Muliaman D. Hadad - JP/Ricky Yudhistira
The government is bombarding the banking industry with concerted efforts to push down lending rates as the banking regulator prepares a new policy to encourage banks to reduce their profit margins to make loans more affordable.
The policy is currently being drafted by the Financial Services Authority (OJK) and is expected to be issued by the end of the month, which is a slight delay from the initial release schedule of early this month.
OJK chairman Muliaman D. Hadad said the upcoming rule would offer incentives to banks to bring down their net interest margins (NIMs) and overhead costs — two major components contributing to expensive lending rates.
OJK data shows that the NIMs of domestic banks increased from 4.23 percent in 2014 to 5.39 percent in December last year, making them among the highest in ASEAN despite the lower profits caused by weak economic growth.
In the proposed policy, Muliaman said banks that were able to provide affordable loans would receive administrative leniencies and be allowed to open branches and launch new products without the need to increase their capital as required in existing regulations.
“Banks are currently optimizing their efficiencies through mobile and digital banking services. However, many of them are still seeking to open new physical branches. We will give them leniency if they can cut costs and provide cheaper lending,” he said recently.
The government has been pushing the banking authorities to force banks into providing loans at single-digit interest rates in a bid to kick-start the economy amid looming fears of another global economic slowdown.
According to recent data compiled by major banks, the corporate segment is offered an annual interest rate of 11.1 percent, while retail, mortgage and non-mortgage consumer loans are offered at 12 percent, 11 percent and 12.2 percent, respectively.
The microloan segment currently carries the highest rate, an average of 19.4 percent per year, the data show.
The central bank recently cut its benchmark interest rate to 7 percent from the January position of 7.25 percent to encourage lending.
The OJK’s commissioner for banking supervision, Nelson Tampubolon, said the authority would monitor each bank’s efforts in cutting their unnecessary expenses, including in marketing and human resources.
The OJK has insisted that the Indonesian banking industry is one of the most inefficient among its peers in Southeast Asia as it has a high average cost-to-income ratio (BOPO). A bank with a high BOPO percentage means it is less efficient.
The data reveal that the banks’ BOPO stood at 81.49 percent by the end of last year, up from 76.29 percent in 2014. The percentage was higher than the 40 to 60 percent average in the ASEAN region, including Malaysia’s 50 percent.
“We want domestic banks’ BOPO to be at least en par with the Philippines and Thailand. We don’t expect to compare it with Singapore, which already has a sophisticated IT-based banking system,” Nelson said.
Bankers have argued that the high BOPO was caused by the country’s vast geography and high inflation, which forced them to spend large amounts of money to maintain network expansion, as well as to employ tens of thousands of people.
Bank Central Asia (BCA) president director Jahja Setiaatmadja said the lender, the country’s largest private bank, had a low cost of funds as almost 80 percent of its third-party funds were composed of current accounts and savings accounts (CASA).
However, he said BCA and other lenders that have similar funding structures had to face the fact that CASA was ironically more expensive in terms of maintenance because of its high frequency of daily transactions, compared to banks that relied a lot on time deposits.
“We have many ATMs and maintenance costs for each unit reaches Rp 12 million a month, equal to Rp 144 million a year. People often don’t know that banks also have costs for each ATM transaction, including when customers make balance inquiries,” he said.
Bank Mandiri president director Budi Gunadi Sadikin said previously that Indonesian banks tended to have high NIMs because of the high cost of credit, triggered by a higher level of operation risks compared to neighboring countries.
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