Fri, 22 Aug 2003

BI expects lending rate to fall to 13% by year-end

The Jakarta Post, Jakarta

Bank Indonesia Governor Burhanuddin Abdullah expects the bank lending rate to drop to around 13 percent by the end of this year following the cutting by the central bank of its benchmark interest rate to a record low.

Speaking at a business forum on Thursday, Burhanuddin said that lower lending rates would make loans more affordable to the corporate sector, and also reduce excess liquidity in the banking industry.

"I expect that the (average) lending rate will decline to 13 percent by the end of the year," he said.

"Currently, from some Rp 170 trillion (US$20.48 billion) of funds circulating in the banking sector, Rp 120 trillion of them are invested in SBI (Bank Indonesia promissory notes).

"That's not only unhealthy, but also places greater difficulties in the way of monetary management," he said.

Bank Indonesia has been aggressively cutting the interest rate on one-month SBI notes (the benchmark rate) from over 13 percent earlier this year to current level of around 8.99 percent in the hope this would spur banks to lower their lending rates.

But lending rates remain stubbornly high, currently still standing at between 15 percent and 16 percent.

Some businessmen had previously said that the ideal lending rate level would be in the range of 12 percent to 13 percent.

Burhanuddin acknowledged that one of the things that discouraged banks from boosting their lending to corporations was the slow progress in the corporate debt restructuring program, which resulted in indebted companies being classified as high- risk customers.

Given the excess liquidity in the banking sector and the non- functioning of the intermediary role of the banks, Burhanuddin said in his paper that monetary policy was consequently "chasing its own tail."

"Banks put their excess liquidity in SBIs and in return Bank Indonesia has to pay the interest on these SBIs, which simply means pumping the liquidity back into the sector."

Encouraging banks to provide more loans to the corporate sector could be expected to help increase economic growth.

Over the past couple of years, the economy has been growing at a modest rate of between 3 percent and 4 percent, which is insufficient to create jobs for the millions of people who are unemployed. The current modest growth is mainly driven by consumption.

The government is targeting economic growth of 5 percent next year. To achieve this, more investment will be needed, and according to one estimate, lending from the banking sector will need to grow by at least 20 percent.