Indonesian banks see hurdles to higher lending despite liquidity boost

[February 19, 2016]  By Gayatri Suroyo

JAKARTA (Reuters) - Bold steps by Indonesia's central bank aimed at spurring lending to lift economic growth might not generate a significant rise in loans, bankers say.

On Thursday, Bank Indonesia (BI) cut a host of rates. It has now reduced its benchmark reference rate by 50 basis points this year and chopped banks' rupiah reserve requirement by 150 bps since November.

The moves should give a solid boost to liquidity. But still-weak economic conditions and rising levels of bad loans will cap expansion of lending, according to bankers who say loan demand remains tepid at best.

"Banks follow the trend, we don't lead," Sigit Pramono, chairman of Indonesia's banking association, told Reuters on Friday. "Economic growth must improve for us to follow."

He added that banks will be cautious about lending when times are tough because it may create bad loans.

Non-performing loans rose to 2.5 percent of total credits at end-2015, up from a historical low of 1.8 percent in 2013, BI data shows.

BI said on Thursday that loans expanded 10.5 percent in 2015, below the 15-17 percent target for the year. The economy grew only 4.8 percent last year, the slowest pace since 2009.

The central bank has to be bold because the lending pace "is constraining our economy", Deputy Governor Perry Warjiyo told an investor conference call late on Thursday. "We need to support economic growth with the availability of credit."

BI said the cuts to reserve requirements would give banks 52 trillion rupiah ($3.84 billion) of fresh liquidity.

Warjiyo said he expects the economy to grow 5.4 percent this year but said annual credit expansion of 14 percent would be needed to achieve this pace.

On Friday, banking stocks dragged down Indonesia's stock market as investors worried that banks could have lower net margins.

Parwati Surjaudaja, president director of OCBC's Indonesian unit, said loan growth is not determined only by liquidity but by the condition of the economy.

"The current condition is full of challenges, including what happens with commodity prices, oil prices, etc," she said while noting that consumer confidence is improving.

(Additional reporting by Fransiska Nangoy; Editing by Nicholas Owen and Richard Borsuk)

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