Banker disputes forecast on lower interest rates

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)