BI sees slower growth in bank lending
Leony Aurora, The Jakarta Post, Jakarta
The country's commercial banks are expected to see slower growth in time deposits and savings this year due to continuing declines in interest rates and other factors, according to a senior official of the central bank.
Bank Indonesia director for banking supervision and information Siti Fadjriah also said that bank lending would remain slow during this general election year, especially in the light of high-profile reports of loan fraud cases.
"Alongside the decline in the (Bank Indonesia) benchmark interest rate, deposit interest rates will also fall," Siti said during a discussion on Indonesia's banking prospects.
The central bank has been aggressively cutting its benchmark interest rate over the past couple of years amid a benign inflationary environment.
The interest rate on one-month Bank Indonesia SBI promissory notes is currently at an historic low of 8.06 percent, compared to more than 13 percent earlier last year.
Meanwhile, interest rates on time deposit are around 6 percent, which means that depositors will only receive interest of between 4.8-4.9 percent after tax. But if the current inflation rate of about 5 percent is taken into account, the real interest rate will be negative, which has discouraged many people from putting their money in the banks.
Indeed, according to the Bank Indonesia report, depositors have withdrawing their money from banks since February 2003. While the figure for one-month time deposits totaled Rp 213 trillion during the month, this had dropped to Rp 191 trillion by October 2003.
Experts have said that in addition to the lower interest rate, people had transferred some of their money into mutual fund products, which were still free of tax. Others had invested in the local stock market, which has recently been one of the top performing stock markets in the world.
Siti said another factor that would put the brakes on time deposit growth in commercial banks was the recent controversial edict issued by the Indonesian Council of Ulemas (MUI), which declared that interest was haram (prohibited) according to Islamic Law.
The MUI further urged Muslims not to use the services of conventional banks, except when there were no sharia banks in their areas.
The edict is not yet final as it still needs the approval of the MUI board of executives before taking effect.
Aside from money coming in, the brakes have also been put on money going out in the form of loans after loan scandals hit Bank Rakyat Indonesia (BRI) and Bank Negara Indonesia (BNI) recently.
"The credit risk remains high," she said. "Many banks are also over-liquid and prefer to retain funds."
Total bank lending as of September last year only amounted to Rp 454.2 trillion, giving a loan to deposit ratio of 52.5 percent.
The central bank had initially hoped that the lower benchmark interest rate would push banks to lend more money to the corporate sector to help accelerate economic growth.
But bankers say that they still see huge risks in the corporate sector due to the slow progress made so far in the restructuring of corporate debt.
The upcoming general election is also seen as a factor increasing the jitters among bankers as regards boosting lending.
But bankers say, nevertheless, that are ready to channel more money into the retail and consumer sectors despite the upcoming election.