D

espite the recent cut in Bank Indonesia'€™s (BI) interest rates, domestic lenders will not rush to lower their lending rates as they will first monitor costs of funds and liquidity in the market, according to bankers and analysts.

Bankers contacted by The Jakarta Post said they were still in wait-and-see mode as liquidity in the banking system was expected to tighten as a result of a government bond-issuance program and the low growth in third-party funds since last year.

Bank Tabungan Negara (BTN) finance and treasury director Iman Nugroho Soeko said the BI rate cut would not necessarily lower the cost of funds for the domestic banking industry as lenders were still anticipating the impact of the government'€™s front-loading strategy in bond issuance.

'€œThe front-loading strategy could create a crowding-out effect in the market, which eventually will suck in funds from the banking industry for the sovereign debt papers, which in turn will probably increase costs of funds for banks,'€ Iman said recently.

The front-loading strategy refers to the government'€™s long-term scheme of offering as many bonds as it can at the beginning of the year in order to secure immediate funds.

With such a strategy, funds in banks'€™ time deposits are expected to shift to government bonds as the debt papers will offer higher yields, forcing banks to compete head-to-head with other instruments.

However, Iman said BTN would not seek significant growth in net-interest margin (NIM) this year, which meant that the bank could decrease its costs of funds and had the potential to lower lending rates.

'€œWe will see next month if we can prioritize lending-rate reductions in some products, especially in mortgages related to low-income segments,'€ he said.

Bank Mandiri finance and strategy director Kartika '€œTiko'€ Wirjoatmodjo had previously said that the tighter competition in liquidity due to the government'€™s debt-paper program would mostly affect '€œspecial rates'€.

The '€œspecial rates'€ is a term given to time deposit rates with a level above the maximum interest rate guaranteed by the Deposit Insurance Corporation (LPS) often offered to customers with a large amount of funds.

Other senior banking executives, such as CIMB Niaga strategy and finance director Wan Razly Abdullah, Bank Negara Indonesia (BNI) finance director Rico Rizal Budidarmo and DBS Indonesia institutional banking director Peter Suwardi also expressed similar views.

DBS'€™ Peter said the bank expected that the government'€™s efforts to improve the investment climate in Indonesia would help the inflow of third-party funds in banks to increase.

Annual inflation eased to 3.35 percent in December, the lowest since March 2010, providing room for BI to cut its rate to boost growth in an economy that has slowed to levels unseen for six years in the past few quarters.

As BI cut its rate for the first time since February 2015 on Thursday, it also lowered deposit and lending facilities by 25 bps as well, to 5.25 percent and 7.75 percent, respectively.

BI executive director for economic and monetary policy Juda Agung said the central bank was also monitoring closely the impact of the government'€™s front-load strategy on the banking industry as it also saw low growth in third-party funds last year.

'€œThird-party funds in banks grew 7.7 percent in November last year, so that we need to anticipate liquidity pressure as an effect of the government'€™s operation and weakening of banking funds,'€ Juda said recently.

The Financial Services Authority (OJK) received the banking industry'€™s business plan for 2016, in which lenders predicted their third-party funds would increase 12.7 percent year-on-year in 2016, which was within the OJK'€™s projected range of around 13 percent to 15 percent.