Bank loans still hard to come by for real sector due to uncertainties

Dadan Wijaksana, The Jakarta Post, Jakarta

Hefty cuts in Bank Indonesia's benchmark interest rate have apparently failed to persuade banks to boost lending to the anemic real sector, in what analysts believe to be the result of a poor investment climate here.

Analysts Ryan Kiryanto and Edwin Syahruzad said that the lowering of central bank interest rates should have spurred lending activity as loans became cheaper, but ultimately it was a good investment climate that would encourage banks to lend more money.

"A lower interest rate environment will definitely help, but other stimuli are needed too. In the end, it'll all come down to what the investment climate looks like here," Edwin, of the Danareksa Research Institute, told The Jakarta Post last week.

Reviving the real sector by pushing banks to channel more loans is crucial to help push economic growth and accelerate the country's economic recovery.

For this year, the government has targeted 4 percent economic growth, although some, including the International Monetary Fund and National Development Planning Board (Bappenas) have recently revised their growth forecasts lower, to 3 percent to 3.5 percent.

Ryan said another reason for the slower lending activity was because there was a time lag before bank lending rates could be adjusted to the lower Bank Indonesia rate.

"When Bank Indonesia lowers its interest rate, a bank needs two or three months before it finally lowers lending rates, as it has to lower its time-deposit rates first," Ryan told the Post.

Since January of this year Bank Indonesia had been cutting its benchmark interest rate in the hope of giving leeway to the banking sector to improve its intermediary role by expanding more loans. Another objective is to help ease the burden on the government in covering the interest repayments on government bonds issued in the late 1990s to bailed-out banks.

The relatively loose monetary policy has been made possible amid lower inflation and a stronger exchange rate of the rupiah against the U.S. dollar.

Although Bank Indonesia data shows that bank loans increased during the first half of this year, they still failed to live up to expectations.

New credit approvals throughout the first semester reached around Rp 22.5 trillion of a total Rp 346.9 trillion in outstanding loans. Of new loans, 25 percent were channeled to the trading sector, while the trading services and industrial/manufacturing sectors took 20 percent and 19 percent respectively of the loans.

During the same period, the benchmark interest rate on Bank Indonesia one-month SBI promissory notes dropped from 17.50 percent in early January to 15.06 percent in June. Currently, the rate is hovering at 14.87 percent.

In comparison, lending rate is currently set at 19 percent to 22 percent, while time-deposit rate is hovering at 13 percent to 14.5 percent.

New loan approvals in the fourth quarter of 2001 stood at Rp 20 trillion, when the central bank's interest rates were still hovering at around 18 percent.

According to Ryan and Edwin, such a small amount of new loans should explain why in the first semester there was a huge drop in domestic investment approvals, declining by almost 70 percent compared with the same period last year.

Data from the Investment Coordinating Board (BKPM) shows that domestic investment approvals for the first six months of the year reached only about Rp 11 trillion, compared with nearly Rp 40 trillion posted last year in the same period.

Legal uncertainties, among other things, are widely regarded to have scared investors away from the country. The domestic political situation, labor conflicts and development in the global economy also played a part in damaging the investment climate.

President Megawati Soekarnoputri even admitted in her speech before lawmakers last week that the country's legal reforms had been slow, thus creating uncertainty among investors, both foreign and domestic.

The relatively risky investment climate here has caused banks, badly hit by the 1997 financial crisis, to be extra careful in channeling their money, thus resulting in the slow growth of lending.

Also contributing to the banking sector's reluctance to provide more lending was its dependence on the lucrative revenues from recapitalization (recap) bonds, which currently dominate banks' productive assets.

Loans made up only 34.7 percent of the banking industry's productive assets, with 44 percent consisting of recap bonds.

So far, of the total interest revenue enjoyed by the banking industry, almost 45 percent has come from the interest on recap bonds.

Analysts also said that the slow lending activity in the first half should put Bank Indonesia's target, set earlier this year, for bank loans to grow by Rp 62.12 trillion this year, at risk.