BI to auction on monthly basis

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).