BANKS ORDERED TO CUT LENDING RATES

By Andi Abdussalam

Jakarta, May 7 (ANTTARA) - Amid calls by businesses and economic observers for significant cuts in banks' lending rates, the government ordered state-owned banks to lower the interest rates of their credits in order to stimulate the real sector.

        Acting Coordinating Minister for Economic Affairs Sri Mulyani Indrawati has said banks which have been operating efficiently should lower their lending rates because Bank Indonesia (BI/the central bank) has cut its benchmark rate. "We emphasize that state banks whose balance sheets are good and efficient should lower the interest rates of their credits," the minister said.

        The government's instruction on state banks came up amid calls by businesses that banks should cut their lending rates following BI's step on Tuesday to lower its benchmark rate by 0.25 basis points to 7.25 percent.

        Businesses grouped in the Indonesian Chamber of Commerce and Industry (Kadin) hope that the central bank's key rate cut would be followed by signification reduction in banks' lending rates in order to generate the performance of businesses in the real sector.

        "Business community hopes a significant cut scale in the banks' lending rate,"Kandin's chairman for Permanent Trade Committee, Bambang Soesatyo said.

        However, he has doubts that the BI rate cut would be able to drive down banks' lending rates in the country, owing to the fact that the central bank has aggressively cut its rate several times in the past four months but it has no significant impact on the lowering of lending rates.

        "We have doubts because a series of BI rate cuts failed to bring banks interest rates down," Bambang Soesatyo said.

        Therefore, economic observer Umar Juoro of the Center for Information and Development Studies (Cides) said that BI must urge banks to lower their lending rates after it had cut its key rate by 0.25 basis points to 7.25 percent.

        "BI must aggressively persuade banks so that they would cut their lending rates," Umar Juoro, said.

        BI's board of governors in its meeting on Tuesday decided to cut the central bank benchmark rate to 7.25 percent from the previous month's rate of 7.50 percent.

        The banking lending rates at present still range at 13-14 percent, which indicates a wide spread between them and the BI benchmark rate. The interest rate reference is at 13.79 percent with a difference spread of 600 basis points of the BI benchmark.

        For this purpose, the government should provide stimulation or guarantee for certain economic activities so that the chance for credit extension would become bigger. The government, for example, could take over the problem of land clearance for an infrastructure project so that banks would disburse their credits soon.

        "In this way, and with the purchasing power of the people still high, the development of the real sector would be boosted soon," he said.

        In the meantime, Minister for State Enterprises Sofyan Djalil said that State-owned banks cannot dictate their will to the market mechanism with regard to interest rates.

        "Let banks interest rates develop based on the market mechanism. State banks cannot dictate their will on interest rates to the market," the minister.

        However, he said that state banks would be able to adjust their rates to BI policies. They would cut their interest rates but it would depend on the macro or monetary policies adopted by Bank Indonesia.

        "Bank Indonesia has done its job well. If it cuts the interest rate of its certificates (SBI), banks' interest rates will also follow," he said.

        The government on Wednesday instructed state-owned banks which had efficient and good balance sheets to lower the interest rates of their credits. With BI cutting its benchmark by 0.25 basis points to 7.25 percent, banks which have been efficient should also lower the interest rate of their credits.

        Finance Minister Sri Mulyani said there was no difference between state banks and commercial banks. They were expected to lower their interest after the central bank cut its key rate on Tuesday.

        She said that if economic risks were not too bad, banks did not need to set too much reserves so that they would have enough room to lower the interest rate of their credits.

        After all, the BI's move to cut its key rate to 7.25 percent would boost funds into the productive sector. "What we hope with BI cutting its benchmark rate is its follow-up effect," the minister said.

        She said that if a bank had a healthy financial balance sheet as indicated in the decline in the interest rate of its deposit, it would have a room to adjust its cost of lending or the interest rate of its credits.***2*** (T.A014/A/HAJM/19:10/a014) (T.A014/A/A014/A/A014) 07-05-2009 19:06:01