Suku Bunga Dasar Kredit (Prime Lending Rate) and Competitiveness

Based on the Surat Edaran Bank Indonesia no 13/5/DPNP in February 28, 2011 about transparency of prime lending rate information, all bank possessing asset of Rp. 10 trillion in Indonesia have to release their basic prime lending rate in every 3 months. Aims of the policy are to improve transparency of banking product and to improve good corporate governance also to encourage market efficiency. The components of the prime lending rate include basic cost of money, overhead cost and certain profit margin. The rate encompasses corporate credit rate, retail credit rate and consumption credit rate. First publication was launched in March 31, 2011. By the publication, all existing bank customer and potential customer recently know about ‘the price’ they pay for enjoying money from banking. Customer also could compare the price from a bank to other bank. So, by this case is it true that basic law of economics, i.e. higher ‘price’[1] means lower ‘quantity’ demanded vice versa is played here?

Basically, an economy actor is utility optimizer and always attempt to push price down. He would demand less if the price offered by the seller is too high, otherwise he would request more. In other side, the seller would be better of when he could sell his services in higher price so that he could gain more, otherwise he would get a less gain and as a consequence he offer the service less. By the negotiation, the seller and buyer would decide a certain accepted price, assuming other thing is stay fixed (in economics term it is called ‘cateris paribus’). But, frequently the cateris paribus assumption can’t be worked in real world. Cateris paribus is often useful in making theoretical construction.

As we know that the term ‘credit’ is come from Greek ‘credere’ that means trust. It is simply belief of the bank to the debtor. But it is also the opposite: the reliance of the debtor to the bank. If the debtor make a trust to the bank (especially to the manager), in this case by big name of the manager and keeping the secret of the company, the company would make a transaction with the bank, even they willing ‘to pay’ more. Furthermore, history of the company is playing here. There are some companies that grew with the assist of bank credit. They started make a business in small scope. Because customer satisfied with the product, so that the companies made expansion. Limited by small capital, then the companies proposed its business to the bank. The bank accepted and lent his money to the companies. From year to year, the business made continuous expansion and the bank supported the business. These relationships truly become a deep relationship. Recently the companies become great company having Rp billions of assets. With the kind of correlation, it is not easy task to break the connection between the two. So, given higher ‘price’ by the bank, the company would pay the price.

Next point that should be considered is maximum limit of credit lending. We should understand before that a bank is given maximum limit of their lending effort. It is related to the amount of capital possessed by the bank. Higher asset means higher capacity they lend, vice versa. By some cases, there are companies which have ‘need’ of big nominal of fresh money. Big companies used to borrow billions of rupiah for their working capital or procurement of fixed assets (e.g. building and machinery). To satisfy their needs, the companies would ‘pay’ more. In small bank usually big amount of the credit, so as procedure stand, the decision should be given to central of the small bank, that usually needs time.

The third point is various degree of banking product and its price. Do you ever know a great company work? They usually need varieties of banking products encompasses credit, funding and other service like international trade finance and service, payroll, treasury transaction, bank guarantee, and internet cash management. By enjoying the banking products, the companies can efficient their cost by certain amount. Other thing they can make their money move in optimum way, such accelerate the account receivable and put of the account payable for a certain time. By this case, they can gain more profit. A company would make a business deal with bank which posses various types of banking product in one packet.

The fourth thing is speed of booking. The speed means time required by the bank to give his money to the customer. Let me I ask you: you are just playing basketball in hot afternoon on basket ball field and get thirsty, then you go to drink shops either A and B. In drink shop A you would get fast service, you order a drink and less than a minute you would get your fresh and cool drink, in other case if you go to B, you would have to wait 25 minutes to dismiss your thirsty. Then it is logic you would get to go to drink shop A, even you pay more. The same analogy can be employed in banking field. The speed of booking in every bank is different depend on the internal bank system.

There are certain cases states that prestige of the bank is important thing. Make a deal with great and service oriented bank is more valuable than if we make a deal with small and un-famous bank.

So, in summary rate of the credit is important thing for the customer, but we should take into account ‘other thing’ like how deep the relationship between bank, customer and officer; the limit of credit lending; bank products; prestige of the bank etc. The cateris paribus assumption can’t be employed fully here.


[1] We can assume in this case that price means ‘rate’ of the credit. It is simply the price he/she pays for enjoying the service (credit). We also can think that ‘quantity’ is simply the amount of credit demanded.

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