• Lower deposit-rate caps will cut the cost of funds for lenders
  • The goal is to spur growth through reduced charges for loans

Indonesia’s top banks may get a lift from new government plans to spur the economy, which are seen boosting loan growth while allowing them to protect margins that are already among the world’s widest.

The Financial Services Authority, known as OJK, will lower the ceiling for deposit rates this month for major lenders, a step it intends to bring down lending rates to promote economic expansion, Nelson Tampubolon, head of banking supervision, told reporters Monday. The action will produce a one-percentage point savings for lenders, according to Haru Koesmahargyo, finance director at PT Bank Rakyat Indonesia, the nation’s second-largest bank by assets.

President Joko Widodo is enlisting the support of banks as he seeks to shore up flagging economic growth, a strategy that’s been used by other emerging Asian economies like China. Cutting banks’ deposit costs will permit them to offer cheaper loans without damaging profitability.

“Net net, it’s positive for the banking sector as it can generate loan growth,” Ivan Tan, a Singapore-based analyst at Standard & Poor’s LLC, said Tuesday in a telephone interview. “Overall the measure is to offset external headwinds that came with the China slowdown and lower commodity prices.”

Banking Stocks

The Jakarta Finance Index, which includes Indonesia’s largest banks, is little changed since Feb. 26, the last trading day before the government announced its plan for deposit rate caps. That compares with a 1 percent gain by the broader Jakarta Stock Exchange Composite Index. The benchmark for financial stocks has declined 1 percent this year, while the broader index rose 4.1 percent.

OJK is seeking to increase loan growth by 13 percent to 14 percent this year, Chairman Muliaman Hadad said Feb. 25. Lending grew by 10 percent to 11 percent last year, according to S&P. In November, the regulator had initially set a target for loans to climb 12 percent to 13 percent in 2016.

Weighing on banks are non-performing debts, which may rise to 3 percent to 4 percent of the total outstanding this year, from 2.7 percent in November, according to an S&P estimate.

Benchmark Rate

The government’s current budget calls for the nation’s gross domestic product to increase by 5.3 percent this year, from a 4.79 percent expansion in 2015, the slowest in six years. So far in 2016, Bank Indonesia, the central bank, cut its benchmark interest rate by 50 basis points, to 7 percent, and lowered the reserve requirement ratio to 6.5 percent.

The premium over the central bank’s reference rate at banks with more than 30 trillion rupiah ($2.25 billion) core capital will fall to 75 basis points above the central bank’s reference rate, from 200 basis points currently, OJK’s Tampubolon said. The cap for lenders with between 5 trillion rupiah and 30 trillion rupiah will drop to 100 basis points from 225 basis points above the benchmark.

While not setting similar limits on lending rates, the OJK wants banks to reduce them to a single-digit percentage by the end of this year, Tampubolon said. The regulator will monitor loan rates and will call in banks those that don’t comply, he said.

Lender’s Response

Bank Rakyat is drafting a plan to lower its loan charges, Koesmahargyo, the finance director at the Jakarta-based bank, said Tuesday in a telephone interview. He declined to elaborate.

While Indonesian banks’ lending rates average 14.5 percent, the biggest banks charge borrowers less. Loan rates at PT Bank Mandiri, the nation’s largest lender, range from 10.50 percent for corporate loans, 12.50 percent for non-mortgage consumer loans and 19.25 percent for micro-business loans.

The country needs cheaper borrowing costs to spur spending on infrastructure, manufacturing and services, said Bharat Joshi, who helps manage $3.5 billion in Jakarta as head of Indonesia investments for U.K.-based Aberdeen Asset Management Plc. As banks lower lending rates, they will also grow non-interest businesses such as transaction banking and wealth management to diversify sources of income, he said.

Reduced loan charges will help the nation’s lenders expand their customer base, said Joshi, who invests in bank stocks. 

“Indonesia can still achieve loan growth of 10 percent to 15 percent over 10 to 15 years,” he said. “The growth trajectory is intact.”

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