Central bank sees higher lending after smooth election

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.