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."