BI urged to end high rate policy, public SBI sales

JAKARTA (JP): The Federation of Private Domestic Banks (Perbanas) appealed to the central bank on Monday to review its high interest rate policy and stop selling its short-term promissory notes (SBI) to the public.

Newly elected Perbanas chairwoman Gunarni Soeworo told a media luncheon that the interest rate policy had caused many members of the country's banking industry to fall into the red.

The policy has resulted in a ballooning of the banks' nonperforming loans and forced the institutions to exercise negative rate spreads to maintain liquidity and ensure solvency.

"I'm afraid this situation will make it so that our national banking system could not function accordingly and this would worsen our national economy," Gunarni said.

Another executive of Perbanas, Agus Martowardoyo, charged the high interest rate policy pursued by Bank Indonesia since the floating of the rupiah on Aug. 14, 1997, had practically destroyed the country's economy, including the banking system.

"The cost of the high interest rate policy is too high for us to bear. So, we called on the central bank to lower rates gradually, of course not drastically because it could be detrimental to our rupiah's exchange rate," Agus said.

Bank Indonesia Governor Sjahril Sabirin has repeatedly stressed the central bank would lower interest rates only if the rupiah had strengthened and stabilized at a level reflecting the country's fundamentals.

Sjahril argued that lowering interest rates at time when rupiah was still volatile would only weaken the currency further and cause the inflation rate to soar.

A relaxation in the monetary policy at this point in time would pose enormous risks, he argued, although high interest rates had not brought about a recovery in the ailing rupiah.

Sjahril maintained the tight monetary policy had to continue in line with rising inflation.

On several occasions the central bank has raised its key interest rates to rein in inflation while keeping the rupiah attractive.

Perbanas also called on the central bank to abandon the practice of selling short-term promissory notes directly to the people.

Gunarni, also president of Bank Niaga, noted that the selling of SBIs to the public had created direct competition with commercial banks which had suffered enough from negative spreads.

"BI should actually not compete with us to attract funds from the public. It is just not fair."

She said she could understand the objective of the BI policy as an effort to absorb excess rupiah liquidity in the market.

"But the problem is that SBIs are offered at interest rates higher than the level that we are allowed to offer," she said.

One-month SBI rates offer yields of more than 68.95 percent per annum, compared to guaranteed bank deposits of 66 percent or lower.

Bank Bali president Rudy Ramli, a deputy chairman of Perbanas, also disputed the SBI approach.

"This is unrealistic. By offering SBIs to the public, BI actually wants to tell the public that they should not put their money in commercial banks."

He argued that promissory notes, unlike U.S. Treasury Bills, were a monetary instrument and should not therefore be sold to the public.

"T-bills in the U.S. are issued by the government and therefore they are freely traded by the public. But SBI is not like T-bills. SBI is a monetary instrument, and thus, it should not be sold freely to the people," he said.

"If BI wants to pursue monetary contraction, it should sell SBIs to commercial banks only, not to people in general." (rid)