Lending growth hampered by high interest rates

The central bank's move to hike its key interest rate to help contain stubbornly high inflation has taken its toll on the banking sector, with the banks seeing slower lending growth last year.

Lending is also expected to remain sluggish this year, as Bank Indonesia (BI) remains cautious about relaxing its monetary policies, which in the end could affect the financing and growth of investment.

In its latest quarterly review on the country's economy, the central bank noted that bank loans as of December last year amounted to a total of Rp 722.4 trillion (some US$76 billion), having increased by only 21 percent from 2004.
"The rise in interest rates during last year's third quarter has affected the ability of lenders to provide loans," BI said in the review.

"Although loans increased by Rp 7.2 trillion from the third quarter, this was a slower pace compared to previous quarters."

Bank loans grew by some Rp 50 trillion during last year's first three quarters. The banking sector saw a nearly 25 percent growth in loans to Rp 595.1 trillion in 2004 from 2003.

BI also reported that the net figure for non-performing loans (NPLs) in the banking sector averaged 5 percent in 2005, up from 1.9 percent during the year's first quarter. The capital adequacy ratio (CAR) of lenders, meanwhile, stood at 19.6 percent, down from 21.7 percent previously.

BI requires lenders to have net NPLs of not more than 5 percent and a minimum CAR of 18 percent.

The central bank tightened its loan criteria for lenders last year, and began hiking its benchmark BI Rate to 12.75 percent to support the rupiah and tame surging inflation.

It is expecting that lending will grow by at least between 15 and 20 percent this year, with BI having recently relaxed its loan criteria to help banks channel more credit.

With the banking sector still likely to face difficulties in increasing lending this year, including for investment financing purposes, BI is forecasting that investment may only grow by between 8.4 and 9.4 percent this year, down from 9.6 to 10 percent growth in 2005.

This is in line with a declining trend in investment growth from some 13 percent in last year's first quarter to only some 3 percent in the fourth.
"The slowdown in investment is mainly due to the still negative business prospects resulting from the recent decreases in the public's purchasing power. Businesses are also seeing their cost of capital increasing due to the recent rise in interest rates," BI said.

The central bank is, however, expecting that the overall investment figures may be helped by government investment in the infrastructure sector, with financing being provided by external sources.

Economic growth, which is forecast to reach between 5 and 5.7 percent this year compared to last year's 5.3 to 5.6 percent, is also expected to be boosted by exports, which may grow by 10 percent.

Source:
The Jakarta Post,
February 06, 2006