Interest rate hikes from the weakening rupiah pain everyone

By Devi M. Asmarani

JAKARTA (JP): An unsubstantiated rumor has it that the currency turmoil claimed the life of a private bank director here.

The director reportedly had a heard attack after realizing he could no longer repay a highly inflated loan.

Apparently, he had taken a substantial short-term loan to invest in the stock market and property. Close to the loan's maturity, Bank Indonesia, the central bank, imposed the tight money policy, which in turn caused loan interest rates to skyrocket.

Already downbeaten by the downhill slope of the stock market and lethargic property market, the director had to face a new reality: a loan swollen by the interest rate surge, which some say rose to about 40 percent.

Whether the story is credible or not, it was not too far- fetched given the dramatic downturn plaguing the country's monetary sector.

Since Bank Indonesia more than doubled the rates of its short- term Bank Indonesia Certificates (SBI) to as high as 30 percent on Aug. 19, interest rates have become a liability in the country's economy.

Increasing the SBI rates while simultaneously closing short- term money market securities (SBPU) facilities for domestic banks was one of the government's measures to drain liquidity.

The move proved ineffective in bolstering the rupiah. The currency was then already showing signs of weakening against the U.S. greenback, dropping by around 18 percent from the initial value a month before.

The credit crunch spurred banks to raise their interest rates, too. Now businesses not only face threats from the weakening rupiah -- which raised production costs and costs of servicing foreign debts -- but also from the tight money policy.

Liquidity became scarce.

Suddenly, withdrawing a large amount of funds from a bank for many people has become a challenging task, as many banks were unwilling to part with their money.

The Indonesian Chamber of Commerce of Industry (Kadin), businesses associations, economists, and individuals all pleaded to the government to gradually open the faucet for more liquidity.

Although the central bank has begun to gradually lower the SBI rates and to provide the SBPU facilities for certain banks, interest rates remain as high as 40 percent in many private banks.

Indeed, this has badly affected the business sectors, causing their loans to inflate from the interest rates, and making it next to impossible for companies to get new credit.

Kadin chairman Aburizal Bakrie says the tight money policy created a dormant economy, as many companies prefer to deposit their funds in the bank and rake profit from the high interest rates, than to actually produce.

But businesses are not the only casualties here.

Economic turmoil always victims the man and woman on the street.

In the property sector, consumers are now burdened by the increase in housing loan interest rates, destroying plans of many young married couples who were planning to get their own houses through loans.

"How could you get a loan, if you couldn't even afford paying the interest rate?" complains a frustrated newlywed husband.

Brokers and developers admitted that sales were dead now. Properties do not sell like proverbial hot cakes as they did only a few months ago. Many customers canceled their purchases and withdrew down payments.

The crisis has also put the automotive sector on the skids.

The Association of Indonesian Automotive Industries says the rupiah depreciation forced automakers to raise the prices of their import-heavy products by about 3 percent last month, and a further 5 percent next month.

The price increase is not the only thing discouraging prospective automotive buyers: the rise in interest rates is another factor.

Association chairman Herman Z. Latief says the tight monetary policy has made car loans more expensive.

Those who plan on leasing a car or motorcycle may have to frown and be patient, as interest rates on car loans have shot up to 40 percent.

Credit cards

The interest rate hike has also dented the credit card business.

Candy Sitanggang, a 27 year-old bank employee, says she has left her credit cards at home since the interest rates soared.

Her August credit card monthly statement announced the bank charged a 5 percent interest rates on retail purchases and cash advances. A month before the rate was still 3.25 percent.

Candy, who formerly used her credit cards for shopping, has had to adjust to the hard new realities.

"No more credit cards for me for a while, I'll just use them in emergency cases," she says.

Candy is not the only one who has to lay off on credit card use because of the crisis.

The Indonesian Credit Card Association's vice chairman Malik Habir says the interest rates hike will cause many people to cut down on credit cards transactions, and even to stop using them altogether.

At the same time, predicted high inflation next year would lower consumers' purchasing power, further reducing the use of credit cards, says Malik, who also heads the Bank Niaga Card Center.

He believes the interest rate hike could lead to a slight increase in the delinquency rate.

"The delinquency rate would possibly rise by 1 or 2 percent to about 11 or 12 percent, from the normal of less than 10 percent," he says, adding that credit card delinquents are defined as those behind in payments for more than 30 days.

Not all card issuers have raised the interest rates.

Many issuers have maintained their interest rates, such as Citibank, which have stayed at 3.2 percent, and Bank Papan at 3.25 percent.

Data from the October edition of Infobank monthly affirms that several domestic banks increased their credit cards' interest rates in August.

Among them are Bank Danamon, which raised its retail purchase interest rate from 3.25 in July to 4.25 percent in August; Bank International Indonesia, from 3.25 to 5 percent; Bank Mashill, from 2.8 to 3.25 percent; Bank Niaga, from 3.25 to 4 percent and Standard Chartered Bank, from 3 to 5 percent.

Those which did not follow the upward trend include Bank Central Asia, whose retail purchase interest rate remained at 2.8 percent, Bank Bali at 3.5 percent, and Bank Dagang Nasional Indonesia at 3 percent as of last August.

Having lower interest rates is one of the ways to lure more customers to increase a bank's performance, Malik says.

Some raised the rates because their funding structure increased, and even those which increased the interest rates did not raise them unreasonably high, he adds.

Credit cards issuers must sacrifice, however, in order to lure more credit cards applicants. "Credit card issuers generate profits from issuing credit cards, so they must offer competitive interest rates," Malik says.

To prevent further defaults, credit card issuers must be more cautious before issuing new cards, he says.

He predicts the percentage of defaulting card holders might increase if the current situation continues.

"So far it's been stable, the percentage of those who defaulted, or who have not paid for more than 180 days, is less than 3 percent," he said.

It is not an impossibility that many card holders will default around closing Christmas, New Year and Lebaran holidays, he said.