Indonesia to Unleash Loan Funds as Micro Lending Rates Cut

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Indonesia wants to unleash 30 trillion rupiah ($2.3 billion) of new loans for small businesses and halve some bank micro lending rates to help revive an economy running at its slowest pace in five years.

The government has asked state-owned lenders to cut lending rates for so-called Kredit Usaha Rakyat, or financing given to small businesses that may not meet bank criteria, as part of the package, said Gatot Trihargo, a deputy at the State-Owned Enterprises Ministry, in an interview in Jakarta on Wednesday. Rates for such loans can be as high as 24 percent.

The move is the latest by policy makers who are trying to spur flagging growth in Southeast Asia’s biggest economy, having already loosening lending rules for mortgages and with plans to cut corporate tax. Bank Indonesia has little room to cut its benchmark interest rate because of a current account deficit and a currency at its weakest in 17 years, while planned government spending on infrastructure has yet to kick in.

“The economic growth target is high, so the government wants to get everyone underneath its authority involved in helping, including the banks,” said Rully Arya Wisnubroto, a financial market analyst at PT Bank Mandiri in Jakarta.

Shares in state-owned lenders fell on Thursday, extending Wednesday losses. Bank Mandiri had dropped 2 percent by 11.00 a.m. in Jakarta while PT Bank Rakyat Indonesia slid 2.4 percent and PT Bank Negara Indonesia fell 2.2 percent.

Trihargo said the government would transfer some state funds from the central bank to the state-owned lenders, to help subsidize the lower lending rates to small businesses. Bank Rakyat, the world’s largest micro lender, has the widest branch network to lend in remote areas, he said.

Earnings Trimmed

“We realize there’s a mismatch in banking principles in the last few years,” Vice President Jusuf Kalla said in a speech in Jakarta on Wednesday. “Small business loans have much higher interest rates compared with bigger loans. This is one thing that needs to be straightened up.”

Kredit Usaha Rakyat, or People’s Business Credit, provides financing for working capital or investment particularly for micro-, small- and medium-sized businesses that may have limitations in fulfilling bank requirements, according to the government’s poverty eradication website.

Such loans cover 12 percent of Bank Rakyat’s micro loans, or 4 percent of its total book, Rahmi Marina and Isnaputra Iskandar, analysts at PT Maybank Kim Eng Securities, said in a report on Wednesday. With micro lending contributing half of the state-owned bank’s earnings, the discounted rates could impact estimated income by 1 percent this year and 2 percent in 2016, they said.

Government Intervention

In January, President Joko Widodo announced cement price cuts for state-owned producers, leading shares of PT Holcim Indonesia and PT Semen Indonesia to fall. The intervention sparked concerns that efforts to revive the economy will come at the expense of some of the nation’s largest companies. After the move on cement, Manulife Aset Manajemen Indonesia and UBS AG said bank earnings may also be at risk.

The economy expanded 4.71 percent in the first quarter, the least since 2009, while inflation accelerated for a third month in May to 7.15 percent. A government growth target of 5.7 percent for this year might be difficult to achieve, Finance Minister Bambang Brodjonegoro said this week.

The lending policy change might give a boost to economic growth “on the margins but the sentiment on the business side is poor,” said Gundy Cahyadi, an economist at DBS Group Holdings Ltd. in Singapore.

“The way to boost the sentiment is through fiscal policy,” he said. “That’s what’s been lacking.”

Related News and Information: Bank Indonesia Plans Easier Lending Rules as Key Rate Held

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