Indonesia should avoid more rate cuts, chief of biggest bank says

Indonesia’s central bank should avoid cutting interest rates further because borrowing costs are at an appropriate level even as loan growth remains subdued, according to the chief of the country’s biggest lender.

The current benchmark rate of 4.25% is “quite optimal,” PT Bank Mandiri president director Kartika Wirjoatmodjo said in an interview. “Overall liquidity is much better” and “is not an issue anymore,” he said.

Further rate cuts would do little to stimulate lending, which is unlikely to accelerate much beyond current levels until Indonesian lenders finish reducing the number of non-performing loans (NPLs) on their books, Wirjoatmodjo added.

Bank Indonesia lowered its benchmark rate for a second straight month in September as low inflation gave it room to boost SouthEast Asia’s biggest economy.

Yet credit expansion remains slow even after eight rate cuts totalling 2 percentage points since the beginning of last year, as lenders including Bank Mandiri grapple with lingering bad debts.

“The good news is the corporate sector is doing well,” but there is still “a massive unwinding of NPLs” particularly among small and mid-sized enterprises, Wirjoatmodjo said.

While most banks are about 70% to 80% through an “aggressive” unwinding of soured debts, lending won’t start picking up until they are done, he said.

The central bank lowered its estimate for credit expansion in August. It now sees loans increasing 8% to 10% in 2017, down from a goal of 10% to 12%. Lending rose 8.2% in July.

Wirjoatmodjo said about 10% of Bank Mandiri’s so-called commercial loans – lending mainly to mid-sized companies – were non-performing.

“Now we are in the process of restructuring, collection – and some of them, a large number, are going through the liquidation process.”

Central bank Governor Agus Martowardojo said last week that recent measures including the 25 basis-point rate cut in September are “adequate enough” to support the economy. — Bloomberg