BI plans prudential ruling for booming mutual funds industry

Zakki Hakim, The Jakarta Post, Jakarta

Bank Indonesia is preparing a set of prudential regulations for the booming domestic mutual funds industry to protect banks and investors, according to a source familiar with the situation.

"Bank Indonesia is closely monitoring the industry and they will issue the regulations," the source told The Jakarta Post over the weekend.

The mutual funds industry has been booming since last year. By the end of 2002, public money invested in mutual funds reached Rp 46.62 trillion (US$5.24 billion), translating into an almost 500 percent jump from 2001. More than half the money was collected by banks seeking fee-based income.

According to one estimate, the net asset value of the mutual funds industry could reach Rp 100 trillion this year as more banks, in cooperation with the investment management firms, are planning to take a piece of the action.

Most mutual funds marketed by the banks are linked to investments in government bank recapitalization bonds.

But central bank officials are concerned with two matters. First, certain banks might be tempted to guarantee the principal and yield of their mutual funds to lure investors. This would require banks to set aside provisions, thus putting the banks' capital adequacy ratio (CAR) at risk. As most banks are still in a relatively weak condition after being bailed out by the government, Bank Indonesia is unhappy with this unnecessary risk.

Bank Indonesia also suspects that the banks marketing the mutual funds have not sufficiently informed their customers -- mainly depositors who are tempted to invest in bond-based mutual funds that are tax exempt and promise higher returns -- about the risks.

There may be a misperception among depositors that since the mutual funds are linked to the banks, the government would come to the rescue if something went wrong, particularly if investors rushed to redeem the funds.

But the source said that the government blanket guarantee scheme only applies to time deposits at banks.

"In the prospectus distributed to potential investors, the names of the banks are written in big letters, while the names of investment management firms are written in small letters. This may lead to misperceptions," he said.

The source said that it was important for the central bank to act immediately to ward off another crisis hitting the banking industry.

He expected that under the planned prudential ruling, the central bank would force the banks marketing mutual funds to properly inform the public about the risks.

Banks would also be barred from providing guarantees for mutual funds.

In the case of investments in corporate bonds, only those with a triple B rating should be considered worthwhile to invest in.

Many banks have been eager to market mutual funds -- in some cases the funds are issued by investment management firms owned by the banks -- in a bid to secure extra income from fee-based activities, such as lending to the real sector, which is still considered risky, and to avoid existing depositors from turning to mutual funds offered by competitors.

For depositors and investors, mutual funds seem to be an attractive investment choice amid the declining trend in interest rates.