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everal major lenders predict that their lending rates will change little before the end of this year as credit risks remain high amid economic uncertainties despite the cost of funds declining.

Bank Mandiri finance director Kartika '€œTiko'€ Wirjoatmodjo said lending rates could stay relatively unchanged in the fourth quarter as quality of assets in the banking industry had been deteriorating due to weak economic growth as well as global uncertainties.

The declining quality of assets, indicated by a rising non-performing loan (NPL) ratio, could force banks to increase their risk premium percentages, one contibuting factor to the prime lending rate (SBDK) for each type of credit, Tiko said.

'€œWorsening asset quality over the past nine months has triggered risk premium increases. I don'€™t remember the exact figure, but the proportion of risk premium is quite high as it can reach around 3 to 4 percent in smaller loans,'€ Tiko said.

According to Tiko, an adequate risk premium percentage is essential for banks to calculate their loan-loss provisions '€” highly needed during downtrends such as this as nationwide gross NPL continues to rise from 2.46 percent in May to 2.8 percent in August.

As for cost of funds, another main component in the prime lending rate, Tiko said Mandiri had already seen a 0.8 percent decline, to 7.5 percent, in the cost of funds for rupiah time deposits in the third quarter,
from 8.3 percent in first quarter, as growth of third-party funds tended to outpace loan growth in the weak economy.

Tiko added that the cost of funds would continue to slide if Bank Indonesia (BI) decided to cut its interest rate as it had already signaled a possible monetary relaxation, which was unlikely to be done this year due to uncertainty around the US Federal Reserve'€™s plan to hike its fund rate.

Despite the central bank'€™s decision to maintain its interest rate, the Deposit Insurance Corporation (LPS) cut its rate by 25 basis points (bps) in October, to 7.5 percent, following the falling trend of deposit rates in domestic banking over the past six months, indicating ample liquidity.

The declining trend in the cost of funds has not necessarily helped banks to cut their interest rates as the average lending rate in the banking industry only slightly decreased, to 12.91 percent, in September, from 12.92 percent in the previous month, according to BI'€™s latest data on broad money (M2) circulation.

Bank Central Asia (BCA) president director Jahja Setiaatmadja said the private lender already provided the lowest lending rates in the domestic banking market, saying '€œour mortgage rates are below 10 percent, while our small and medium customers are enjoying 11.25 percent, far lower than the 16 to 17 percent offered by other banks.'€

'€œWe have cut our deposit rates eight times since January, by a total of 2 percent, and we decided to maintain them in October, while also monitoring our needs and secondary reserves,'€ Jahja said.

On the other hand, Bank Rakyat Indonesia (BRI) vice president director Sunarso said the higher proportion of low-cost funding would help the lender to cut its lending rate without sacrificing profits, which were already under pressure due to weak economy.

'€œOur net interest margin [NIM] had decreased to 8.08 percent as of September, from 8.78 percent in the same period last year, because of the declining cost of funds. We don'€™t think it is the right time to raise the NIM amid uncertainties and worsening credit quality,'€ he said.