Bank interest rates fall, but negative spread remains

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)