Rising BI rates slow down lending growth

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.