BI urged to modify rate structure of SBIs

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)