Bank told to up reserve deposits

Bank told to up reserve deposits

Dadan Wijaksana, Jakarta

Bank Indonesia may require banks to double their deposits as
reserves with the central bank, but in return it also promises to
provide banks with interest rate on the additional funds.

Bank Indonesia Governor Burhanuddin Abdullah said on Monday
that the central bank planned to increase the minimum reserve
requirement by 3 percent to 5 percent in a bid to help stabilize
the embattled rupiah.

Commercial banks will have to meet the new requirement within
two weeks, he added.

Banks currently place 5 percent of their rupiah deposits as a
reserve with the central bank without interest.

Burhanuddin said the move could absorb up to Rp 40 trillion
(US$4.3 billion) in "excess" bank funds, draining liquidity from
the banking sector that might otherwise be used for speculation
against the rupiah.

"If we raised it by 3 percent, we would absorb Rp 25 trillion
to Rp 28 trillion. If we raised it by 5 percent, the amount would
reach Rp 40 trillion," Burhanuddin said.

The central bank first floated the idea last week amid concern
that the huge excess liquidity in banks had been in part used in
speculation against the rupiah, which has already fallen victim
to negative sentiment stemming from a widely expected hike in
U.S. interest rates and concern at political tension at home
ahead of next month's presidential election.

The rupiah has declined by around 11 percent so far this year.
The sharp drop in the local unit is creating concerns of rising
inflationary pressures, which in turn would eat into consumer
purchasing power, thus affecting domestic consumption, the main
engine of economic growth.

According to Burhanuddin, the slow pace of restructuring in
both the banking and corporate sectors resulted in a much lower
bank lending volume compared with the situation that existed
before the late 1990s financial crisis.

Consequently, banks are left with abundant funds in their
control. Against that backdrop, the central bank introduced a
set of measures mainly to absorb excess liquidity.

Apart from increasing the reserve requirement, other measures
include the creation of a seven-day "intervention rate", which
allows Bank Indonesia to borrow rupiah from banks at a 7 percent
interest rate; also, selling 6-month bills, in addition to the
existing 1-month and 3-month bills. The seven-day intervention
rate was effective from Monday.

In what seems to be a response to the central bank's planned
measures, the rupiah gained on Monday for the first time in four
days. The local unit ended at 9,340 per dollar, up from 9,465 on
Friday.

Meanwhile, responding to appeals from bankers, Burhanuddin
said the central bank might offer a 3 percent interest rate for
the additional funds deposited at Bank Indonesia.

Bankers have previously warned that raising the reserve
requirement would eat into bank profit margins and raise the cost
of funds and hence increase the interest rate charged to
borrowers.

President of Bank Negara Indonesia (BNI) Sigit Pramono and
president of Bank Permata Agus Martowardojo welcomed the new
policy.

Sigit said: "If no interest rate were applied, then the
reserve requirement increase would eventually burden the banks,
which would in turn be translated into raising their credit
rates," he said.

Agus also welcomed the plan, saying: "We've been waiting for
this for a long time. Now, we'll have a return on our funds
placed in the central bank."