Business Backs Bank Indonesia on Prime Rate Disclosure

Business leaders and economists have backed Bank Indonesia’s plan to require lenders to declare their prime lending rates to encourage competition. Bank Indonesia Governor Darmin Nasution said on Friday the new regulation would require lenders to publish the rates given to their most creditworthy customers. The policy is expected to take effect by the end of the year. Erwin Aksa, chairman of the Indonesia Young Entrepreneurs’ Association, said the move would make it easier for businesses to shop around for lower interest rates. “It will create competition among banks to win customers,” he said. Erwin said businesses were still burdened by high lending rates, relative to the central bank’s benchmark 6.5 percent. In July, Indonesian banks enjoyed a net interest rate margin — the spread between the rate they charge for loans and what they give depositors — of 5.78 percent, the highest in Southeast Asia. At his inauguration this month, Darmin criticized the high lending rates as “outrageous,” saying lenders were enjoying excessive rate spreads at the expense of growth. “It seems that the huge numbers of banks these days has failed to create a competitive loan market, aside from consumer loans,” Erwin said. BI spokesman Difi Johansyah said on Monday the central bank wanted to pressure lenders to reduce their lending rates by promoting transparency. “Banks should announce their prime lending rates so customers can see the components of loan interest rates — cost of funds, overhead costs,” Difi said. “Transparency will encourage banks to be more efficient and in turn to lower interest rates.” Drajad Wibowo, an economist with Sustainable Development Indonesia, said he supported the move because it should lead to lower lending rates. However, he said the policy’s effectiveness would be limited as long as yields on government bonds remained high. “I think bonds’ yield disrupt setting interest rates,” Drajad said. “The BI rate cannot become the benchmark rate since the government started issuing bonds.” Bank Central Asia, Bank Danamon, Mandiri and Negara Indonesia declined to comment.

September 20, 2010