[Kabar-indonesia] BI rate cut gets sluggish response from lenders

[Joyo at aol.com]

The Jakarta Post
November 9, 2006

BI rate cut gets sluggish response from lenders

Urip Hudiono, The Jakarta Post, Jakarta

Commercial banks are unlikely to lower their lending rates
until the end of the year despite Bank Indonesia's decision
Tuesday to cut its benchmark rate to 10.25 percent.

Financial analysts said here Wednesday that banks would be
slow in responding to the central bank's rate cut, because
most were not "technically" prepared to increase lending
before the turn of the year.

"The rate cut will not immediately influence banks to trim
their own lending rates," economist Aviliani of the
Institute for the Development of Economics and Finance said.

"And the banks are not to blame, as much of the problem
still lies in the real sector," she added.

Aviliani said Indonesia's real sector -- particularly the
usually credit-hungry footwear and textile industries -- was
still struggling to stay afloat amid worsening
competitiveness, and was in no position to consider
expanding production.

Even if there was a demand for loans from the real sector,
banks would consider them risky and would ask for premium
interest rates to safeguard against possible default, she
said.

And with the end of the year approaching, banks will not
rush to expand their lending through cheaper loans, she
said.

"I don't think there will be any significant loan expansion
until December. Banks will likely focus on their current
credit portfolios for now.

"If we want to boost lending, then it is the real sector
that the government must focus on now, providing more fiscal
incentives for growth, for example," Aviliani said.

For the time being, banks may eye less risky consumer loans
and export credits. They may also play it even safer by
investing excess funds in Bank Indonesia bills and
government bonds as a "logical" business strategy given the
still unfavorable economic conditions for disbursing more
loans.

Considering all this, Aviliani expects banks to play a
"waiting game", only cutting rates and expanding lending
next year.

Economist Ryan Kiryanto of Bank Negara Indonesia (BNI) also
doesn't expect any action by banks until 2007, when he
predicts an improvement in lending growth to 20 percent from
this year's 14 percent.
Bank Indonesia recently reported the banking sector's
outstanding loans increased by Rp 18.5 trillion (US$2
billion) in October to reach Rp 787.7 trillion.

Lending rates still average some 17 percent, according to
BI's latest survey of the sector, and are expected to
decline only slightly to around 16 percent by the end of the
year.

Coordinating Minister for the Economy Boediono, meanwhile,
left it up to the banks to determine their lending rates in
response to BI's latest rate cut, yet hinted at the benefits
of lowering rates.

"Lenders can expand their customer base and build their
businesses if they provide cheaper loans," he said.

Boediono previously called for banks to lower their lending
rates, in line with industry players saying a rate of 12
percent was ideal for encouraging expansion in the real
sector.

Several major banks, including Bank Mandiri and Bank Central
Asia (BCA), have said they are in the process of lowering
their rates by up to a percentage point in line with BI's
six rate cuts since May, when the central bank's key
interest rate stood at 12.75 percent.

Bank Indonesia cut its key rate Tuesday by 50 basis points
to 10.25 percent, the fourth cut of that size since Aug. 26

There are some fears the cut in the rate might cause the
withdrawal of foreign funds from the country's large bond
market.

Forex analyst Farial Anwar and other analysts, however,
believe the rupiah will remain stable because there is still
a large spread between the U.S. Federal Reserves' current
5.25 percent rate and the rate for rupiah-based bonds.

They also say there is room for further cuts, but warned
caution was needed to prevent an outflow of foreign funds
from the country.

------------------------------------------
Joyo Indonesia News Service
------------------------------------------