Central bank calls on banks to lower lending rates

The Jakarta Post, Denpasar

Bank Indonesia has called on the country's banking industry to reduce lending rates in line with a declining interest rate on central bank promissory notes (SBIs) to make borrowing more affordable to the corporate sector.

"Banks should cut their lending rates to persuade businesses to take out loans," Bank Indonesia deputy governor Bun Bunan Hutapea told Antara on the sidelines of a seminar on small and medium-sized enterprises (SMEs) in Bali.

Last week, the interest rate on one-month Bank Indonesia SBIs fell to 10.27 percent from 10.44 percent the previous week. The interest rate on three-month notes also declined to 10.18 percent from 10.88 percent.

Early last year, the interest rate on one-month SBIs stood at more than 17 percent.

Bank Indonesia Governor Burhanuddin Abdullah said last week that the benchmark rate could still further drop to 10 percent on the hope of increased bank lending to the business sector, which would in turn help stimulate economic growth.

Despite an aggressive interest rate cut by the central bank last year, local banks have largely been reluctant to boost lending, partly because they are still struggling to recover from the late 1990s financial crisis. Boosting the amount of lending would put banks at a serious risk, particularly as many companies are still saddled with bad debts.

Banks are charging borrowers with interest rates of between 16 percent and 18 percent, compared to a time deposit rate of about 13 percent.

Bun Bunan, however, said that Bank Indonesia would not tell banks what the lending rate should be, saying that it would be up to the banks to decide.

The Bank Indonesia senior official also said that banks should pay more attention to SMEs, which have proved to be relatively unscathed by the country's economic crisis.

"Banks are still hesitant about lending them money, given the risky nature of SMEs," he said, adding that one of the many handicaps plaguing SMEs was not having sufficient collateral.

He said that the problem could be resolved by establishing a credit guarantee institution.