Central bank sees higher lending after smooth election

The Jakarta Post, Jakarta

The country's corporate sector is expected to increase borrowing from banks soon as political uncertainty has been removed following the smooth presidential election last week, according to Bank Indonesia Governor Burhanuddin Abdullah.

He said that the corporate sector would start to absorb some Rp 135 trillion (US$14.77 billion) in undisbursed fresh bank loans.

"According to last month's report, some Rp 135 trillion had not been absorbed. Now the (political) risk has been reduced, the election has been successful, and there will be a new president with a new commitment. I think the current condition is promising," Burhanuddin was quoted Tempointeraktif.com over the weekend.

The amount represents the size of loans already approved by the banking sector to be lent to the corporate sector, but businesses had not utilized it due to various reasons among others political uncertainty ahead of the election.

The central bank has been pushing banks to resume their intermediary role, which had been greatly weakened since the late 1990s financial crisis, by boosting lending to the corporate sector to accelerate economic growth.

Bank Indonesia has worked hard to guide interest rates down to make bank loans more affordable to companies, but unfortunately bank loans remain low as reflected by the relatively low loan to the deposit ratio (LDR) of the banking sector, now at around 40 percent, compared to around 80 percent prior to the crisis.

Businesses said that although Bank Indonesia's benchmark interest rate now has dropped a low level of around 7.39 percent, interest rates on lending remains stubbornly high at around 15 percent to 16 percent.

Meanwhile, bankers said that while lending to the corporate sector is still considered risky in many cases due to the slow progress in the restructuring of corporate debts, some companies had been reluctant to make use of loans already approved by banks.

They said that some companies particularly with good reputations and strong assets preferred to raise cash through the bond market because of the cheaper interest rate burden.

Burhanuddin dismissed criticism that the current lending rate was still too expensive, arguing that if the inflation factor of around 7 percent is taken into account, the real lending rate is only between 8 percent to 9 percent, compared to time deposit rate of 6 percent to 7 percent.

"This (lending rate) is not too high," he said.

The relatively low rate of credit absorption by the corporate sector, at around 15 percent according to one estimate, is one of the factors causing banks to be plagued with excess liquidity of around Rp 200 trillion (BI data). The central bank has previously increased bank's minimum reserves requirement to help reduce the excess liquidity in the banking sector, as the excess funds had been used by some people to speculate against the rupiah.

Analysts said that the credit absorption rate of the corporate sector needs to increase to at least 20 percent to help push economic growth higher at around 6 percent.