual bankers’ dinner meeting in mid January. Late last month Coordinating Economic Minister Hatta Rajasa again raised the issue of the damaging impact of punitively high lending rates on the economy, at a special meeting with the managements of state banks (as the market leaders) and the minister of state enterprises.
The central bank last week again decided to keep its benchmark interest rate at 6.5 percent for the seventh straight month, to promote bank lending.
The big question remains why the transmission of the central bank’s easier money policy to commercial bank lending rates has remained so slow, even though the financial market stability has become much stronger and the outlook for economic growth remains upbeat. There is usually a time lag of only two to three months before the impact of the central bank rate cut is transmitted to a reduction in lending rates.
How can we expect lending growth to expand by 20 percent this year, as targeted by the central bank, to support an economic growth of 5.5 percent, if most businesses consider credit rates so punitively high. Look at how many businesses were reluctant to withdraw loans already approved, leaving undisbursed credit as of last December at almost Rp 300 trillion (US$30 billion). Last year lending expanded only by about 10 percent, but the biggest portion of that growth was enjoyed by consumer loans.
We think it is high time for Bank Indonesia to thoroughly audit the cost structure of bank funds and investigate why they continue to charge such unusually high interest rates while deposit rates have fallen to as low as 5 percent. The central bank should also be more forceful in jawboning banks to lower their credit rates. It is simply not fair and economically unwise to allow commercial banks to continue to enjoy net interest rate margins of 5 to 6 percent, while most of their funds, instead of being poured into the real sector, were ploughed to the financial market.
Do banks refrain from lending because of self-fulfilling expectations that other banks will not lend as well? If that is the case, state banks, which still account for 40 percent of the industry’s total assets, should become the trendsetters, leading credit expansion at reasonably low rates to government-selected priority sectors.
Seen from their multiplier impact on the economy, it would be much better for state banks to significantly expand lending to the real sector at relatively low interest rates rather than booking high profits but clogging the arteries and lifeblood of the economy.
