CONTRACTION IN BANK CREDITS TO AFFECT REAL SECTOR

By Andi Abdussalam
     Jakarta, June 20 (ANTARA) - The high inflation rate which this year is estimated to range between 11.5 percent and 12.5 percent may slow down bank credit provision and affect national economic activities, particularly in the real sector.
     Domestic banks at home might revise their business targets in the second semester of 2008 out of worry about high inflation rates which would offset national economic growth.
     "The slow economic growth and high inflation will prompt domestic banks to reduce the amounts of credits they will extend to  the business sector. They fear that this condition will drive up the rate of non-performing loans (NPLs)," banking industry observer Edwin Sinaga said on Thursday.
     While banks are downsizing their credit provision targets, bank customers are also discouraged to borrow more money as bank  interest rates are also being raised following Bank Indonesia (the central bank=BI)'s decision to increase its benchmark interest rate.
     The real sector which is struggling to absorb the impact of  the recent fuel oil price hike will come under pressure following Bank Indonesia's decision to raise its key rate to 8.5 percent recently.
     "A significant rise in lending rates will put a further strain on the real sector following the 28.7 percent rise in fuel oil prices," Seno Hardiono, a member of the Central Java provincial chapter of the Indonesian Chamber of Commerce and Industry (Kadin), said.
     The central bank decided at a meeting of its board of governors early this month to raise its benchmark interest rate, locally known as BI Rate, by 25 basis points to 8.5 percent in reaction to the high inflation rate in May due in part to the fuel oil price hike.
     With bank credits being reduced, the production sector which so far is expected to help fuel the engine of national economy will also be slowed down.
     "The real sector has not performed as previously expected," Edwin Sinaga said.
     According to Edwin Sinaga, this condition will eventually reduce the profits of banks because cutting back credit provision targets would also have a proportionate effect on the economy.
     "We are afraid it will create more problems hampering economic growth," Edwin Sinaga said.
     However, he was still convinced that the economic growth target of six percent was still achievable because the government was still receiving foreign assistance funds for infrastructure development which was expected to move the wheels of economic growth.
     After all, the condition was also expected to return to normal next year when inflation was predicted to be drop to 6.5 - 7.5 percent.
     "If everything runs well, the inflation rate in 2009 can be lowered to a range between 6.5 and 7.5 percent, although in 2008 the inflation rate is at a range of 11.5 - 12.5 percent," Hartadi A Sarwono, a BI deputy governor, told a journalist workshop recently.
    
                       People's Business Credit (KUR)

     As a result of tight credits, small businessmen have been complaining about the lack of capital and promotion as well as marketing.
     In connection with the tight credit provision, President Susilo Bambang Yudhoyono has asked for an increase in the distribution of people's business credits (KUR) to boost national economic growth.
     "We will continue developing the KUR program which is currently worth Rp6 trillion and hopefully it will reach Rp15 trillion. The state has pledged another Rp1.4 trillion," the president said when opening an Indonesian Cultural Production Week early this month.
     The distribution of KUR is very important to help handicraft dealers in improving the KUR program to boost national economic growth and to reduce poverty.
     The president and the House of Representatives have agreed to enhance the KUR program to spur national economic growth and to reduce poverty in this country.
     "We develop and maintain our ancestors' legacy by developing a creative economy capable of improving our national economy," Yudhoyono said.
     With the KUR scheme, a number of banks have promised KUR packages to handicraft businessmen with state-owned bank BRI to provide Rp4.176 trillion to 625,083 customers and Bank Mandiri Rp993.24 billion to 33,110 debtors.
     State-owned BNI promised over Rp911,871 billion in KUR to 7,413 debtors, Bukopin Bank Rp452.623 billion to 2,384 debtors, Bank Syariah Mandiri Rp258,485 billion to 4,400 debtors and BTN bank Rp81.05 billion to 470 debtors.
     Meanwhile, the chairman of the National Committee on Empowerment of Indonesian Micro Finances, BP Kusmoljono, said implementation of a program to extend KURs below Rp5 million through six banks would be intensified through cooperation with the Micro Finance Institution (LKM) to achieve a target of Rp15 trillion by the end of this year.
     He expressed optimism that the target of Rp15 trillion would be achieved as expected by the President. Up to June 9, 2008, the amount of disbursed KUR had reached a total of Rp6.5 trillion.
     The micro credits for small scale businesses were channeled by BRI, BNI, Bank Mandiri, BSM, Bukopin and BTN banks. The credits were underwritten by the government through PT Askrindo and public company Business Development Facility.***2***

(T.A014/A/HAJM/B003/2. 19:10) (T.A014/A/A014/B003) 20-06-2008 19:30:01