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Lending growth remains healthy despite high interest rates: Bankers
Bankers have acknowledged the country’s banks face difficulties reducing their lending rates despite a series of cuts to Bank Indonesia’s (BI) reference rate in recent months, as many banks, especially low and mid-sized banks, still have liquidity problems
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span>Bankers have acknowledged the country’s banks face difficulties reducing their lending rates despite a series of cuts to Bank Indonesia’s (BI) reference rate in recent months, as many banks, especially low and mid-sized banks, still have liquidity problems.
However, bankers also claimed that despite the relatively high lending rates, lending growth remained relatively healthy.
President Joko “Jokowi” Widodo has called on local banks to gradually lower their lending rates following the cuts to BI’s reference rate so that it is easier for businesses to take out loans. It is hoped that loan growth will revive the country’s sluggish economic growth.
The president director of private lender Bank Central Asia (BCA), Jahja Setiaatmadja, said that low-interest rates were not the only way to boost loan growth, pointing out that the double-digit loan growth recorded in 2018 despite BI’s decision to increase its benchmark interest rate by more than 100 basis points.
“The hypothesis is that loan growth is not only affected by interest rates, although [lower] interest rates are needed for businesspeople to compete in the international market,” said Jahja during a discussion at the Indonesia Banking Expo in Jakarta on Nov. 6.
Jahja said the belief that loan disbursement would increase if banks lowered their interest rates was not correct. “It is not certain that if we lower our interest rates credit will grow,” Jahja told the audience. However, he said banks would gradually lower their interest rates to follow the benchmark.
BI cut its benchmark rate in October for the fourth consecutive month as it aims to boost lending growth, which slowed to a 21-month low amid the country’s sluggish economic growth.
The central bank has cut its seven-day reverse repo rate by 25 basis points (bps) to 5 percent, the lowest level since May 2018, backed by stable inflation and attractive yields in the financial market, in support of an accommodative policy for business expansion.
In total, the central bank has slashed its benchmark interest rate by 100 bps since July.
Following the cuts, banks have mostly lowered their deposit rates. However, their lending rates are still relatively high. Analysts said that small and mid-sized banks could not immediately adjust their lending rates due to growing competition to raise funds from the public. Banks not only compete among themselves but also against the government’s bonds, which offer higher investment returns.
“It is not certain that if we lower our interest rates credit will grow.”
With high lending rates, banks’ loan disbursement had increased just 8.59 percent year-on-year as of September, the weakest growth rate since January 2018. A loan growth rate of 9.58 percent was recorded by BI in August.
The Financial Services Authority (OJK) slashed in June this year’s loan growth target to 9 to 11 percent from 10 to 12 percent.
Senior economist Raden Pardede said loan disbursement remained low not only because of high lending rates but also because of declining demand among businesspeople. "A countercyclical fiscal policy is needed to boost loan growth," he added.
The World Bank and the International Monetary Fund have slashed their global economic growth outlooks for 2019 and 2020, including for Indonesia, which both institutions predicted would see 5 percent growth this year. The World Bank previously estimated Indonesia’s would experience 5.1 percent growth this year, while the IMF forecast 5.2 percent.
Meanwhile, Statistics Indonesia (BPS) announced on Nov. 5 that the country’s third-quarter economic growth was 5.02 percent, the lowest level in more than two years.
State-owned lender Bank Rakyat Indonesia (BRI) said it would “immediately lower” its interest rate in response to BI’s decision to lower its benchmark.
“We will certainly lower our interest rate but it will take time. For example, if [we] lowered our interest rate today, we would have funds we could only collect in one month’s time,” BRI president director Sunarso said during the same event.
