The prime lending rates (SBDK) at state-owned banks have finally dropped after Bank Indonesia (BI) said banks had been slow in lowering their lending rates.
By
PAUL SUTARYONO
·8 minutes read
The prime lending rates (SBDK) at state-owned banks have finally dropped after Bank Indonesia (BI) said banks had been slow in lowering their lending rates. However, prime lending rates are not the same as the lending interest rates charged to customers. Why have banks been so slow in reducing their lending rates? How can they cut the interest rates?
State-owned banks’ prime lending rates, which have begun to decline, include those charged on corporate loans, retail loans, micro loans, consumption loans in the form of mortgage loans (KPR), and non-KPR loans. State-owned Bank Tabungan Negara (BTN) became the champion in lowering the prime lending rate for corporate loans. The bank cut the rate by 3 percentage points to 8 percent as of February, 2021 from 11 percent as of February 2020. Other state-owned banks, Bank Rakyat Indonesia (BRI), Bank Mandiri and Bank Negara Indonesia (BNII) only cut their prime lending rates by 1.95 percentage points during the same period.
Why have banks been so slow in reducing their lending rates?
The prime lending rate of BTN’s retail loan also dropped by 3 percentage points from 11.25 percent to 8.25 percent in the same period. The fall is far bigger than those of BRI and Mandiri, which only dropped by 1.65 percentage points, respectively and BNI by 1.70 percentage points. Mandiri\'s micro loan fell 6.25 percentage points from 17.50 percent to 11.25 percent, much larger than that of BRI, which dropped by 3.25 percentage points from 17.25 percent to 14 percent. In fact, BRI is the market leader in micro lending.
The prime lending rate of BTN’s KPR loans fell by 3.50 percentage points from 10.75 percent to 7.25 percent, much bigger than those of BNI, Mandiri and BRI which dropped by 3 percentage points, 2.95 percentage points and 2.65 percentage points, respectively. The fall of the prime lending rate of BNI’s non-KPR consumption loans which dropped by 3.50 percentage points was the biggest, followed by BRI by 3.25 percentage points , Mandiri by 3.20 percentage points and BTN by 3 percentage points (Kontan, 24/3/2021).
Various strategies
So, how can banks lower their lending interest rates?
First, once again the prime lending rate is not the same as the lending interest rate, as the public perceives it. The prime lending rate is a reference for the lending interest rate used by banks in many countries. In early 2011, BI issued Circular Number 13/5 / DPNP, dated February 8, 2011, regarding Information Transparency for Prime Lending Rates.
This regulation has two main purposes. First, to increase transparency regarding the characteristics of banking products including the benefits, costs and risks in a bid to provide clarity to customers. Second, to promote good corporate governance and to encourage healthy competition in the banking industry through the establishment of a better market discipline.
In clearer language, the prime lending rate is the lowest interest rate used banks as the basis determining the lending interest rates charged to bank customers. It means that prime lending rate does not include the customer risk premium. For example, BTN ‘s prime lending rate for mortgage (KPR) loans of 7.5 percent will be added to the risk premium, for example, 2.5 percent so that the lending rate will be 10 percent.
Well, 10 percent is called the effective lending rate for mortgages. The risk premium depends on the potential risk of each credit segment, such as corporate loans, retail loans, micro loans, KPR consumption loans and non-KPR consumption loans.
Second, why are banks slow to lower their prime lending rates, even though the benchmark interest rate or Bank Indonesia’s 7-Day Reverse Repo Rate has fallen by 125 basis points (bps) or 1.25 percentage points since 2019? Now the benchmark interest rate is at 3.5 percent. The transmission from the cut in the benchmark interest rate to the cut in the prime lending rate is always slow, because the banks will have to calculate the cost in raising the funds when the reference interest rate is high.
The reduction in prime lending rates will be followed by the cut in deposit interest rates, which will result in the reduction of the lending rates. In general, the prime lending rate immediately drops when the authorities lower the benchmark rate. However, many commercial banks have not responded.
