Careful monetary policy reaffirmed<\/p>\n
JAKARTA (JP): Bank Indonesia Governor Soedradjad Djiwandono
\nannounced last night an estimated robust economic growth of seven
\npercent for last year but re-emphasized the imperative need for a
\ncautious monetary policy and continued consolidation of the
\nbanking industry.<\/p>\n
Soedradjad told the Annual Bankers' Meeting that since last
\nyear's economic growth was fueled largely by the domestic market
\ndemand, inflationary pressures were consequently very strong.<\/p>\n
\"The fast economic expansion also has spurred the demand for
\nfunds, as can be seen in the 23.1 percent increase in bank
\ncredits last year,\" the central bank's governor told about 320
\nIndonesian and foreign bankers at the dinner meeting.<\/p>\n
He said there is a definite potential for the economy to grow
\nby more than seven percent this year but \"we should bear in mind
\nthat higher growth also carries a greater risk of overheating the
\neconomy and a deterioration in the balance of payments.<\/p>\n
\"What we want to achieve is a reasonably high growth rate but
\nwith economic and monetary stability,\" the governor cautioned.<\/p>\n
He took note of the upward trend in bank interest rates due in
\npart to the gap between the rate of credit expansion and the
\nincrease in deposits raised by the banking system.<\/p>\n
\"The adjustments of interest rates to changes in the economic
\nfundamentals are simply normal and should be made,\" Soedradjad
\nnoted, apparently referring to the recent rise of between one and
\ntwo percentage points in deposit rates.<\/p>\n
\"However, Bank Indonesia will not tolerate abnormal changes or
\nspiral rises in interest rates which may affect the monetary and
\nmacro-economic stability,\" he warned.<\/p>\n
He called on banks to cautiously manage their lending
\noperations so that the gap between their credit expansion and the
\nfunds they can mobilize is soundly sustainable.<\/p>\n
\"The central bank will closely monitor the developments and
\nthe ratio between credits and deposits at every bank to ensure
\nthat all banks properly fulfill prudent banking practices,\" he
\nadded.<\/p>\n
Soedradjad said credit expansion in the next fiscal year
\nbeginning in April will be checked at 19 percent and the growth
\nof money supply also at 19 percent.<\/p>\n
He noted that despite the remarkable progress in the banking
\nindustry last year banks should continue their consolidation
\nprocess.<\/p>\n
As of September, he added, 92.9 percent of commercial banks
\n(about 240) had fulfilled the minimum eight percent capital
\nadequacy ratio (capital against assets).<\/p>\n
\"Overall, the average capital adequacy ratio of banks is now
\n10.9 percent.\"<\/p>\n
Another encouraging development, he said, is the improvement
\nin the quality of credit. Collectibility has improved with the
\nproportion of credits rated as current on the rise while sub-
\nstandard and doubtful credits are on the decline.<\/p>\n
\"But the amount of bad credits has not decreased,\" he said,
\npointing out the urgent need for more concerted efforts to
\nresolve the problem.<\/p>\n
Lending limits<\/p>\n
Soedradjad further reminded banks of their obligation to fully
\ncomply with the central bank-set legal lending limits by the end
\nof this year.<\/p>\n
\"At the end of this year, credit to one group of borrowers may
\nnot exceed 35 percent of a bank's capital, and to a borrower
\nconnected with the bank may it not exceed 12.5 percent,\" he said.<\/p>\n
He said these proportions will gradually be reduced to a
\nmaximum limit of 20 percent for one group of borrowers and 10
\npercent for a borrower connected with the bank by the end of
\nMarch, 1997.<\/p>\n
\"Although more and more banks have complied with the legal
\nlending limits, there are still many that have not,\" the governor
\nwarned.<\/p>\n
The government, he added, is very serious about enforcing the
\nlegal lending limits because experiences have shown that a large
\nportion of the problem loans and other bank difficulties has been
\ncaused by the violation of the lending limits.<\/p>\n
The governor did not give further details on the problem loans
\nbut recent official estimates put the amount of bad debts (not
\nincluding doubtful loans) at all banks at 3.8 percent of total
\ncredits outstanding as of September.<\/p>\n
Soedradjad cited several additional measures to prevent new
\nproblem loans and to enforce prudent banking practices:<\/p>\n
* The credit policy guidelines have been redesigned, the
\ncredit information system and bad-debt list have been updated.<\/p>\n
* Banks are required to provide a working plan and a report
\nfrom the board of commissioners (supervisors) on lendings to
\ndebtors affiliated with the owners or management of the banks and
\nto large debtors.<\/p>\n
* Criteria for banning persons from becoming bank shareholders
\nor members of bank management will soon be issued.<\/p>\n
The central bank governor cited the increasing foreign
\ncapital inflows as another imperative for continuing a cautious
\nmonetary policy.<\/p>\n
\"We could also look into what happened in Mexico so that we
\ncan prevent the same thing happening in Indonesia,\" he said in
\nwarning against the dangers of financing the current account
\ndeficit with short-term foreign funds.<\/p>\n
He noted that short-term foreign funds are very sensitive to
\nmarket fluctuations. The behavior of trust fund managers who get
\non the bandwagon can create massive over-reactions that lead to
\ncrises.<\/p>\n
\"We must be aware of this and stay alert,\" Soedradjad said.<\/p>\n
The central bank was forced to sell more than US$500 million
\nlast week to defend the rupiah amid speculative attacks set off
\nby the financial chaos in Mexico soon after the devaluation of
\nits peso last month.<\/p>\n
But the currency market returned to normal early this week and
\nthe spot rate of the rupiah rate movements have stabilized within
\nthe conversion band set by the central bank. (vin)<\/p>",
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