BI asks bankers to tread carefully in debt market

JAKARTA (JP): Bank Indonesia Governor Soedradjad Djiwandono told Indonesian bankers yesterday that their involvement in the debt market should not endanger their banking activities.

"We've seen our debt market grow very rapidly in the last few years. This resulted from globalization which we cannot avoid," he told a seminar on the development of the local debt market yesterday.

He warned bankers that their excessive involvement in the debt market could destabilize the financial system.

The one-day seminar, organized by WinPlus International, was attended by about 300 people -- mostly bankers.

He admitted the private sector's increased participation in national development had required more funding alternatives. And securitization of commercial papers, medium term notes, bonds and asset backed securities had become the main feature of the banking industry.

"We cannot avoid such a trend. We, therefore, must cooperate to develop new alternatives of funding with a view to improving and not endangering our financial system," he said.

He said the banking sector could only fund the real sector within a sound macro-economy, which is influenced by the financial system.

Soedradjad said most Indonesian commercial papers were bought by foreigners, and because most of the papers were denominated in rupiah they tended to strengthen the currency.

"We've also seen that our currency has been increasingly traded on domestic and foreign markets, particularly in London and New York. This has resulted in an inflow of foreign funds to our banking industry," he said.

He said such an inflow would not affect the rupiah's exchange rate if the local market could fully absorb the foreign funds.

Farid Harianto, the president of Credit Rating Indonesia Ltd., called on the government yesterday to improve its legal framework to accommodate the development of securitization.

"There has been a growing demand for securitization of commercial papers here. Our companies consider it to be a better funding alternative to expand business, and to improve their assets and liquidity," he told The Jakarta Post yesterday.

Because of insufficient local regulations, seven companies -- including Citibank and Astra Sedaya Finance -- are selling their commercial papers on foreign markets.

"Why don't we create a better legal framework to benefit from such a trend," he said.

He said securitization should become bankruptcy remote, whereby commercial papers were guaranteed against bankruptcy.

He said that tax neutrality and accounting standards were other factors that should be regulated to encourage securitization.

Edgar Ekaputra, the director of PT Danareksa, suggested several measures to develop the local bond market, which still lacks liquidity particularly in the secondary market.

Banks, he said, should become the market makers for bonds and increase their credits to securities firms, which are bond brokers.

The government should allow banks to buy mutual funds, allow the issuance of bonds denominated in foreign currencies on the domestic capital market. The government should issue bonds denominated in rupiah on the domestic market to create a benchmark.

He also called for the establishment of a bond dealers association and a standard convention on trading mechanisms. (bnt)