BI plays down significance of rate increase

BI plays down significance of rate increase

JAKARTA (JP): Bank Indonesia deputy governor Subarjo
Joyosumarto said on Monday the country's bank restructuring
program was in no danger as long as the interest rate of Bank
Indonesia's short-term promissory notes (SBIs) remained below 15
percent.

Subarjo said the current increase in the interest rate was
still relatively "small".

"It (the rate increase) has not yet become a threat; only if
it reaches 15 percent," he told journalists during a break in a
seminar.

He said the increase in the SBI rate was merely a signal from
the central bank it was concerned by current developments in the
country's political and security spheres.

The interest rate on the one-month SBI note has increased by
more than 44 basis point to more than 11.32 percent since early
May.

The increase in the SBI rate, however, has not been
accompanied by an increase in the interest rate of bank time
deposits, now hovering at between 9 percent and 10 percent.

Bank Indonesia deputy governor Miranda Goeltom said earlier
the SBI rate was expected to be around 12 percent by the end of
this year, assuming domestic political and social conditions
improved.

Analysts have warned that higher interest rates would further
burden the state budget in financing the government's bank
recapitalization program.

The government is financing at least 80 percent of the cost of
the bank recapitalization program by issuing bonds, whose
interest is covered by the state budget.

The government so far has issued more than Rp 321 trillion
(US$37.32 billion) worth of bank recapitalization bonds, and is
expected to issue another Rp 105.65 trillion in bonds.

Analysts also have cautioned higher rates would threaten
efforts to restructure the huge amount of nonperforming loans
(NPLs) in the banking sector.

Subarjo said the amount of NPLs in the banking industry had
dropped to approximately 32 percent as of April, from 69 percent
when the country's economic crisis was at its height in 1998.

He said the amount of NPLs in the banking industry reached Rp
270 trillion in 1998.

According to Subarjo, most of the large NPLs had been
transferred to the Indonesian Bank Restructuring Agency, while
the smaller nonperforming loans were being restructured by
individual banks.

He said the recent decision by Bank Indonesia to relax certain
banking rulings was expected to encourage more debt restructuring
deals, and that by the end of 2000 the amount of NPLs in the
banking industry was expected to fall to 25 percent.

Subarjo said reducing NPLs was crucial in helping banks resume
lending to the real sector. He said banks were currently very
liquid, but remained reluctant to channel the money to the real
sector partly due to the NPLs.

Subarjo also stated a target had been set of cutting the
amount of NPLs below 5 percent by the end of 2001, compared to
the 13 percent prior to the economic crisis in mid-1997.

In other matters, Subarjo said the owners of seven smaller
banks being monitored by BI had expressed their commitment to
inject some Rp 1 trillion in cash into their banks to increase
the capital adequacy ratio (CAR) of their institutions.

He said the deadline for this action was the end of July,
adding that the banks would be transferred to IBRA if the owners
failed to come up with the funds by this deadline. He declined to
name the banks.

The seven banks are listed in the "A category" of banks, or
those which were not included in the government's bank
recapitalization program because their CARs were greater than the
minimum 4 percent required by the government when the
recapitalization program was launched last year.(rei)