Battle in lending market getting fiercer

Battle in lending market getting fiercer

Burhanuddin Abe, Contributor, Jakarta

Many people dream of owning their own house and car. But to
make this dream come true, they need a large sum of money at
their disposal.

Houses and cars have soared in price since the economic crisis
hit this country in mid-1997. The crisis caused banks to curb
their lending to consumers and increase interest rates
considerably. As a result, for many the dream of owning houses
and cars remained a dream.

However, times change and now the country's economy is showing
signs of improvement, One indicator, the lower rate of Bank
Indonesia promissory notes -- better known as its Indonesian
acronym SBI -- has led commercial banks to channel more resources
into consumer loans.

As the SBI interest rate dropped from 12.93 percent in January
2003 to 8.3 percent in late 2003, there was more room for
commercial banks to further cut their interest rates, including,
of course, the rates imposed on consumer loans.

Today, commercial banks appear to be engaged in a race to
offer the lowest interest rates for consumer loans. Take the home
loan, or KPR, for example. In early 2003, the rates for home
loans were still in the region of 17 to 20 percent per annum and
not a single bank seemed willing to cut their interest rates.

In May and July 2003, however, Bank Central Asia (BCA) slashed
its home loan interest rate to 15 percent. BCA even offers a
fixed interest rate of 12 percent per annum for the first year.

Bank Central's move has compelled other banks to follow suit.
Bank Niaga, Bank Permata, Bank NISP and Bank Mandiri are among
large institutions that have also lowered interest rates for home
loans. Bank Tabungan Negara (the State Savings Bank, or BTN),
which has for years been synonymous with property loans, has also
cut its rates.

At present, the interest rates in home loan schemes range
between 13 and 15 percent annually. This is a landmark as the
rate had never before fallen to below 14 percent per annum. Even
in the pre-monetary crisis period, the rate was always higher
than 16 percent per annum.

The present level of interest is favorable to consumers.
That's why there has been a sharp jump in the demand for home
loans in the past year. This year alone, Bank Central has
allocated Rp 2 trillion to its home loan scheme, a 100 percent
rise compared with the figure last year. The BTN, meanwhile, has
set aside Rp 1.4 trillion (about US$164.7 million) for the same
scheme, about a 15 percent increase on last year's Rp 1.2
trillion.

Other banks will also focus on home loans. According to the
Center for Indonesian Property Studies, this year public-owned
banks will allocate a total of Rp 10 trillion for property loans,
an increase of Rp 2 trillion on the figure recorded last year.
This expansion is reason enough for banks with home loan schemes
to compete in attracting customers. "Now is the right time for
expansion. Unless we do it now, we will lose out to private
banks," said a state bank official, who spoke on condition of
anonymity.

Private and state banks can freely compete with each other.
The banks that win offer the lowest interest rates and, with
customer satisfaction in mind, provide excellent personalized
services.

Similarly tough competition is also taking place in car loan
schemes (KPM). In this sector, banks are competing not only with
each other but also with leasing companies. Currently, the
interest rate for cars ranges between seven and 12 percent for a
loan-repayment period of between one and five years.

Just as with home loans, banks are putting more resources into
car loans this year. The Info Bank Research Bureau calculated the
funds allocated for such loan schemes would reach Rp 100 trillion
this year.

It is only natural banks are interested in boosting their KPM
schemes. While the national economy is still somewhat sluggish,
channeling funds into consumer loans, such as KPMs, will be more
profitable than providing loans for investment and working
capital to businesses. In the consumer sector the likelihood
these loans will turn into bad debts is quite small. This is the
likely reason why Bank Bumi Putera has decided to issue bonds
worth Rp 300 billion to expand its KPM scheme.

Figures show resources put into consumer loans from 1999 to
last year have soared, registering an average growth rate of
42.99 percent annually. This growth rate was much faster than for
investment and working capital loans. During that period loans
for investment grew by only 11.96 percent -- to Rp 90.6 trillion.
As for working capital loans, they increased 55 percent from Rp
143.4 trillion in 1999 to Rp 222.8 trillion last year -- an
increase of only 11.70 percent annually.

The same research shows the growth in consumer loans is likely
to continue this year. Car loans and other forms of consumer
loans -- credit cards, non-collateral loans and home and
apartment loans -- are predicted to amount to Rp 150 trillion in
the consumer loans market.

The jump in the growth of consumer loans is attributable to
several things. The corporate sector needs more time to grow as
its loan-restructuring is yet to run smoothly. The investment
sector also continues to stagnate because of a slowly recovering
economy and suspicions about the judiciary, employee quality and
political uncertainty.

Meanwhile, the consumer sector is first to grow and to be
relatively unaffected by the economic crisis. Banks have eased
further the requirements for the approval of consumer loans, not
only for home and car ownership, but also in the case of non-
collateral loans.

Economic growth has been spurred mostly by consumers so it is
only natural increased liquidity will result.

Obviously, the tight competition between banks over KPRs and
KPMs is to the benefit of their customers. Hence, more and more
people are likely to realize their dream of owning their own
house and car.

Still, customers must always be on the alert and must not let
themselves be lured by banks into taking loans that turn into an
unbearable burden.

They don't want to turn into bad debtors -- like some of their
counterparts in the business world.