Central Bank Faces Challenge After Interest Rate Cuts

The low interest rate environment in Indonesia will pose as a challenge for Bank Indonesia amid the uncertain global economy that has pushed risk premiums higher.

At the same time, banks in Indonesia are competing to tap depositors' funds, luring them with higher interest rates.

Several banks have welcomed the central bank's move to intervene in the setting of lending rates. This was done through commercial banks' business plans that were discussed with and presented to the central bank.

PT Bank Panin Tbk Vice President Roosniati Salihin said the central bank needs to know every bank's business plan, so there will be discussions between bankers and the regulator.

“But how do we know that interest rate is quite dynamic and in line with the market movement? Impacts from the global crisis needs to be anticipated,” she told Bisnis Monday.

She explained that more global economic tension has increased risk outlook. This can be seen from the increase of corporate debts' yields to 9%-11%.

More yields will indirectly lead to higher cost of fund. Moreover, banks are seeking larger third party funds while expanding credit.

Banks recorded third party fund of IDR2,545 trillion at end of September 2011, increasing 18.7% from 17.5% at one month earlier.

Competition in collecting depositors' funds to anticipate a mismatch has also led to high bank deposit interest rates. The rate for 1-month time deposit was 6.83% in September, increasing 3 basis points from the previous month.

On the other hand, the central bank has cut interest rate by 75 basis points to 6.0% in the past two months. The interest cut made lending rate lower, which is expected to stimulate the industries amid decelerating global economic growth.

To ensure the implementation of the monetary policy, Bank Indonesia will force banks to decrease lending rate by supervising their business plans. However, Association of National General Banks is against the action.

Positive response

PT Bank Mandiri Tbk Director Sunarso thinks that the central bank’s step in supervising bank business plan must get positive response since the action is aimed at supporting credit disbursement to the real sector, or industries. In other words, lower interest rate will boost investment and enlargement of business capacity.

However, increased investment and enlarged business capacity in Indonesia are not solely influenced by interest rate. There are other factors beside interest rate that needs special attention, such as investment object with clean & clear status, efficiency in the real sector, and taxation.

Bank Indonesia is evaluating bank business plan to ensure that banks implement the monetary policy, said Deputy Governor Halim Alamsyah. “We are evaluating their business plans.”