Monetary management<\/p>\n
The new regulations issued jointly last week by the finance
\nministry and Bank Indonesia (central bank) on finance companies
\nseemed at first glance to be designed mainly to further tighten
\nthe monetary policy amid great concern over the overheating
\neconomy. After all, the new rulings were enforced just one week
\nafter the central bank moved to restrict credit expansion by
\nincreasing the reserve requirement of banks from 2 percent to 3
\npercent of third-party deposits.<\/p>\n
True, the regulations which close finance companies (leasing,
\nfactoring, credit card and consumer financing) to newcomers and
\nimpose restrictions on their lending, equity participation and
\nborrowing, will have a further contractive impact on the
\naggregate credit growth.<\/p>\n
However, the significance of the new regulations lie more in
\nthe broadening of the central bank's supervisory power to include
\nfinance companies, which were previously overseen only by the
\nfinance ministry.<\/p>\n
Finance companies began to develop rapidly after the 1988
\nbanking deregulation package. As the finance ministry announced
\nlast week, the number of licensed finance companies has reached
\n253, including 54 Indonesian-foreign joint ventures. Their
\nlending operations also have been expanding steadily, amounting
\nto an estimated Rp 25 trillion (US$10.8 billion) this year. That
\nsum almost doubled the Rp 14 trillion they lent last year.<\/p>\n
The problem was that before last week's rulings, non-bank
\nfinance companies were supervised only by the finance ministry.
\nThat meant that monetary management was not fully in the hands of
\nthe central bank, thereby limiting the effectiveness of its
\ncontrol of the money supply. The dualism in the supervision also
\nresulted in different prudential regulations being imposed on
\nbanks and finance companies.<\/p>\n
With the volume of lending by finance companies increasing to
\nas high as 8.6 percent of total bank credit and with their credit
\nexpansion likely to continue at a high pace, the central bank's
\ncredit policy would probably have been rendered less effective if
\ntheir operations remained outside its supervision. The
\ncentralized supervision of banks and finance companies has become
\nurgent because many finance firms, notably the joint ventures,
\nusually fund a great portion of their lending operations with
\noverseas loans.<\/p>\n
Now that the finance companies are under the direct
\nsupervision of Bank Indonesia, their lending and borrowing both
\nfrom domestic and foreign sources, like the operations of banks,
\ncan be monitored and controlled by the central bank. The credit
\nsqueeze and overseas borrowing restrictions which the central
\nbank is imposing on banks will no longer be neutralized by
\nuncontrolled lending or borrowing by finance companies.<\/p>\n
There would likely have been another negative aspect if the
\nfinance companies remained outside the central bank's
\nsupervision. Banks, faced with the tougher credit policy, might
\nhave used finance companies as their credit outlets to circumvent
\ntheir legal lending limits and credit ceiling, especially because
\nmost finance companies are partly owned by banks, or are
\naffiliates of the business groups which also own banks.<\/p>\n
So all in all, the new rulings on finance companies should be
\nwelcomed as another effort to improve the central bank's overall
\nmonetary management.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/monetary-management-1447893297",
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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