Jakarta – The country's prevailing lending growth is still too low to support economic growth targets of 7 percent within the next few years, economic observers say.

University of Indonesia economist Faisal Basri and Bank Indonesia researcher Juda Agung said Thursday that the amount of disbursed loans was still too low to support the country's economy, as indicated by a lower credit-to-GDP ratio compared to neighboring countries.

"National banks' credit-to-GDP ratio currently stands at about 30 percent, while in China the ratio is at 140 percent and in Vietnam, Thailand and Malaysia surpasses 100 percent. That means industrial performance is weak," Faisal said at a seminar conducted by the central bank at the Intercontinental Hotel in Jakarta.

With the low growth in the country's lending, it would be difficult to achieve economic growth of more than 7 percent within the next few years, he said.

Faisal and Juda agreed the persistently high lending rate contributed to slow growth in lending because corporate borrowers still considered the loans offered by banks too expensive.

Currently, the average lending rate offered by banks lies between 13 percent and 14 percent, even though the central bank has kept the benchmark BI rate at a record low of 6.5 percent for 17 consecutive months. A fair lending rate should be between 10 percent and 11 percent.

As of Dec. 8 this year, national banks have disbursed Rp 1,700.93 trillion in loans, an 18.93 percent increase throughout the year, but lower than BI's target of 22 percent to 24 percent loan growth for the full year. The GDP stood at Rp 4,727.6 trillion as of the end of the third quarter this year.

Apart from keeping its key interest low, BI has taken steps to encourage banks to increase their lending.

BI recently, for example, required banks to have a loan-to-deposit ratio (LDR) of between 78 and 100 percent starting from Mar. 1 2011, or they would be penalized through storing more minimum reserve requirements (GWM) at the central bank.

BI also plans to issue another ruling to encourage competition by requiring banks to announce their lending rates in the mass media. The regulation is expected to be operational in the first quarter of 2011.

Faisal said the LDR ruling was not enough to spur lending growth, adding that the interest rates stayed higher due to structural problems in the country's banking industry such as inefficiency as well a banking oligopoly.

Faisal said a large supply of loans were still controlled by a handful of banks. He said that such structural problems should first be removed if Indonesia wanted its banking sector to operate more efficiently.

Faisal said banks should reduce operating costs to enable them to lower lending rates. Juda said the lending growth was still relatively low because many banks did not want to be "too aggressive" in order to minimize risk. (est)