BI to auction on monthly basis

The Jakarta Post, Jakarta

The central bank is planning to change its weekly SBI promissory note auctions to monthly auctions as part of its effort to push banks to boost lending, according to an official.

"Bank Indonesia wants the banks to know that the SBIs are not portfolio investments but rather monetary instruments," central bank spokesman Rusli Simanjuntak was quoted by Dow Jones as saying on Thursday.

He said that the cut in the frequency of the SBI auctions could be implemented in the coming months.

During the past two years, the country's commercial banks have invested much of their depositors' money in the SBI notes instead of lending it to the corporate sector, taking advantage of the interest rate spread as banks pay lower interest for deposits while receiving higher interest from their SBI investments.

Bank Indonesia has been aggressively cutting the interest rate on its SBI notes over the past two years amid easing inflationary pressures in the hope that the banks would also lower their lending rates to make borrowing more affordable to the corporate sector. The interest rate on one-month SBI notes, for instance, now stands at a record low of around 7.42 percent, compared to around 13 percent at the beginning of last year. Interest rates on bank time deposits currently stand at around 6 percent.

To date, the banks have remained generally reluctant to boost lending to the corporate sector as investing in local companies is still deemed too risky due to the slow progress made in the restructuring of corporate debts.

As of November last year, the loan to deposit ratio of the banking sector remained at a relatively low level of around 40 percent. Most banks are focusing their lending operations on consumer loans or credit for small and medium-sized companies.

Analysts have also warned the central bank about the huge burden placed on the central bank through its issuing of SBI notes as Bank Indonesia has to pay interest to the investors. And every time the central bank pays interest on the SBI notes, additional liquidity is pumped into the market, forcing the central bank to absorb it again through the issuance of more SBI notes to help avoid inflationary pressure.

According to one estimate, the country's commercial banks on average have daily excess liquidity of between Rp 20 trillion and Rp 25 trillion (US$2.94 billion).