BI revises rules on overnight loan facility

JAKARTA (JP): Banks facing funding problems can now get an overnight loan facility from Bank Indonesia (BI) as a lender of last resort by ceding the central bank's SBI promissory notes or treasury bonds as collateral.

This new ruling was announced by the central bank on Wednesday for its overnight loan facility to be provided for banks facing illiquidity problems.

"But the facility can be used only to overcome short-term funding problems," Bank Indonesia's deputy director for research and banking supervision Nelson Tampubolon said in a press conference.

He said that a short-term funding problem was defined as a condition suffered when a bank's cash inflow was less than the cash outflow, causing the bank to have a negative reserve with Bank Indonesia.

The new ruling was made effective early this week.

Under the previous rule, established in May 1999, banks could sell their SBI notes directly to the central bank to obtain the loan. The borrowing banks could also sign a repurchase contract with Bank Indonesia under which banks would surrender their SBIs to the central bank in return for the loan facility, but the banks would repurchase the notes within a certain period of time.

But under the new ruling, banks can not sell their SBI notes directly to the central bank.

Tarmiden Sitorus, another deputy director of Bank Indonesia, said that if the banks wanted to sell their SBIs to get cash to overcome a funding mismatch they could go to the secondary market.

"The new ruling is aimed at helping develop the domestic debt market," he said.

Tarmiden said that banks could only go to the central bank for an overnight loan if they could no longer obtain loans from the interbank money market.

"They can come to us after four in the afternoon or between five and six o'clock ... We really want the central bank to be the last resort lender," he said.

Clearing activity ends at four.

Tarmiden said that the overnight loan facility was designed in this way to discourage banks from using it.

He pointed out that the interest rate for the central bank overnight loan facility is very high compared to the similar facility in the money market.

He explained that the interest rate was 200 basis points above the weighted average interest rate of the interbank overnight money market or the weighted average interest rate of the one- month SBI notes, depending on which was higher.

The interest rate of the overnight facility in the interbank money market currently hovers between 10.5 percent and 10.7 percent while the interest rate for the one-month SBI notes is now around 13.5 percent, which effectively puts the interest rate for the Bank Indonesia overnight facility at about 15 percent.

"This (rate) is very punitive for the banks. If they can borrow from the interbank money market, they will not come to us," Tarmiden said.

Under the previous rule, the interest rate for the loan facility was set at 125 basis points plus the weighted average interest rate of the SBI notes or interbank money market.

Tarmiden said that the overnight facility could be rolled over for 90 successive days. Previously, there was no clear specification on the roll over period.

But he added that if a bank continued to ask for the overnight facility for more than five consecutive days, the central bank would ask its bank supervision division to check the bank to see whether there was any structural problem or whether the bank had misused the overnight facility.

"If there's a structural problem, we have other kinds of treatment," he said.

Nelson said that a bank which was found to have misused the overnight facility would risk being denied the same facility for a certain period of time or an administrative sanction, including a change in the management of the bank or the managers being put on Bank Indonesia's black list.

He dispelled concern about the impact of the new rules, assuring that the overnight loan facility would not lead the central bank to suffer as in the case of the emergency liquidity support injected to troubled banks between 1998 and 1999.

He pointed out that the SBI notes to be used as collateral must have a market value of at least 100 percent of the overnight facility, while the government bonds must have a market value of at least 115 percent of the overnight facility.

Nelson said that in the future, the central bank would consider other forms of securities as collateral for the overnight facility. (rei)