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

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.