UPDATE 1-Indonesia cbank to set bank LDR ratio

(Adds details, quote)

By Dicky Kristanto and Aditya Suharmoko

JAKARTA, July 29 (Reuters) - Indonesia's central bank said on Thursday it will set the loan-to-deposit ratio (LDR) for banks at between 75-102 percent, linking it to the banks' reserve ratios in a move to boost lending and drive economic growth.

Bank Indonesia previously said that those banks which do not meet the LDR would be penalised by having to place more reserve funds at the central bank.

Indonesia's commercial banks are far keener to place their money in bonds and central bank bills, known as SBIs, rather than risk their funds by lending to companies.

"The range (of 75 percent to 102 percent) is manageable for banks. Below 75 percent means banks won't be encouraged to lend; and above 102 percent may cause a bank's capital adequacy ratio (CAR) to drop," said Juniman, an economist at Bank International Indonesia.

The central bank previously used a similar LDR regulation, forcing banks to place more reserves with the central bank if the LDR was below a certain figure. That regulation was revoked in 2008 as banks faced tight liquidity because of the global financial crisis.

Juniman also said the new LDR regulation might be ineffective considering that demand for bank loans is still relatively weak.

Bank Indonesia said last week that as of July 16, outstanding bank loans grew nearly 20 percent. [ID:nJKB003761]

While loan growth reached 30 percent in 2008, the pace slowed to just 10 percent last year.

"Companies have other financing sources, like rights issues or borrowing from their holding companies," he said.

He added that bank lending would remain low if lending rates remained high.

Central bank governor designate Darmin Nasution said last week that the central bank would also issue a regulation prompting banks to disclose their "prime lending rate" to be more competitive. (Editing by Neil Chatterjee/Sara Webb)