B

ank Indonesia (BI) has uncovered worrying evidence that the country’s banks are being held hostage by their big clients, preventing them from lowering their interest rates in line with the central bank’s low interest-rate policy.

BI Governor Darmin Nasution said that based on the central bank’s survey, most banks could not cut their interest rates to an affordable level for businesses as they had to spend huge amounts to keep their big depositors from going elsewhere.

Around 99 percent of the country’s banks offer special high-level interest rates or provide generous gifts to their big depositors, which then must be covered by proceeds from higher interest rates levied on businesses, including small-scale enterprises, according to Darmin.

Banks usually offered a rate of at least 8 percent to their big clients, well above the usual deposit rate of 5.8 percent, annually, Darmin said.

BI’s benchmark interest rate currently stands at 5.75 percent.

“Only a small percentage of bank clients have significant amounts of funds. Therefore, they have huge bargaining power,” said Darmin late on Tuesday.

“If a depositor has funds of between Rp 1 billion [US$106,000] and Rp 10 billion, banks will have no problem letting him go. But when he has Rp 5 trillion, then he can shake down any bank,” he said.

Indonesia, Southeast Asia’s largest economy, has been aiming for a low interest rate comparable with neighboring countries such as Malaysia, Singapore and Thailand.

Low interest rates help spur business activity and have kept economic growth hovering at above 6.5 percent amid the global economic slowdown. “Mid-scale and large-scale businesses need to borrow from banks to invest. But if lending rates stand at 22 percent, businesses are reluctant to borrow,” said Darmin.

Recent data from BI revealed that the average lending rates for investment stood at 11.29 percent for rupiah loans in February. For working capital purposes, private banks imposed 11.83 percent.

Due to these high interest rates, the country’s loan to gross domestic product (GDP) ratio remains low at 29 percent, while in Malaysia and China it is more than 100 percent.

Darmin also blamed local banks for being too greedy in reaping profits by imposing high interest rates.

“Both our cost of funds and net interest margin (NIM) index are relatively high compared to our neighbors, such as the Philippines and Malaysia,” he said.

“The spread between cost of funds and NIM is only 3 percent in Malaysia and is only 4.5 percent in the Philippines. In Indonesia, the spread is still between 5.5 percent and 6 percent,” he added.

Standard Chartered economist Fauzi Ichsan said that although Darmin might have a point on banks’ desire to keep their rich clients happy, there were also other factors that made banks more prudent when providing loans, and imposing high interest rates.

“First, learning from the experience of the last monetary crisis, banks are now more prudent about containing risks before making loans. Secondly, banks lack confidence in the legal system,” he said.

“Our legal system has not yet been able to reassure creditors about their loans. How many times have we seen banks not being able to take legal measures against debtors who fail to comply with their obligations?” he added.

Fauzi said that lowering interest rates could be achieved if the authorities managed to create a competitive environment within the banking industry.

“We need to see more banking penetration and access to provide competitiveness. With more competition, banks will be more likely to lower their rates,” he said.