Bankers back gradual cut of interest rates

JAKARTA (JP): Mochtar Riyadi, chairman of publicly listed Bank Lippo, supported yesterday the move of the Association of State- Owned Banks (Himbara) and the Federation of Private Domestic Banks (Perbanas) to gradually lower interest rates.

Mochtar said keeping interest rates at current levels would devastate the already weak business sector.

He noted that many companies were in trouble because of the credit crunch and the high interest rate policy pursued by the government to stabilize the rupiah.

"More companies will collapse if the tight monetary policy is maintained. Supplying enough liquidity and lowering interest rates at banks are the best alternatives to help them," he said at a business luncheon celebrating the fourth anniversary of the Center for Corporate Leadership, a non-profit institution that promotes corporate leadership.

Mochtar, who is also chairman of the widely diversified Lippo Group, said interest rates should be cut gradually because currency trading was volatile and a cut in interest rates could backfire on the economy.

Himbara and Perbanas reached a consensus Monday to gradually lower interest rates. But analysts doubted if it would be effective enough to curb the interest rates. In the past many banks faced difficulties keeping their pledges due to liquidity problems.

Himbara chairman Widigdo Sukarman said the country's seven state-owned banks had agreed to lower deposit interest rates by 2 percent while private banks pledged to lower rates by 1 percent.

He said the cut would be performed gradually and deposit rates would probably fall below 21 percent by the end of this year.

Bank Indonesia, the central bank, raised its benchmark interest rates up to 30 percent on Aug. 19 as part of measures to shore up the falling rupiah.

In late September, the central bank lowered its interest rates on one- to three-month SBI papers to a range of 17 percent to 21 percent, from 18 percent to 23 percent.

Deposit interest rates have still hovered between 23 percent and 30 percent despite the cut in SBI rates.

Mochtar said companies which relied on loans were the hardest hit by the currency turmoil, which had cut the value of the rupiah by about 35 percent since early July.

"Loans have become a time bomb for them because they have to generate a lot of rupiah to finance their offshore loans," he said.

Mochtar said those companies should renegotiate their loans and admit their financial difficulties to lenders honestly.

"Foreign creditors and investors will not trust Indonesian businesses anymore if we're not honest about our difficulties," he said.

Another alternative in dealing with the financial difficulties, according to Mochtar, is to offer convertible bonds to the public or other corporate investors.

In this way, companies could reduce their financial burdens because investors would have an option to exchange their bonds for a company's shares.

Economist Nyoman Moena also applauded the move and said the central bank had to be the first one to lower interest rates, because its move would be followed by other banks.

He said local private banks faced more difficulties in lowering interest rates than state-owned banks.

"It's easier for state-owned banks because they have a stronger position, especially during this currency crisis which has seen many people move their money to state banks," he said.

He said although the central bank had cut its interest rates several times, the rates were still too high.

He said the normal rate for credit was between 18 percent and 20 percent, with deposit rates between 16 percent and 17 percent, SBI rates between 12 percent and 13 percent, and money market securities 15 percent. (08)