BI official says high SBI rate not necessarily trouble for banks

BI official says high SBI rate not necessarily trouble for banks

JAKARTA (JP): Bank Indonesia's high benchmark interest rate
will not necessarily cause further financial difficulties for the
country's banking industry, Bank Indonesia deputy governor
Miranda Goeltom said.

Miranda said banks could offset the higher interest rate on
the Bank Indonesia SBI promissory notes by lending money at
increased rates.

"Actually, negative spread is not occurring because the
lending rates are still higher (than the SBI rate)," she said on
the sidelines of a seminar.

Negative spread takes place when a bank's interest income is
lower than the interest cost for time deposits.

Bank Indonesia has allowed the SBI rate to increase over the
past several weeks in a bid to help defend the ailing rupiah and
curb inflationary pressure. The benchmark interest rate on the
one-month SBI note increased to 15.79 percent on Wednesday from
15.58 percent the previous week. Banks normally set their deposit
rates several percentage points above the SBI rate.

Minister of Finance Prijadi Praptosuhardjo and Indonesian Bank
Restructuring Agency (IBRA) chairman Edwin Gerungan recently
warned that the higher SBI rate could cause banks to suffer
negative spread, including some banks that were recapitalized by
the government.

To recapitalize a number of ailing banks, the government
injected bonds that carry a variable interest rate linked to the
SBI rate and a fixed interest rate. However, some banks received
bonds that mostly carried a fixed interest rate of 12 percent.

With most banks still unable to loan money because of the
country's economic problems, the recapitalized banks rely on the
interest rates of the government bonds as their main source of
income. Banks that received the 12 percent fixed-rate bonds are
viewed as vulnerable to the rising SBI rate.

Analysts have warned that negative spread could erode these
banks' capital adequacy ratio (CAR), which in turn would force
the government either to spend more money recapitalizing the
banks or close them. Banks are required to have a CAR of at least
8 percent by the end of this year.

Miranda admitted the higher SBI rate could add to the burden
on the state budget, which must cover the interest of the
government's bank recapitalization bonds. But she insisted Bank
Indonesia had to allow the SBI rate to rise to help curb
inflationary pressure.

Miranda said the central bank was concerned by domestic
inflation. She pointed out that the year-on-year inflation rate
in March was 10.62 percent, compared to a year-on-year rate in
February of 9 percent and 8 percent in January.

"Inflation is increasing at a faster rate and this is very
worrying," Miranda said. The central bank has targeted a core
inflation level of between 4 percent and 6 percent this year.

Miranda said the weakening rupiah and an increase in fuel
prices were the reasons behind the higher inflation. And she was
adamant that measures must be taken to help curb inflation,
including monetary tightening by Bank Indonesia.

She also said efforts to strengthen and stabilize the rupiah
must were necessary to prevent higher production costs in the
manufacturing sector, which depends heavily on imported raw
materials.

The rupiah recently dropped to a 30-month low of around Rp
11,500 against the U.S. dollar because of domestic political
problems and an impasse with the International Monetary Fund. The
rupiah ended at Rp 10,600 against the dollar late on Wednesday,
down from Rp 10,450 on Tuesday. (rei/bkm)