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Commercial banks are unlikely to lower their lending rates
until the end of the year despite Bank Indonesia's decision Tuesday to
cut its benchmark rate to 10.25 percent.
Financial analysts said here Wednesday that banks would be slow in
responding to the central bank's rate cut, because most were not
"technically" prepared to increase lending before the turn of the year.
"The rate cut will not immediately influence banks to trim their own
lending rates," economist Aviliani of the Institute for the Development
of Economics and Finance said.
"And the banks are not to blame, as much of the problem still lies in
the real sector," she added.
Aviliani said Indonesia's real sector -- particularly the usually
credit-hungry footwear and textile industries -- was still struggling
to stay afloat amid worsening competitiveness, and was in no position
to consider expanding production.
Even if there was a demand for loans from the real sector, banks would
consider them risky and would ask for premium interest rates to
safeguard against possible default, she said.
And with the end of the year approaching, banks will not rush to expand
their lending through cheaper loans, she said.
"I don't think there will be any significant loan expansion until
December. Banks will likely focus on their current credit portfolios
for now.
"If we want to boost lending, then it is the real sector that the
government must focus on now, providing more fiscal incentives for
growth, for example," Aviliani said.
For the time being, banks may eye less risky consumer loans and export
credits. They may also play it even safer by investing excess funds in
Bank Indonesia bills and government bonds as a "logical" business
strategy given the still unfavorable economic conditions for disbursing
more loans.
Considering all this, Aviliani expects banks to play a "waiting game",
only cutting rates and expanding lending next year.
Economist Ryan Kiryanto of Bank Negara Indonesia (BNI) also doesn't
expect any action by banks until 2007, when he predicts an improvement
in lending growth to 20 percent from this year's 14 percent.
Bank Indonesia recently reported the banking sector's outstanding loans
increased by Rp 18.5 trillion (US$2 billion) in October to reach Rp
787.7 trillion.
Lending rates still average some 17 percent, according to BI's latest
survey of the sector, and are expected to decline only slightly to
around 16 percent by the end of the year.
Coordinating Minister for the Economy Boediono, meanwhile, left it up
to the banks to determine their lending rates in response to BI's
latest rate cut, yet hinted at the benefits of lowering rates.
"Lenders can expand their customer base and build their businesses if
they provide cheaper loans," he said.
Boediono previously called for banks to lower their lending rates, in
line with industry players saying a rate of 12 percent was ideal for
encouraging expansion in the real sector.
Several major banks, including Bank Mandiri and Bank Central Asia
(BCA), have said they are in the process of lowering their rates by up
to a percentage point in line with BI's six rate cuts since May, when
the central bank's key interest rate stood at 12.75 percent.
Bank Indonesia cut its key rate Tuesday by 50 basis points to 10.25
percent, the fourth cut of that size since Aug. 26
There are some fears the cut in the rate might cause the withdrawal of
foreign funds from the country's large bond market.
Forex analyst Farial Anwar and other analysts, however, believe the
rupiah will remain stable because there is still a large spread between
the U.S. Federal Reserves' current 5.25 percent rate and the rate for
rupiah-based bonds.
They also say there is room for further cuts, but warned caution was
needed to prevent an outflow of foreign funds from the country.
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