Rising BI rates slow down lending growth

Urip Hudiono and Rendi A. Witular, The Jakarta Post, Jakarta

Signs of a possible economic slowdown due to the recent rise in interest rates are only now becoming more apparent, with the country's banking industry likely to miss their lending targets for this year on slumping demand for new loans.

"Credits from the banking industry have so far only increased by between 18 and 19 percent (from last year), while we had initially expected growth of 22 percent," Bank Indonesia (BI) deputy governor for banking, Siti C. Fadjrijah, said on Thursday.

She spoke to reporters after a meeting with Coordinating Minister for the Economy Aburizal Bakrie and several major banks to assess the sector's latest situation.

"With only two months left, and the recent fiscal and monetary policies making it unfavorable for new loans, that target is unlikely to be achieved."

Data from BI shows that loan disbursements from the banking sector had reached some Rp 650 trillion during this year's first semester. Total lending had reached Rp 553.5 trillion last year, or up 26 percent from Rp 437.94 trillion in 2003.

Included among the "unfavorable policies", Siti said, was the government's latest fuel price hike in October -- which is expected to cause a surge in inflation -- and the central bank's own policy of raising its benchmark BI Rate -- to stem that possible surge.

BI has been sharply raising its key rate to contain recent volatility in the rupiah and inflation, the latest being earlier this month by as much as a percentage point to 11 percent, in anticipation of full-year inflation that may hit 12 percent.

The Central Statistics Agency (BPS) reported that on-year inflation reached 9.06 percent in September, ahead of the fuel price hike and the usually high inflationary pressures in year- end holidays.

While higher interest rates may help ease inflation, it could also stem economic growth as both consumer credits and commercial loans for business expansion became more expensive.

Senior government officials have said that economic growth may indeed slow down to only 5.7 percent from its expected 6 percent target.

Nevertheless, Aburizal expected that the banks' lending growth could reach at least 20 percent by the end of the year, with several banks reporting growth of up to 30 percent despite the latest circumstances.

Separately, Bank Rakyat Indonesia (BRI) vice president director I Wayan Alit Antara said on Thursday the prevailing high benchmark interest rate had discouraged demand for lending, which might eventually derail the bank's lending target this year.

"Due to the high interest rate environment and other economic problems, we are pessimistic that our lending target can be attained this year. Many medium- and large-size companies are withholding the use of their provided loans," said Wayan.

To cope with the rising rates, the state-owned bank has recently raised its retail interest rates to between 14 percent and 15 percent from around 13 percent annually.

The country's fourth largest lender has targeted some Rp 15.89 trillion in new loans this year, an increase of 26.04 percent on last year. About 80 percent of new loans will be provided to small and medium enterprises.

However, Wayan said that in the third quarter of this year, the bank could only channel some Rp 3.3 trillion (US$323 million) for lending, still below the expected target.

At the end of June, the bank's total outstanding loan portfolio stood at Rp 68.95 trillion, up from Rp 55.04 trillion at the end of June 2004.