Banks yet to boost lending despite low interest: BI

Banks yet to boost lending despite low interest: BI

Dadan Wijaksana, The Jakarta Post, Jakarta

The sharp drop in the central bank benchmark interest rate last
year has not caused banks to significantly increase lending, said
Bank Indonesia governor Sjahril Sabirin.

Sjahril said on Friday the benchmark rate cut had not been
followed by a comparable reduction in bank lending rates.

He explained that the intermediary role of the banking
industry has not performed as expected because banks continued to
face internal problems, and because lending to the real sector
was still considered too risky.

The benchmark interest rate of the one-month Bank Indonesia
SBI promissory notes dropped from more than 17 percent in the
beginning of 2002 to slightly below 13 percent by the end of the
year.

The central bank initially expected the lower interest rate
would spur banks to lending more money to help revive the anemic
business sector, which in turn could push economic growth. The
lower benchmark rate will also help minimize the burden of the
state budget in covering the interest accrued from large
government bonds.

In the past few years, economic growth has been mainly driven
by consumer spending.

However, some analysts warned earlier that some banks were
still facing difficulties in issuing new loans due to their
limited capital and outstanding non-performing loans (NPLs),
making lending to the real sector an unaffordable, risky
business.

"Providing loans to the private sector still carries a great
risk of the loans turning bad," Sjahril was quoted by Antara.

Nevertheless, he added, banks' new loan exposures still
managed to improve last year, as with other banking indicators
used to determine a bank's health, including the capital adequacy
ratio (CAR) and NPLs.

NPLs last year fared batter than the year before, which
averaged at 10.4 percent in 2001, against 12.1 percent in 2002,
while a comparison on CAR was even more encouraging.

The average CAR level stood at 22.8 percent, 2.3 percent
higher than in 2001 at 20.5 percent, and far above the minimum 8
percent requirement set out by the central bank.

The NPL ratio measures a bank's non-performing loans against
its total loans. Loans on which interest payments are 90 days
overdue are categorized as non-performing loans.

As for CAR, it measures a bank's health by comparing its
capital against risked-weighted assets such as loans. The higher
the CAR, the better a bank's capacity to cover the risks of its
assets with capital.

Elsewhere, Sjahril said he was hopeful that the banking sector
would further improve this year on the prospect of stable
macroeconomics indicators.

The central bank has said that further cuts in its interest
rate were still possible in the near future, in hopes of forcing
banks to keep lowering its lending rate.

Only with a low lending rate would the private sector be
tempted to turn to banks for working capital. This would
consequently accelerate productive activities, which would in
turn spur on economic growth.

Analysts have warned, however, that room was extremely limited
for Bank Indonesia to continue to lower the benchmark rate this
year, amid a strong inflation outlook caused by the recent
increase in fuel and electricity prices.