Banks won't be quick to renew lending: Experts

JAKARTA (JP): Indonesia's real sector should not expect local banks to resume significant lending in the immediate future even though the central bank benchmark interest rate has dropped to the precrisis level and major banks have been recapitalized, experts say.

Senior banker I Nyoman Moena says that domestic banks need more time to adjust their lending rate structure to reflect the current low interest rate environment.

"The real sector will have to be more patient," he said on Sunday.

Moena said that only banks which had received import financing deposits from the government could immediately resume lending, albeit at a limited capacity because the funds were free of interest costs.

He said importers still had to pay up-front cash at local banks to open a letter of credit.

"This includes banks like BCA," he said, referring to Bank Central Asia, which was the country's largest private bank before being nationalized by the government last year.

The benchmark interest rate of one-month Bank Indonesia promissory notes has dropped to 18.84 percent, compared to more than 35 percent at the end of December and 70 percent in August. A decline in the benchmark rate is usually followed by lower time deposit rates and lending rates.

Bank Indonesia announced last week that the maximum interest rate of one-month bank time deposits guaranteed by the government was 22 percent.

Bankers said that lending rates were now below 30 percent, but businesspeople say the ideal lending rate is around 25 percent.

The real sector has been badly hit by the economic crisis because banks have completely halted lending for over a year.

The government has recapitalized some 14 major domestic banks, including BCA, to lift their capital adequacy ratio (CAR) to the minimum 4 percent level.

Pande Radja Silalahi, an economist at the Centre for Strategic and International Studies (CSIS), said that another hurdle to banks immediately resuming lending was the existing problem loans plaguing the banking industry.

"Local banks are still having difficulty channeling credit to the real sector," he said.

"Banks can only resume lending at a considerable amount next year," Pande added.

The high interest rate environment introduced by the central bank to prop up the ailing rupiah and curb inflation worsened the operating climate for banks, causing their loan portfolios to either turn into problem loans or nonperforming loans.

The Indonesian Bank Restructuring Agency (IBRA) has assumed some Rp 220 trillion in nonperforming loans of the recapitalized banks.

Pande said the real sector should look to foreign banks or other lending institutions for the time being to secure working capital.

But analysts have said that overseas lenders are reluctant to channel money to Indonesian companies until a credible resolution on some US$68 billion in corporate overseas loans has been reached. Only a few local companies have reached debt restructuring agreements with their foreign creditors.

Pande said a credible loan workout strategy employed by IBRA would be essential to help local banks start channeling credit again.

"But IBRA has so far failed to display a credible program. It has often delayed its program schedules at the expense of its professional credibility," Pande added.

He cited last week's decision by IBRA which provided more time for recalcitrant bad debtors to enter into a debt repayment agreement.

IBRA announced last week that 26 bad debtors, out of the 200 largest bank bad debtors, failed to sign letters of commitment to repay debts owed to the agency by the June 30 deadline. The deadline was initially set at June 22.

But the agency said it was giving more time to some of the debtors, claiming that the delay was due to technical reasons. (rei)