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.