BI Calls on Lenders to Lower Interest Rates
The central bank encouraged the nation’s commercial lenders to trim lending rates and improve operational efficiency on Friday, by obliging them to include targets for both objectives in their business plans.
Bank Indonesia governor Darmin Nasution, speaking late on Friday at an annual dinner gathering of bank executives, criticized the country’s lenders for operational inefficiency, which he said has led to higher interest rates and has contributed to a “high cost” economy.
At the so-called “Bankers’ Dinner,” Darmin also reiterated earlier comments that Indonesian lenders are less efficient than other lenders in Southeast Asia.
In a bid to boost competitiveness, he said the “prime lending rate announcement” policy will continue next year. Darmin was referring to the policy implemented in March 2010 that requires banks with assets of more than Rp 10 trillion ($1.1 billion) to make their prime lending rates publicly available.
The policy, he said, will be “accompanied by enforcement” to ensure that lenders include targets for reduced lending rate levels and improved efficiency in their business plans.
“Though intermediary roles run well, the inefficiency of banks creates expensive financing costs in Indonesia,” Darmin said. “These costs are then reflected in high lending rates.”
The central bank has held its annual dinner in January in past years, but it pushed the event up this year to give banks more time to create their targets before the beginning of 2012.
Borrowers currently pay lending rates at 12 percent for working capital loans, 11.7 percent for investment loans and 13.4 percent for consumption loans, although the central bank’s key rate has fallen to 6 percent, Darmin said.
In contrast, he said, Malaysian lenders charge an average of 6.5 percent interest, while their country’s benchmark interest rate is 3 percent.
Lenders in the Philippines charge about 5.7 percent interest in a nation where the benchmark rate is 4.5 percent.
BI slashed its benchmark overnight rate by a total of 75 basis points in October and November. With the rate cut, the central bank joined neighbors elsewhere in Asia to refocus its policy from battling inflation to shielding the domestic economy from the effects of the European debt crisis and a US slowdown.
In December, the central bank delayed further rate cuts because it wants to see transmission of its previous cuts. It aims to maintain the attractiveness of Indonesian portfolio assets so it can support the rupiah, which is under pressure from capital outflows as investors dump their assets in emerging markets.
At the dinner, Darmin also criticized the banking sector’s relatively low contribution to the economy.
He said the ratio of lenders’ total assets to the nation’s gross domestic product stood at 47.2 percent as of September, while the ratio of loans to gross domestic product was only 29 percent. The country’s 122 commercial lenders had Rp 3,371.45 trillion in total assets as of September.
These numbers indicate that the nation’s banking assets were not effectively channeled to spur economic growth.
“As a comparison, Malaysia’s [loan-to-GDP ratio] was 114 percent, Thailand’s was 117 percent and China’s was 131 percent,” Darmin said.
He highlighted the banking sector’s ratio of operational costs and revenue (BOPO), which measures efficiency in managing overhead costs. BOPO stood at 86.44 percent as of October, compared to an average BOPO of 40 percent to 60 percent among lenders in Southeast Asia as a whole, he said.
Darmin said the central bank is also studying a plan to limit banking ownership and issue multi-licensing policies to foreign lenders, though he did not provide any details about the plan.
He added that Indonesia’s banking sector must work hard to help spur the economy because the global economic slowdown could affect growth at home.
BI has lowered its growth forecast for next year to 6.3 percent from 6.7 percent to reflect the possibility of slowing exports due to decreased international demand. Europe and the United States are two of Indonesia’s major overseas markets.
“In a bid to maintain growth momentum, we must strengthen the domestic economy,” he said.
When it wasn’t supposed to be that high, but now it is doubled or almost doubled. Are you one of the borrowers? Lower lending rates might push inflation, but at the same time will spur some growth on the local business and consumption as it becomes cheaper to borrow money. What’s your take on this?