Bank loans still on hold, BI says

JAKARTA (JP): Bank Indonesia deputy governor Subarjo Joyosumarto said on Thursday domestic banks could not immediately resume lending despite the sharp drop in interest rates.

Subarjo said most banks could not resume lending operations because of their capital's negative position.

He acknowledged certain banks, especially medium-sized ones, had stronger lending capacities but such banks could not immediately lower lending rates due to high overhead costs.

"We realize lending rates can not immediately drop although the benchmark interest rate has fallen close to 17 percent," he announced.

The benchmark interest rate of one-month Bank Indonesia promissory notes (SBI) fell to 17.15 percent on Wednesday from 18.84 percent last week.

The rate was at more than 35 percent early this year, and 70 percent in August last year.

Subarjo said if the benchmark interest rate stood at the 17 percent level, and bank time deposit rates at 22 percent, then the bank lending interest rate should ideally be at around 27 percent.

But the lending rate still hovers between 32 percent to 35 percent.

Subarjo said the central bank would continue to lower the benchmark interest rate to around 15 percent by year-end.

He said this was designed to make SBI notes a less attractive investment to encourage banks to lend money.

"But it will depend on when each bank resumes lending," he said, pointing out each bank had a different capacity to amend itself from the impact of the economic and financial crisis.

"I expect banks, particularly those which have been recapitalized, can resume lending before year-end," he added.

Subarjo estimated bank lending could rise by 20 percent by year-end from "zero" lending last year, assuming the benchmark interest rate could drop to the 15 percent target.

"If lending can rise by 20 percent by year-end, it is good enough," he said.

Banks completely halted lending last year when the economic crisis heightened, causing many companies to cut production capacity significantly because of an unavailability of working capital.

Businesses have urged the banking sector, particularly recapitalized banks, to resume lending as the benchmark interest rate was declining significantly.

They also asked the banks to cut lending rates to below 25 percent.

Asked whether banks would be prohibited to lend to certain industries, Subarjo said: "We have not made a decision on that. But the important thing is that banks should be prudent in lending money." (rei)