Banks say no rates increase in offing

Banks say no rates increase in offing

Dadan Wijaksana, Jakarta

Banks may not necessarily increase their interest rates on loans
despite the central bank's new reserve requirement policy which
increases the cost of funds, according to top bankers.

But the bankers hope the policy will be a stopgap measure and
short-lived, and that it will be immediately dropped after the
rupiah has stabilized.

"We expect the ruling will not be there for the long haul, but
only temporary. The minimum reserve requirement should return to
5 percent once rupiah stability has returned," said Bank Rakyat
Indonesia president Rudjito, who is also the chairman of the
Association of State Banks (Himbara).

In a bid to help stabilize the embattled rupiah, Bank
Indonesia has increased the bank reserve requirement from 5
percent to between 6 percent and 8 percent. The policy, which
will force banks to deposit a greater amount of their funds
(deposits and savings) as reserves with the central bank starting
next month is aimed at draining excess liquidity from the banking
sector, which is believed to have been used to speculate against
the local unit.

The central bank will pay an annual rate of three percent
interest for the additional funds.

"Based on our calculations, the three percent interest rate
seems sufficient ... We (the bank) can still make a profit,"
Rudjito said, but quickly added that the reserve requirement
should be reduced to 5 percent again once the rupiah has
stabilized, a new government has been elected and the demand for
loans from the corporate sector has started to pick up.

Some analysts had previously warned that the hike in the
reserve requirement would push the cost of funds up, which in
turn would force banks to charge consumers and businesses higher
interest. Even with the three percent interest rate, banks could
still be at risk of potential losses as investing in seven
percent central bank promissory notes provided a higher return.
The higher reserve requirement would also lessen the amount of
funds available for lending to businesses, thus affecting the
profit margins of banks.

Bank Negara Indonesia (BNI) president Sigit Pramono and Bank
Permata president Agus Martowardojo have also said that their
banks could still cope with the new ruling without raising their
lending rates.

Achmad Baikuni, a BNI director, also stated that raising
lending rates now would be detrimental to the goal of raising
credit demand from the private sector -- which remains relatively
stagnant.

"For sure, banks will take into account the current demand for
credit -- which is not yet at the sort of level we would like to
see. So, I do not see a raise in the commercial credit rate in
the near future," Achmad said.

The details of the new bank reserve requirement are as
follows. Banks that have deposits worth more than Rp 50 trillion
will have to keep eight percent of these funds as reserves with
the central bank, while banks with third party funds of between
Rp 10 trillion and Rp 50 trillion will have to allocate 7 percent
of these funds as reserve. Meanwhile, those banks with funds of
between Rp 1 trillion and Rp 10 trillion will only have to
deposit six percent of the funds as reserves.

The central bank will also limit a bank's maximum foreign
exchange net open position to 20 percent of its share capital at
all times starting July 1. Currently the limit becomes operative
at the end of each business day, meaning that banks can have more
than a 20 percent net open position prior to the end of the
business day.