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.