Banker disputes forecast on lower interest rates

JAKARTA (JP): Economist Sjahrir's expectation of lower bank interest rates next year because of lower inflation were contradicted yesterday by banker Trenggono Purwosuprodjo who warned tight monetary policy would slow any credit expansion.

"Theoretically, credit interest rates should decrease next year because the inflation rate should fall to less than 7 percent this year (from 8.65 percent last year)," Sjahrir said yesterday.

But Sjahrir said there would be a time lag before credit interest rates declined by 2 to 2.3 percentage points from their current levels between 18 percent and 21 percent.

He told a seminar on the 1997 economic outlook that lower interest rates would allow banks to lend more to businesses because credit risk would be more manageable.

But Trenggono, the chairman of the Indonesian Private National Banks Association, cautioned that the rate of credit growth would decline next year mainly because of tight monetary policy.

"The increase in the compulsory reserve requirement (at the central bank) from 3 percent now to 5 percent beginning next April will decrease the amount of loan funds by between 0.3 and 0.5 percentage points," he told the same forum.

He said the prudential rulings which required banks to increase their capital adequacy ratios from 8 percent to 9 percent next September would also squeeze lending.

Trenggono argued that as long as Indonesia's balance of payments remained under pressure, the monetary authority was not expected to ease monetary policy.

"That means the banking industry should refrain from high credit expansion," he said.

Trenggono estimated that the higher capital adequacy ratio (bank capital against lending) would eat into banks' profit margins unless they could become more efficient.

He, therefore, predicted that banks would prefer to lend to high-margin sectors such as trading.

He said high interest rates should not have become such a big issue because businesses should operate with a sound debt to equity ratio and tap into equity financing.

"The problem, though, is that enterprises in Indonesia, like in many other developing countries, depend largely on loan funds," he said.

Property loans

Sjahrir warned about large numbers of potentially bad debts among property developers because of weakening property demand.

"I think several banks have unsoundly lent too much money to the property sector which is vulnerable to a short boom-and-bust cycle," he said.

He considered that the Rp 50 trillion (US$21.35 billion) in outstanding credits to the property sector was too big.

"Given the weakening demand for property, an estimated Rp 5 trillion in bad credits in the property industry is quite conservative," Sjahrir said.

He called on the central bank to take preventive measures against a possible credit crash in the property sector.

"Credits in the property sector are surely a potentially big problem in the banking industry," he said, warning that another bank failure as big as Bank Summa (which went bust in 1992) could happen if adequate preventive measures were not taken immediately.(pwn/vin)