BKPM urges BI to help boost lending

Rendi A. Witular, The Jakarta Post, Jakarta

Amid an excess of liquidity within the banking sector, the Investment Coordinating Board (BKPM) has urged the central bank to find a way to encourage banks here to increase lending and so help promote domestic investment.

BKPM Chairman Theo F. Toemion said Bank Indonesia had done little to help revive domestic investment at a time when foreign investment was still hard to come by.

"We are not talking about luring foreign investment here as there is a lot of local potential that has not been fully availed of, such as excessive liquidity in the banking sector," said Theo after meeting Vice President Jusuf Kalla on Wednesday.

Theo said the meeting was aimed at exploring ways of helping convert this excessive liquidity in local banks and pension funds into investment in the real sector, which had yet to recover from the crisis due in part to a lack of working capital.

Reviving the real sector by boosting domestic investment is part of the government's priorities for generating economic growth of a level sufficient to deal with the problem of chronic unemployment.

At present, it is reported that the banking sector has excess liquidity of about Rp 200 trillion (US$21.5 billion), with most of the money being invested in the central bank's promissory notes, and securities and foreign exchange.

The excess is attributable to strict prudential management being applied by the banking sector to reduce risk and the relatively low demand for loans from the corporate sector -- exacerbated by double-digit interest rates for loans on average at the present time, which are considered high when compared to Bank Indonesia's benchmark interest rate of around 7 percent.

"At present, our banking sector is in a comfort zone. It is simply wasteful if they refuse to significantly boost their lending, by lowering their interest rates, because of trauma in the past," said Theo.

In terms of financial health, the country's banking sector has successfully managed to recover from the impact of the late 1997 financial crisis, with the situation regarding capital adequacy ratio (CAR), non-performing loans (NPLs) and profit all rapidly improving.

In terms of lending exposure, however, the current loan-to- deposit ratio (LDR) of around 60 percent is still below the pre- crisis level of above 80 percent.

According to Theo, Vice President Kalla had expressed the hope that the banking sector would lower its interest rates to below 10 percent from the current rate of about 13 percent on average.

However, the final say on the issue would be entirely up to the central bank, which has been granted independence from the government in determining banking sector policy.