BANKING - BI may require banks to disclose prime lending rate and raise LDR ratio

Bank Indonesia (BI) may require banks to disclose their risk profile methodologies as part of its fight to boost lending to boost economic growth.

Bank Indonesia recently said it might introduce a regulation to require banks to disclose their prime lending rates, which are the interest rates given to a bank’s best customers.

BI deputy governor Halim Alamsyah said that the nation’s central bank might introduce the regulation so banks would compete in the open market.
“Therefore, the public would know which banks have more competitive rates. If they maintain or lower their rates, the public will react,” Halim said, adding that a formal policy announcement might be made by the end of the year.

“We still have other policies in the pipeline. When all have been issued, it will be clear that BI’s goal is to bolster economic growth by focusing on lending to the real sector,” he added.

BI recently issued two new policies. The first will require banks to store more cash as part of their primary reserve requirement at the central bank starting from Nov. 1. The central bank wants to lower the amount of money in circulation over fears of inflation, which reached a 16-month high in August.

BI’s second policy will require banks to have a loan-to-deposit ratio (LDR) of between 78 and 100 percent by March 1 next year to push banks to disburse more loans or place more cash as part of their additional reserve requirements at the central bank.

Bankers unveiled plans to raise interest rates following the announcement of the policies, while analysts responded with confusion and concern, calling it a “mixed-bag”.

Purbaya Yudhi Sadewa, head of research at the state-owned Danareksa Research Institute, said Thursday the new prime lending rate policy would not ease the concerns over rising cost of funds caused by the new reserve policy, let alone prevent banks from raising lending rates.

“Disclosing the prime lending rate, or the structure of lending rates, will not stop banks from raising rates. If this is what BI wants to do, it needs clearer, more firm and decisive policies,” Purbaya added.

Muliaman Hadad, another BI deputy governor, said lending rates remained too high regardless of the economy’s ability to curb inflationary pressures as had been reflected in the benchmark policy rate, which had been steady at 6.5 percent for the last 13 months.

“Banks need to lower their margins [of lending and deposits rates] in order to better serve the public with competitive rates,” he added.

Higher lending rates could hurt economic growth as businesses might be reluctant to borrow money from banks for expansion.

Therefore, the central bank has since early this year urged banks to lend more as part of their main aim to bolster loan growth, in line with the government’s pro-growth agenda. The loans were expected to be disbursed to the real sector which could create a multiplier effect to the country’s economic growth.

Banks, however, have said there has been limited demand for productive loans. On the other side, businesses have expressed “complaints” over the “high rates” they have to pay if they want to borrow. (est)

Source : http://www.thejakartapost.com/news/2010/09/17/bi-may-require-banks-disclose-prime-lending-rate.html - Sept 17, 2010