Banks still reluctant to boost loans, BI says

Dadan Wijaksana, The Jakarta Post, Jakarta

Bank Indonesia acknowledged on Monday that the country's banking sector had been slow in channeling new loans to the real sector despite a drop in the central bank benchmark interest rate.

"There are at least three reasons why banks continue to be reluctant in providing loans," Bank Indonesia deputy governor Miranda Goeltom told reporters on the sidelines of a meeting with legislators.

She said the first reason was that investing in the corporate sector were still considered risky as many of the companies had yet to complete their debt restructuring process.

"The second one refers to the fact that banks remain reluctant to lend in an environment where investor confidence remains weakened by global uncertainties."

She said the global economy downturn, highlighted by the shaky economic performance of the world's major economic powers such as the U.S. and Japan, had further discouraged banks to provide loans to export-oriented firms.

"If the U.S. economy can only grow by around 2 percent each year, banks consider that as a risk to be taken into account before providing loans to exporters," Miranda said.

Along with Singapore, the U.S. and Japan are Indonesia's main export destinations.

The third reason was the banking industry's traumatic experience in the past, she said.

In the past, local banks aggressively channeled their funds to the private sector, often their affiliated businesses, without a sound and proper credit risk assessment. It was the absence of such action that is believed to have contributed to the systematic collapse of the banking industry in 1997-1998.

The central bank has been guiding downward the interest rate of the one-month Bank Indonesia SBI promissory notes in the past year. The SBI rate is currently hovering at 10.91 percent, compared to more than 17 percent early last year.

Bank Indonesia expects the lower rate environment will encourage more bank loans to help companies expand their businesses and create more jobs.

But the latest data showed that in the first quarter of the year, new loans only stood at a mere Rp 88 billion. Throughout 2002, the total new loans reached Rp 62 trillion.

Late last week, Bank Indonesia Governor Sjahril Sabirin said the current SBI rate was low enough, indicating the rate was unlikely to fall further in the near future.

But Miranda, who is running for the governor post, told reporters there was still room for a further cut in the benchmark rate, in hopes to force banks to also further lower its lending rates.

"If the current condition keeps improving, the interest rate could fall to around 10.5 percent," she said.

Only by a lower lending rate, the private sector would be tempted to turn to banks to seek working capital, she said, which would consequently accelerate productive activities and bode well for the economic growth.

The lending rate currently stands at a range of 17 percent to 18 percent.

Benign inflation has been the main reason for Bank Indonesia to allow its benchmark interest rate go down.