PT Bosowa Corporation

Erwida Maulia and Aditya Suharmoko THE JAKARTA POST/JAKARTA

President Susilo Bambang Yudhoyono urged the banking industry to drastically lower interest rates for lending Tuesday to propel the sluggish economy. The request comes after banks widely refused to adjust their rates following Bank Indonesias series of benchmark interest rate cuts that almost hit a four-year low of 7.75 percent recently. Yudhoyono said although he understood it was not easy for banks to just cut the rates due to the "prudential" principle, banks would have to start "looking outward" during these hard times to help the business sector weather the impact of the deepening global economic crisis. "I know there is prudence. I know you (banks) need time to improve your balance sheet But dont just look inward. Lets also look outward," said Yudhoyono, while delivering his speech before members of the Indonesian Young Entrepreneurs Association (HIPMI). "You [banks] should understand the real intention of this [BI] policy and immediately adjust to it because it will bring benefits to all of us." Yudhoyono will hold a limited Cabinet meeting Wednesday to discuss the issue. A lower BI rate may prompt banks to cut their lending rates, which will ease business costs and spur loan demand from consumers to purchase cars, motorcycles and houses. Around 70 percent of Indonesias economy is driven by consumption. Hipmi chairman Erwin Aksa said lower rates would provide "economic justice" not only to businesses, but also to their employees by helping the businesses expand and survive during this globally tight time.

"We appreciate the governments fiscal stimulus package and BIs monetary policy to cut their rates. However we would be more grateful if the banking industry quickly responded to the rate cut," Erwin said. BI director for banking research and regulation Halim Alamsyah said lending and deposit rates had declined 5 percentage points in the past weeks. BI data reveals lending rates slid on average from 14.2 percent in the last week of December 2008 to 13.93 percent by the second week of March, while deposit rates declined from 8.75 percent to 8.32 percent. "The decline isnt steep, but it shows a downward trend," he said, adding banks would need two to three months to adjust to BIs new rate under normal conditions. "Every bank is different. We need to see the structure or composition of their third-party funds, and balance between loans and third party funds. Some banks are quick in cutting the rates and some are not," he said. Analysts have said the economy will run if lending rates are kept at below 13 percent