BI tightens rules on offshore loans

BI tightens rules on offshore loans

JAKARTA (JP): Bank Indonesia (BI), the central bank, is
tightening the rules for commercial banks to raise offshore loans
in a bid to maintain monetary stability and reduce pressure on
the balance of payments.

The central bank now requires banks to maintain their daily
outstanding short-term (of up to two years maturity) offshore
debts at the maximum 30 percent of their capital base.

The head of the central bank's foreign affairs division,
Sumitro, said in a circular to bankers which accompanied the new
ruling, that "offshore loans received by banks need to be managed
according to prudential principles".

The ruling, No. 29/KEP/DIR dated March 26, 1997 and released
yesterday, was signed by the central bank's managing directors,
Boediono and Paul Soetopo Tjokronegoro.

To ensure prudent offshore borrowings by banks, the new ruling
requires commercial banks to report to the central bank their
annual offshore borrowing plans.

Banks which fail to submit their borrowing plans will not be
allowed to raise offshore loans in that fiscal year.

Bank Indonesia imposes the ceiling (30 percent of capital
base) on short-term borrowings, both on a bilateral and
syndicated basis.

Banks which have obtained offshore borrowing quotas from the
central bank are required to notify the central bank one month
before entering the financial market.

Export credits

Banks also have to extend at least 80 percent of their
offshore loans -- except short-term bilateral debts of up to $20
million -- as export credits to export-oriented companies.

The regulation defines export credits as working capital
credit and investment credit.

Working capital export credit consists of all types of working
capital loans to exporters or their suppliers for financing
export goods or the collection or processing of goods for export.
Investment credit is credit for the production of export goods.

Export credits also cover credits given to companies to
finance construction projects overseas, exports of Indonesian
workers and the construction of four and five star hotels in
Indonesia.

The ruling states the requirement on using foreign loans for
export credit financing is to ensure foreign debts generate
foreign exchange earnings to repay the debts.

Commercial banks' foreign exchange borrowing increased
tremendously in 1989 after the removal of the offshore borrowing
ceilings for banks. In that year, the government issued
prudential regulations on foreign exchange net open positions.

Net open position was designed to protect banks from being
overexposed to foreign exchange fluctuations. But the government
expects this new regulation can also be used to control banks'
foreign borrowing.

But the use of net open position to control banks' foreign
borrowing by banks was not effective. So in September 1991 the
government began regulating offshore borrowing by forming a
foreign commercial borrowing coordinating team through a
presidential decree.

Policies introduced by the team included the imposition of a
ceiling on external commercial borrowings to finance government
and state-company projects and the introduction of a queuing
system for commercial banks to enter offshore financial markets.

These measures were designed to keep foreign commercial
borrowing levels in line with the country's capacity to repay
foreign loans.

Indonesia's offshore debts stand at US$110 billion, of which
more than 50 percent is private commercial debt. In 1995 private
debt accounted for only 40 percent of total foreign borrowings in
1995.

To ensure prudent offshore debt management, Bank Indonesia's
new ruling requires banks to report regularly their offshore
borrowing position and follow all of central bank directives in
securing offshore loans.

Fine

Banks that infringe the new regulations will be fined.

The central bank will fine banks Rp 50,000 (US$20.6) for each
week they are late in reporting any changes in foreign borrowing.

Banks which fail to report their annual foreign borrowing
plans to the central bank but still raise foreign loans will be
fined 0.5 percent of the new debt.

The central bank imposes a fine of 0.01 percent of a bank's
total offshore debt if it fails to report its schedule to enter
foreign financial markets.

Banks raising offshore debts exceeding their ceiling will be
fined 0.5 percent of the excess.

Banks' offshore borrowing exceeding 30 percent of their
capital base will be fined 0.5 percent of the excess a year.
(rid)