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Rate cut great but access to loans needs improvement
The central bank cut its benchmark interest rate last week and has signaled that there may be more cuts, a move expected to bring down borrowing costs for business expansion and consumer purchases that will boost growth amid sluggish economic activities
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span>The central bank cut its benchmark interest rate last week and has signaled that there may be more cuts, a move expected to bring down borrowing costs for business expansion and consumer purchases that will boost growth amid sluggish economic activities. But will that really be the case?
Borrowers, especially micro, small and medium enterprises (MSMEs), do not share the excitement the economic theory portrays about the effect of a rate cut, which policymakers and economists strongly believe will have positive effects on the economy.
Yes, they praised Bank Indonesia’s (BI) decision to cut its reference rate as a signal that would encourage the sector to take up loans with lower interest rates, according to Association of Indonesian MSMEs (Akumindo) chairman Ikhsan Ingratubun.
But even with low rates, the difficulty MSMEs face in obtaining access to bank loans has hampered the sector’s potential contribution to the economy, of which 60 percent comes from MSMEs.
“We welcome the policy with open arms,” Ikhsan said. “But what we truly need is fast, cheap and easily accessible loans.”
BI on Thursday trimmed the seven-day reverse repo rate by 25 basis points to 5.75 percent, with economists projecting more rate cuts in the future as BI Governor Perry Warjiyo said the central bank still had room for a looser policy to support economic growth.
Only 19.6 percent of the bank loans disbursed is channeled into MSMEs, according to the latest BI data as per September 2018, although a 2015 BI regulation requires banks to allocate 20 percent of their lending to small and medium enterprises (SMEs).
While financial technology (fintech) has provided MSMEs with easier loan access, Ikhsan admitted that some fintech companies charged excessively high interest rates of between 18 and 22 percent, thus keeping the sector at a disadvantage.
Indonesian Employers Association (Apindo) member Gunawan Tjokro said SMEs faced issues with providing loan collateral, which was normally small in value.
Meanwhile for big companies that operate in a business group, there is difficulty in accessing loans as a BI regulation prohibits group loans from exceeding 20 percent of the bank’s capital.
“Business groups normally take up offshore loans in US dollars, which carry their own risks,” Gunawan added, pushing for bank consolidation in Indonesia, which would reduce the number of banks operating in the country to boost capitalization and therefore local big corporations’ access to bigger domestic loans.
For all small and big enterprises in Indonesia, one thing is certain about the impact of the monetary policy rate cut: It will take time for the effects to bear fruit into lower bank lending rates.
Bank Permata economist Josua Pardede predicted that it would take about a month for deposit rates to be lowered, while that of cash loans would take three to five months. Currently, various data showing that the average interest rate of deposits stands at 6.99 percent and for loans at 10.46 percent.
Policymakers and economists paint a rosy picture about the outlook of the economy following the rate cut.
Finance Minister Sri Mulyani Indrawati said that BI monetary policy easing and dovish stance were expected to jack up investments, assuming a stable exchange rate, manageable consumer prices and strong momentum on domestic economic growth.
“With the interest rate cut and its future direction as well as improvements from investment [policies], we hope that investment will pick up in the second half of the year,” said Sri Mulyani in Jakarta on Monday.
Josua said the rate cut would decrease the cost of funds and encourage banks to channel more loans to bolster both domestic and foreign direct investment.