The funny thing is that the four state banks cut their prime lending rates to the same level. The prime lending rate of their corporate loans is set at 8 percent, retail at 8.25 at percent, KPR loans at 7.25 per cent, and non-KPR loans at 8.75 per cent. Only the prime lending rate of micro loans is different in which BRI set it at 14 percent and Mandiri at 11.25 percent. So far, BNI and BTN have not provided micro loans. It seems there is a "command" from above.
Third, are there any benefits? Of course, there are . The lowering of the prime lending rates of the state banks can encourage private banks to follow suit. If not, other banks will be unable to compete. Apart from being the market leader, the state banks also act as an agent of development. As the logical consequence, the state-owned banks are required to support government programs in extending credit to support national economic growth.
How can we reduce the risk premium to make the lending interest rates more affordable?
Moreover, now state banks have excess liquidity. The state banks have disbursed loans of Rp 192.24 trillion to 28.91 million customers. Meanwhile, the funds to finance the National Economic Recovery (PEN) program of Rp 695.2 trillion in 2020 are placed in state banks. In 2021, the government will also place Rp 66.99 trillion in the state banks to provide loans to the business sector, especially micro, small and medium-scale enterprises (MSMEs).
Fourth, the problem is, how can we reduce the risk premium to make the lending interest rates more affordable? Of course, the risk premium among banks is different because the capital structure of banks varies. However, regulators, both BI and the Financial Services Authority (OJK), can examine all the components in a deeper way in order to set affordable lending rates.
In fact, the prime lending rate consists of three components, namely the cost of funds, overhead costs incurred by banks in the process of extending loans, and profit margins.
Of the three components, only the profit margin can be "controlled" by the authorities or regulators. That is the challenge for the authorities or regulators to control profit margins so that credit interest rates will be more affordable to the business sector.
Fifth, the higher the profit margin, the higher the effective lending interest rate charged to customers. Why do Indonesian lending rates tend to be higher than other country banks? This is because the average prime lending rate of the Indonesian banks is the highest among banks in ASEAN and even in developed countries.
The prime lending rate (in Malaysia it is called the base lending rate) in Indonesia has an average level of 9.170 percent per year as of February 2021, followed by the Philippines at 6.542 percent (December 2019), Russia at 6.100 percent (January 2021), Thailand at 5.415 percent (February 2021), Singapore at 5.250 percent (February 2021).
Meanwhile, in China, the prime lending rate averaged at 4.350 percent (April 7, 2021), Malaysia at 3.443 percent (January 2021), the United States at 3.250 percent (April 5, 2021), Canada at 2.450 percent (March 2021), Germany at 1.990 percent (January 2021), Japan at 1.475 percent ( March 2021), and Italy at 1.177 percent (January 2021), according to Bank Negara Malaysia’s data issued in January 202). Indeed, that is a serious challenge for regulators to reduce the prime lending rate.
Sixth, the prime lending rate can also be reduced if regulators have the courage to regulate effective lending interest rates by imposing the risk premium ceiling. This measure can be applied to KPR consumption loan and non-KPR consumption loans. For example, the lending rate of the mortgage or KPR loans is the sum of the prime lending rate and risk premium rate.
Such a method will be more emphatic in the eyes of customers as it can lower the lending rates more effectively. This also can reduce risk premiums and to prevent the profit margin from being too high.
BI\'s heavy burden
Seventh, if this is not done immediately, banks will prefer placing their excess liquidity in securities. The Indonesian Banking Statistics published by the OJK on April 6, 2021 showed that the placement of bank funds on securities rose 42.85 percent from Rp 1.06 quadrillion as of January 2020 to Rp 1.51 quadrillion as of January 2021.
PERSONAL ARCHIVE
Paul Sutaryono
The more funds placed by banks in securities, the larger funds BI has to spend to finance the monetary costs, especially the interest rate costs. When, for example, the reference rate is 3.5 percent, the BI monetary cost will reach Rp 53.05 trillion. That’s a lot. In fact, securities are not investment instruments, but monetary instruments. In addition, BI is obliged to control the monetary policy, maintain the inflation rate, and guard the rupiah.
Paul Sutaryono, expert staff member at the Center for State-Owned Enterprises (SOE) Studies, banking observer and former assistant vice president of Bank Negara Indonesia (BNI).
This article was translated by Hendarsyah Tarmizi.
