BANKS URGED TO LOWER LENDING RATES

By Andi Abdussalam

        Jakarta, March 12 (ANTARA) - Following last week's step by Bank Indonesia (BI/the central bank) to lower its benchmark rate (locally known as BI Rate) to 7,75 percent, various sides are calling on banks to also lower the interest rates of their credits to help generate domestic economy.

        "Banks need to lower their lending rates in order to help support the real sector in the current global financial crisis," Rachmat Gobel, deputy chairman of the Indonesian Chamber of Commerce and Industry (Kaidn) said here on Wednesday.

        In order to help generate the development of the real sector, industries called on banks to lower the interest rates of their credits from the current level of 11 percent (government banks) and 14 percent (private banks). "The 11 and 12 percent are high as banks in other countries set their interest rates at a range of 1 to 2 percent," Gobel said.

        After all, the central bank has lowered its BI Rate by 1.5 percent to 7.75 percent. If banks at home do not cut their rates, businesses are feared to turn overseas for funding. "It is not impossible for big companies to turn to foreign loans. To prevent, this the government should provide incentives so that they would develop their business with funds obtained from local banks," Gobel said.

        Based on Bank Indonesia's data, since January 2009 until the second week of this month, the interest rate of credits only declined by 0.05 percent while the central bank has cut its rate by 1.5 percent.

        At the end of December 2008, the interest rate of banking credits were 14.2 percent. It dropped to only 13.93 percent in the second week of March 2009 while that of deposit were recorded at 8.75 percent at the end of December 2008 and 8.32 percent now.

        Despite a significant cut in the BI Rate, banks still hesitated to lower their lending rates because they stuck to their prudent principle in drawing up their balance sheets.

        Therefore, President Susilo Bambang Yudhoyono has asked domestic banks to cut their lending rates. "The BI Rate has been lowered to a proper level. That's why banks should follow suit," he said when opening a meeting of the Indonesian Young Businessmen's Association (Hipmi) Tuesday.

        "Banks should not only be domestic-oriented but also foreign-one so that they can follow the aim of the BI policies for the benefit of the nation," he said.

        Hipmi Chairman Erwin Aksa meanwhile said the association did not want the lending rates lowered beyond the banks' capacity.

        "A decline in lending rates can help businessmen maintain economic growth. It can also alleviate the burden of the business world in a realistic way to help employees," he said.

        The same call was also made by Vice President Jusuf Kalla. "State banks should pioneer the lowering of loan interest rate," the vice president.

        Bank Indonesia last week lowered its rate at 50 basis point to 7.75 but the people were still complaining because banking loan interest rate had yet to drop.

        "So, do not ask deposit interest rate to rise. Businessmen want the banking interest rate lowered but deposit interest rate raised," the vice president said.

        In an effort to lower the banking interest rate, Bank Indonesia Governor Boediono said he would communicate with banks to persuade them to lower their interest rates.

        "We must explain things to the banks but it will of course take time for them to lower their interest rates," Boediono said.

        BI and banks have always communicated with each other. "We always communicate with banks. We tell them our concerns. We always have two-way communications in various forums," he said.

        Boediono admitted that banks actually needed time before they could lower their interest rates.

        According to Finance Minister Sri Mulyani Indrawati, cuts in the bank credit interest rates will depend on banks' conditions, though Bank Indonesia has significantly lowered its benchmark rate.

        "There are different variations in the banks' conditions. Usually, banks take a decision based on the conditions of their balance sheet and financial healthiness," the finance minister said at the presidential office here on Wednesday.

        On the possibility of state-owned banks to take the lead in lowering interest rates on credits, the minister said logically banks still had enough room to lower their interest rates.

        "When the BI rate was lowered, state banks also lowered the interest rates on their loans. In this case, banks can also lower their interest rates," she said.

        The finance minister said that if state-owned banks were able to cut the interest rates on their credits, it would serve as a signal for banks (to also lower interest rates on their credits).

        In the meantime, BI senior deputy governor Miranda Gultom said there was still room for the central bank to reduce further its key rate after it had reduced it by 1.5 percent in the past three months.

        "We keep monitoring. If conditions permit and mid-term inflation is down it is possible that the rate will be lowered further. However its decline also will have to be followed by persuasions or regulations to make lending flow," she said.

        Miranda said she hoped banks would start lending again so that the economy could move better.

        "We need to work together. Bankers must start lending so that businesses which are actually still bankable, good and prospective would not go bankrupt because of a lack of funding," she said.***2*** (T.A014/A/H-NG/A014)

        (T.A014/A/A014/A/A014) 12-03-2009 00:20:15