Economist: Consolidating small banks is the first step towards lowering credit interest rates

Promoting the consolidation of small banks is the initial step towards achieving an efficient banking industry, which will ultimately lead to lower credit interest rates.

Jakarta (ANTARA) - Wijayability Samirin, an economist from Universitas Paramadina Jakarta, believes that consolidating small banks could serve as a primary measure to encourage a reduction in credit interest rates. He argues that efforts to lower these rates must consider the overall structure of the banking industry, as high credit rates in Indonesia are influenced by multiple factors, ranging from industry structure and benchmark interest rates to the risks faced by banks.

“Promoting the consolidation of small banks is the first step towards realising an efficient banking industry and resulting in lower credit interest rates,” Wijayanto told ANTARA in Jakarta on Sunday.

This statement was made in response to the policy of Finance Minister Purbaya Yudhi Sadewa, who requested that Special Mission Vehicles (SMVs) under the Ministry of Finance lower their deposit interest rates in banks. Purbaya has asked all SMVs to request deposit interest rates from banks at a maximum of 80 per cent of the BI Rate.

This move aims to help banks obtain funding sources at lower and more controlled costs. With lower funding costs, banks are expected to have more room to disburse credit at lower interest rates to the public.

Nevertheless, Wijayanto views that high credit interest rates in Indonesia are more heavily influenced by several structural factors within the banking industry. The current structure of the Indonesian banking industry tends to be concentrated among a few large banks.

“The high credit interest rates in Indonesia are more caused by systemic factors, including an oligopolistic banking industry structure, where four large players control almost 50 per cent of total assets and almost 65 per cent of net income,” said Wijayanto.

This condition also affects the efficiency of the banking industry and the high net interest margin (NIM) of Indonesian banks compared to other countries. On the other hand, there is a disparity in NIM between large and small banks. This difference needs attention in efforts to encourage lower credit interest rates to avoid placing excessive pressure on smaller-scale banks.

“If large banks are forced to lower interest rates, small banks will experience negative net interest margins; if this persists for a long time, it has the potential to cause small banks to go bankrupt,” he added.

Therefore, consolidation is seen as a way to increase the business scale and efficiency of small banks, making the banking industry structure healthier and more competitive.

In addition to industry structure, Wijayanto mentioned that the relatively high BI Rate also influences bank credit rates. He believes this condition is related to the need to maintain the stability of the rupiah exchange rate. Another factor is legal uncertainty, which he believes can increase the perception of risk within the banking sector.

Previously, Finance Minister Purbaya Yudhi Sadewa requested all Special Mission Vehicles (SMVs) under the Ministry of Finance to request deposit interest rates from banks at 80 per cent of the BI Rate. This step is intended to ensure that banks obtain funding sources at lower and more controlled costs. With lower funding costs, banks are expected to have greater capacity to provide credit at lower rates to the public. This policy is also expected to reduce competition between banks in offering high deposit rates, thereby allowing market interest rates and loan rates to decrease more rapidly.