BI sees slower growth in bank lending

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.