Contraction in bank credits to affect real sector

The high inflation rate which this year is estimated to range between 11.5 percent and 12.5 percent may slow down bank credit provision and affect national economic activities, particularly in the real sector.

Domestic banks at home might revise their business targets in the second semester of 2008 out of worry about high inflation rates which would offset national economic growth.

"The slow economic growth and high inflation will prompt domestic banks to reduce the amounts of credits they will extend to the business sector. They fear that this condition will drive up the rate of non-performing loans (NPLs)," banking industry observer Edwin Sinaga said on Thursday.

While banks are downsizing their credit provision targets, bank customers are also discouraged to borrow more money as bank interest rates are also being raised following Bank Indonesia (the central bank=BI)`s decision to increase its benchmark interest rate.

The real sector which is struggling to absorb the impact of the recent fuel oil price hike will come under pressure following Bank Indonesia`s decision to raise its key rate to 8.5 percent recently.

"A significant rise in lending rates will put a further strain on the real sector following the 28.7 percent rise in fuel oil prices," Seno Hardiono, a member of the Central Java provincial chapter of the Indonesian Chamber of Commerce and Industry (Kadin), said.

The central bank decided at a meeting of its board of governors early this month to raise its benchmark interest rate, locally known as BI Rate, by 25 basis points to 8.5 percent in reaction to the high inflation rate in May due in part to the fuel oil price hike.

With bank credits being reduced, the production sector which so far is expected to help fuel the engine of national economy will also be slowed down.

"The real sector has not performed as previously expected," Edwin Sinaga said.

According to Edwin Sinaga, this condition will eventually reduce the profits of banks because cutting back credit provision targets would also have a proportionate effect on the economy.

"We are afraid it will create more problems hampering economic growth," Edwin Sinaga said.

However, he was ...