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)