BI urged to modify rate structure of SBIs

JAKARTA (JP): Bank Indonesia should modify the rates of its short-term promissory notes (SBIs) so those with slow maturity carry higher rates to attract more long-term funds for the banking system, experts said.

Several local bank treasury executives said the current SBI rates have a negative yield curve -- SBIs with fast maturity have higher interest rates -- and therefore encourage people to place their money in short-term deposits.

"This situation will not improve people's confidence in the banking system," Manaek Robert L. Toruan, the fixed income desk head of publicly listed Bank Niaga, said.

"With this negative yield curve, people with large funds will continue to place their money in short-term deposits, even in on- call deposits which offer the highest rates."

A joint venture bank's treasury department head, who asked to remain anonymous, said BI's policy of maintaining the negative yield curve proved that the central bank just followed market movement instead of trying to influence the market.

In a free market, where interest rates are determined by market power, a negative yield curve is a consequence of the public's deteriorating confidence in the banking system, the treasury head said.

It also reflects the scarcity of funds among banks and the market's expectation of a high inflation rate, he said.

"The negative yield curve is the product of the worsening macroeconomic fundamentals. If we force them to make it positive, wealthy people would open accounts with foreign banks and park their funds there."

He said as long as the government keeps the current free foreign exchange regime in place, it would be difficult for the central bank to make the yield curve positive.

The only way to improve the situation is to get the economy up and running again and restore people's confidence in the banking system, he said.

Robert said the negative yield curve in SBI rates had made some banks, especially those short in either rupiah or dollars, suffer huge losses because they had to borrow money from interbank markets at much higher rates.

Yesterday, for instance, short-term rupiah interbank rates in the Jakarta money market reached some 50 percent among state and large private banks.

"But banks which are long in rupiah or dollar would make a lot of profits just by placing their excess funds in interbank call money or in SBI," he said.

Such a situation encourages banks lacking liquidity to offer higher rates to depositors to attract more funds. This leads to an interest rate war among banks.

Bank Indonesia's decision late last month to peg bank interest rates to SBI rates, following the government's blanket guarantee on all domestic bank deposits, will contain the rate war, Robert said.

"But this ruling will make funds flow back to larger, stronger banks because small banks cannot offer much higher rates to customers anymore."

BI places the ceiling for time deposit rates at 1.5 times the SBI rate for the period leading up to April 15. Starting April 16, the ceiling will be 1.25 times the SBI rates.

A treasury head at another local bank, who also asked not to be named, said the country's banking industry was already in distress because it could not get long-term funds and worse still could not lend credits.

"The only source of income is the money market. But only banks which could mobilize funds from the public would be able to make profits from this market. Banks which could not attract public funds would continue to be the losers," he said.

Bank Indonesia is so far willing to lend cash-strapped banks money to keep them running, he said. But this serves as a time bomb for the country's banking industry. (rid)