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)