Wed, 02 Dec 1998

Bank interest rates fall, but negative spread remains

JAKARTA (JP): The country's commercial banks slashed their deposit interest rates by as much as five percentage points this week, but they still suffer from negative spread, paying higher interest rates on deposits than they are paid for lendings.

Most commercial banks are offering one-month deposit interest rates at 46 percent -- 3 percent lower than the maximum 49 percent that Bank Indonesia will guarantee.

Publicly listed Bank Bali, for instance, cut its one-month interest rate to 35 percent from 40 percent last week, the three- month rate to 30 percent from 35 percent, the six-month rate to 30 percent from 32 percent and maintained its one-year rate at 30 percent.

Publicly listed state Bank Negara Indonesia now offers a 45 percent interest rate for one-month deposits, down from 49 percent last week. It offers 40 percent for three-month deposits, 32 percent for six-month deposits and 30 percent for one-year deposits.

State Bank Rakyat Indonesia cut its one-month and three-month deposit interest rates to 45 percent and 40 percent respectively, down from 50 percent and 48 percent last week.

The country's biggest private bank, Bank Central Asia, lowered its one-month interest rate to 46 percent from 49 percent last week.

Bank Panin also cut its one-month deposit interest rates to 37 percent from 48 percent last week. Bank Bira has set its one- month deposit interest rates at 44 percent, and Bank NISP has lowered its one-month interest rate to 40 percent.

Over-the-counter

All these rates are over-the-counter rates. People with larger amounts of money will still be able to demand higher returns, and most banks will be willing to entertain such demands, according to a money market dealer at a local private bank.

Bank Indonesia has vowed to continue cutting its benchmark rates in a bid to turn around the current negative spread in the banking industry.

Benchmark interest rates on Bank Indonesia's one-month promissory notes (SBIs) fell to 46.42 percent at last week's auction from 49.66 percent the previous week, and the 70 percent level in early September.

The benchmark rates are expected to fall further this week in line with the central bank's plan to bring its one-month SBI rates to 40 percent by the end of this month and 30 percent by March.

When the benchmark rates reach 30 percent, it is expected that banks will start to enjoy positive spread from interest rates.

However, banking analyst Rijanto Sastrosatomo was a bit skeptical about the central bank's ability to reverse the current negative spread by March.

When benchmark rates stand at 30 percent, he said, lending rate would stay at least at 40 percent per annum. "No single company can yet afford that."

Rijanto, a commissioner at a number of private banks, revealed that as of September, state banks suffered negative spread of 26 percent per annum, and private banks 15 percent. Only foreign banks enjoyed positive spread.

Rijanto said that his data was collected from Bank Indonesia's monthly reports.

He predicted that negative spread at state banks would drop to 15 percent by the end of the year, while at domestic private banks negative spread would fall to 10 percent.

In addition to negative spread, banks also suffer from ballooning bad loans, which have also eaten away their capital. Nonperforming loans stood at 49 percent at state banks and 63 percent at private banks. These numbers could increase if the economic situation worsens.

Overall, the negative spread situation and increasing nonperforming loans have practically dried up capital in the banking industry.

As of September, the seven state banks booked a combined capital of only Rp 1.04 trillion (US$140 million), down from Rp 17.4 trillion in January 1998. Cumulative capital at some 200 domestic private banks also shrank drastically to only Rp 2.4 trillion in September from Rp 27.5 trillion in January.

"This situation makes bank recapitalization very costly. I would say by year-end, it will take at least Rp 60 trillion to recapitalize the banking industry," he said. (gis/rid)