JAKARTA, Feb 1, Reuter - Indonesia's powerful state banks cut their prime lending rate by three percentage points to 16 per cent on Thursday in a bid to stimulate development investment.

Rates on time deposits, overwhelmingly Indonesia's favourite form of savings, were cut by one per cent, bringing one-month money down to 14 per cent.

While the banks most favoured customers may welcome the three per cent cut in their rates, the benefit to ordinary borrowers will be diluted, a state bank credit officer said.

"Consumer lending rates will drop from between 20 and 21 per cent to around 19 or 20," he said.

State banks control 70 per cent of total bank lending.

The Finance Ministry, which earlier this week said it would cut cheap liquidity credits that might fuel inflation, said it had no part in the decision by the six state banks.

"We were not involved in this. It is market mechanisms coming into play," a ministry spokesman said.

Others were sceptical.

"I can't imagine that all the state banks would decide voluntarily and on the same day to cut their lending rate by three per cent," one foreign banker said.

Some private banks have already cut their lending rates, but deposits have not followed suit.

The state banks have also been releasing rupiah into the market, apparently to make up for a shortage expected as a result of the central bank's cutting subsidised credits from Thursday, bankers said.

The cutthroat competition to attract deposits among Jakarta's rash of new private banks has kept rates high.

"There's this belief that you can't possibly cut your rates because the next chap won't. Maybe this collective lowering by the state banks will finally have some effect," one analyst said. "After all it's in (the private banks') interest to follow."

"Of course, we'll lose out (on deposits) for a bit but we had to take the lead," said a funding officer at a state bank. "Why put your money with us at 14 per cent when you could put it in a private bank at 16?"

With no exchange controls, high interest rates have been crucial in encouraging people to save in rupiah. Some bankers fear that if rates are lowered Indonesians will choose to save in dollars or other currencies instead.

The rupiah is depreciating at around five per cent a year against the dollar, which earns around eight per cent for one month. Without inflation adjustment or increased depreciation risk, rupiah at the new rates still earn one per cent a year more than dollars.

"It's getting kind of tight, I must say," said a foreign-exchange dealer at a state bank. "Some people are even talking about capital flight. But I think that's a short-term fear."

"Money running out of the country? I don't think so. No one is thinking about rupiah devaluation any more," a foreign banker said.