Although the government was still hesitant about increasing oil price, banks seemed to be ready prepare a scenario for interest increase. Credit seekers better be ready to come to terms with bank’s interest increase.
The main cause was government’s policy to increase oil price which would increase interest for deposits which affected bank’s expenses. Some banks predicted that central banks of the developing nations in Asia would keep low interest longer expect Indonesia.
In Citi Research on Macro Projection and Strategy Asia [27/5] it was mentioned that India, Korea, Sri Lanka, China, Thailand and Vietnam run low interest strategy. The reason was that they had lowering trend of deflation and economy. Some other countries would also use bank interest as instrument to stabilize their exchange rate. As know, Japan’s Yen weakening policy posed as risk to some countries like Korea and Thailand in regard to competitiveness of their export products.
In case of Indonesia, it was almost certain that BI’s benchmark rate would increase as soon as the government increased oil price. Price increase of subsidized oil would ignite inflation to the range of 7.5% - 8.2% as simulated by some economic research bodies.
Meanwhile Citi Research released on Monday [27/5/2013] India, Korea, Sri Lanka, China, Thailand and Vietnam adopted low interest policy as they were having disinflation trend and lowered economy. Some of them would use interest rate as instrument for maintaining stability of their exchange rate value.
By BI’s calculation, oil price increase would jack up inflation to 7.7%. as footnote, oil price increase of 33% was combination of increase price of premium 44% and solar oil 22%. However Citi predicted that oil price increase would not automatically multiply bank’s interest rate: the increase would be moderate instead.
The point was that that price of subsidized oil in the range of 30% -40% would force BI to increase by 25 bps-50 bps gradually. All in all, expenses will increase in parallel with increase of BI rate. Accordingly, increase of credit rate would follow the general trend. Furthermore, it was expected that interest of BI facilities would increase three times by stages by 25 basic point respectively.
BI’s policy to increase FasBI would jack up short term credit interest and banking expenses. However, the chain effect to bank’s credit interest would probably be partial and not significantly reverse credit circle.
Broadly speaking, growth of banking credit would drop by around 2% - 3% to 20% - 23% only all through this year. This was because some credit applicants would postpone their application and some would cancel additional credit facilities. Some business players might seek for alternative financing like the capital market or perhaps also self financing.
Banking circles stated that pricing [of bank interest] was the main reason that made one decides to choose credit. Take for example credit for mortgage [KPR] which was becoming more attractive to customers. However, banks were only in a position to extend credit ar low interest if they had access to inexpensive.
Meaning if a bank had o low cost resources, they could not extend low-interest credit. Normally inflation would drive customers to ask for higher returns.
By historical data, price increase of subsidized oil of 10% would increase inflation of 0.8%. If oil price were increased to Rp6,500 per liter, inflation would increase by 3.2%. Eventually it there would be increase of expenses which would jack up credit interest.
Some banks were already taking stance to increase credit interest for next July-September, if the government increased oil price this June. Banks who reacted swiftly to increase interest was because inflation expectation was already high as the government had been procrastinating too long.
Therefore bankers suggested that business people who did not wish to be burdened by high interest better apply for credit before interest rate was increased. Facts showed that even before BI increase BI rate, i.e. still at 5.75% some banks already increased their tariff. On the other hand BI rated that increase of credit interest was related to tight liquidity policy. Some banks had limited liquidity so they increased their interest rate.
However, BI saw that it was always possible that the banks responded if there was inflation. This was confirmed by statement of BI governor Agus Martowardojo in technical meeting with the parliament to discuss macro assumption and RAPBN-P budget 2013 [27/6] that the high inflation by BI’s calculation was based on several grounds.
For that matter, BI would monitor the second round effect of this increase. Without mentioning the monetary policy to be adopted, BI was ready to respond to the oil price increase with mix policy including currency exchange ate value, liquidity and macro prudential.
Now credit applicants must start to calculate if they wished to apply for credit because nearly al credit interest would be raised. Broadly speaking increase of credit interest would be around 0.5% to 1.5% for all types of credit depending on purpose. The increase range was based on liquidity and loan-to-deposit ratio [LDR] of the respective banks.
One thing almost certain was that most probably banks would revise downward their credit growth target from the previous 23%-26% to 20%-23% only. Meanwhile third party growth would also be predicted to lower from the previous 18%-20% to 15%-17% only. (SS)
Business News - June 05,2013