Indonesia’s moves to lift economic growth by bringing down lending rates are at risk of backfiring as the lower rates may be prompting banks to hold back on loans, according to Bloomberg News.
Lack of deposits in the banking system, rising bad loans and the prospect of narrower net interest margins have made banks cautious in their loan activities.
Indonesia’s Financial Services Authority, known as the OJK, said at the end of February that it will cap deposit rates and force banks to make similar reductions to their loan rates.
The regulator’s chairman, Muliaman Hadad, remarked last week that lending remains sluggish though even interest rates have come down.
The OJK capped deposit rates at 75 to 100 basis points above Bank Indonesia’s benchmark rate, depending on the size of the lender.
It asked banks to lower lending rates in line with deposit rates and said it would summon those that didn’t narrow their net-interest margins.
But the move hasn’t yielded the desired results in terms of a boost in credit growth.
“With non-performing loans rising and weak economic conditions, there is no way the banks can aggressively lend,” John Teja, a director at PT Ciptadana Securities in Jakarta, told Bloomberg.
– Contact us at [email protected]