Per The Jakarta Post, bank lending in Indonesia grew by just 2.09% from December last year to June compared with 16.26% a year earlier. Working capital loans slid the most, a sign of firms’ reluctance to expand, and banks also cutback loans out of fear that non-performing loans (NPL)–currently at 3.94%– would increase beyond the central bank’s accepted 5% threshold. Yet central to the reasons why businesses are reluctant to borrow, argues Erwin Aksa, chairman of the Indonesian Young Entrepreneurs Association, are their lenders’ self-imposed, high deposit rates. Large sovereign bond issuances have driven up the cost of money, as do the demands of large depositors–most of whom are state-owned companies, and which currently account for roughly one-half of banks’ third-party funds. The vicious cycle impairs liquidity, however, as banks fear above anything else a loss of depositors and a sudden run on funds. High deposit rates thus persist despite the fact that Bank Indonesia (BI) again slashed its benchmark rate (for the ninth-straight session) to 6.5% earlier this month, as banks, ever weary of NPLs, place a premium on large capital bases.

A legislative solution, however, may be in the works. Pundits point out that liquidity concerns would lessen if a proposed bill on the financial system safety net (JPSK)–which would allow the central bank to provide funds for banks in short supply of liquidity–is passed in the coming months by the House of Representatives. Last winter, however, the bill was widely shot down by lawmakers who argued that it would overly empower the government and create moral hazard.

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