Indonesia consumers enjoy cheap loans after rate hike

The recovery in credit demand comes on the back of a low inflation environment and a pick-up in spending

JAKARTA • Indonesia’s central bank raised interest rates six times this year, yet consumer lending rates are still falling in South-East Asia’s biggest economy.

Between May and September, when Bank Indonesia (BI) raised its benchmark rate by 150 basis points (bps), average rates for consumer loans fell by 44bps to 11.9%, according to the most recent data from the nation’s Financial Services Authority. Rates for investment loans rose only 25bps.

The central bank raised its policy rate by another 25bps since then, and governor Perry Warjiyo has signalled he is ready to do more next year to stem a sell-off in the currency if emerging markets remain under pressure. Lenders aren’t passing on those rate increases though, worried about still subdued consumer borrowing and an overhang of bad debts.

“We don’t feel there is a need to raise our rates again until year-end,” said Jahja Setiaatmadja, president director of PT Bank Central Asia, the nation’s biggest lender by market value. The company’s net interest margin — the difference between deposit and lending rates — is “still sufficient,” he said.

Official data shows average one-month deposit rates for customers climbed 69bps to 6.28% between May and September.

The central bank has been tracking the US Federal Reserve with rate hikes in order to keep Indonesian assets attractive to foreign investors. At the same time, the drop in lending rates is delivering a timely shot in the arm for the economy, which has been expanding around 5% for much of this year.

Credit growth rose 13% in September from a year earlier, up from 7.6% at the beginning of the year, according to data from the Financial Services Authority.

“Looking ahead, demand for credit has the potential to increase along with the improving economy,” said Dody Budi Waluyo, BI’s assistant governor. The “tightening transmission is going well” and provides a strong signal of policymakers’ commitment to lower the current-account deficit and improve the attractiveness of financial markets, he said.

The recovery in credit demand comes on the back of a low inflation environment and a pick-up in consumer spending, with sales of household equipment, including goods such as electronics and furniture, improving in recent months. Spending by consumers and businesses make up more than half of GDP.

Demand for consumer loans “has just begun to pick up”, said Dian Ayu Yustina, an economist at PT Bank Danamon in Jakarta. “Banks also tend to be more careful in passing on the rate hikes to the consumers.”

The lending market has become more competitive, in part due to the emergence of financial technology, she said.

Lenders say they are being careful to avoid pressure on borrowers that could result in a spike in non-performing loans. PT Bank Negara Indonesia had raised its rates “selectively” in response to the central bank’s policy adjustments, according to president director Achmad Baiquni.

“In principle, lending rate hikes should be done carefully by considering debtors’ capability in order to prevent there being a negative impact on lending quality,” he said. — Bloomberg