BANKS NOT LIKELY TO CUT LENDING RATE SOON

By Andi Abdussalam

Jakarta, May 5 (ANTARA) - Banks are unlikely to lower their lending rates in the near future despite the fact that Bank Indonesia (BI) once again cut its benchmark rate by 0.25 basis points to 7.25 percent on Tuesday, another step which saw the central bank's aggressive steps which have since January cut 200 basis points or 2.0 percent of its key rate.

        The aggressive steps by BI are expected to help drive down banking credits in order to stimulate development of the real sector amid the economic downturn. However, banks are unlikely to lower their lending rates in the near future.

        "Banks will lower their interest rates on credits or savings only if economic growth and investment in the country have improved," economic analyst of state-owned bank Bank BIN Muhammad Alfatih said.

        Alfatih made remarks in response to a call on Tuesday asking the government to exert pressure on banks to lower their interest rates following the BI's step in cutting its benchmark rate. Secretary general of the Islamic Economists Association (IAEI), Agustianto urged the government to force banks to lower their lending rates.

        "Banks should not enjoy the BI rate cut only while refusing to lower their interest rates on credits," he said. His organization supported the BI's step in lowering its benchmark rate because it would help to move the real sector where many small people were doing business.

        The IAEI even hoped BI would continue to lower its rate to six or five percent. He said the BI's step in cutting its key interest rate had not yet been effective as it was not followed by banks which were still imposing high interest rates.

        If banks are ready to lower their lending rates, the real sector could be developed. "The government is expected to force banks to do so," he said.

        However, monetary analyst John Tafbu Ritonga, who is also dean of North Sumatra University's School of Economics, said that the government could not force banks because banks had to cover the costs they had incurred previously.

        Although the BI Rate has dropped, third party funds deposited at banks now were collected when the BI benchmark rate was still high.

        Based on this fact, banks should regain the costs they had incurred to pay in interest on their clients' deposits.

        But a call by the government on banks to lower their interest rates could be fulfilled if there was an advantageous solution such as the readiness of the government to bear the risks of micro-business credits and part of the interest rates of certain business credits.

        "If there is such a solution the government can urge banks to lower their interest rates," he said.

        Basically, banks support lower banks' lending rates. Retail Banking Director of Bank Mega, Kostaman Thayib said that lower bank lending rates would help the people, businessmen and the banks themselves.

        "This is a good step as it will reduce non-performing loans (NPL) and benefit the banking sector," he said.

        Therefore, Muhammad Alfatih said a number of banks would follow the BI to cut their interest rates, if investment and economic growth improved.

        "Banks still see there are investment risks so that they have yet to cut their interest rates," he said.

        He said that fears of economic growth which was not yet stable could add risks to banks' business. After all, there were a number of conventional banks whose conditions were not yet conducive to lowering interest rates.

        Besides, he said, the BI Rate cut by 0.25 basis points would generate stocks market and bonds trade. "This condition would provide strength for the stock market. This would invite more foreign funds into the stock market," he said

        According to economic analyst Ryan Kiryantono, the decision on Tuesday of BI to cut its BI Rate by 0.25 basis points will give a positive sentiment to the market.

        "The BI benchmark rate reduction will give a positive sentiment to the stock exchange and money market because it is predicted it would lead to the lowering of banks' lending interest rates as expected by the business world," he said.

        The interest rate cut is in line with the present improving macro-economic conditions where the stocks market was gaining strength while the rupiah currency was appreciating to below Rp10,500 per US dollar.

        Inflationary pressure is also slackening where in April the country experienced a deflation of 0.31 percent and its foreign exchange reserves have also increased by 1.85 billion dollars to 56.67 billion dollars.

        Factors that affected inflation have also reduced their pressures, such as the low world crude price at 48 dollars per barrel, the grand harvest and the decline in imports. All this has helped the lowering of the BI benchmark rate.

        "If in months ahead inflation remains low, BI will have a big chance to lower its rate to seven percent later this year," he said.

        The board of governors of Bank Indonesia decided on Tuesday to lower its benchmark rate (BI Rate) by 25 basis points to 7.25 percent. Since December 2008, the BI rate has been cut by 225 basis points to 7.25 percent. ***2*** (T.A014/A/HAJM/20:10/A/H-YH)

        (T.A014/A/A014/A/H-YH) 05-05-2009 21:01:29