Sat, 01 May 2004

Lending rate could go down to 13%

The Jakarta Post, Jakarta

Lending rates are expected to decline to an average of 13 percent by year-end from the current level of more than 15 percent, according to a senior banker.

Bank Negara Indonesia (BNI) vice president Arwin Rasyid said on Friday that the decline in the interest rate on Bank Indonesia SBI promissory notes had allowed the banking sector to enjoy cheaper cost of funds as time deposit rates has also fallen.

Arwin said that with the interest rate on one-month SBI notes currently standing at 7.33 percent, banks could actually provide loans to the corporate sector at an interest rate of as low as 12 percent.

He explained that with the time deposit rate now averaging around 6 percent, plus another 3 percent for administrative costs (making the total cost of funds 9 percent), banks would still enjoy a margin of around 3 percent by lending money at an interest rate of 12 percent.

He added that a 3 percent margin was international standard practice.

Arwin, however, added that banks had to charge a higher rate because of the extra cost resulting from provisions for loans that had turned sour.

At present, troubled loans to the real sector account for around 18 percent of total credit exposure, Arwin said.

But, supported by the increasing stability in macroeconomic indicators, which would allow the central bank to keep lowering the SBI rate, and increasing efficiency within the banking sector resulting in lower operating costs, Arwin was optimistic that the lending rate for the corporate sector could reach an average of 13 percent at year-end.

The central bank has been aggressively cutting the SBI rate for the past couple of years in the hope of pushing banks to also cut their lending rates and make loans more affordable to the corporate sector. The SBI rate stood at more than 13 percent early last year.

Bank Indonesia officials, however, have complained about the banking sector's reluctance to boost lending to the corporate sector as lending rates remain stubbornly high.