Careful monetary policy reaffirmed

Careful monetary policy reaffirmed

JAKARTA (JP): Bank Indonesia Governor Soedradjad Djiwandono
announced last night an estimated robust economic growth of seven
percent for last year but re-emphasized the imperative need for a
cautious monetary policy and continued consolidation of the
banking industry.

Soedradjad told the Annual Bankers' Meeting that since last
year's economic growth was fueled largely by the domestic market
demand, inflationary pressures were consequently very strong.

"The fast economic expansion also has spurred the demand for
funds, as can be seen in the 23.1 percent increase in bank
credits last year," the central bank's governor told about 320
Indonesian and foreign bankers at the dinner meeting.

He said there is a definite potential for the economy to grow
by more than seven percent this year but "we should bear in mind
that higher growth also carries a greater risk of overheating the
economy and a deterioration in the balance of payments.

"What we want to achieve is a reasonably high growth rate but
with economic and monetary stability," the governor cautioned.

He took note of the upward trend in bank interest rates due in
part to the gap between the rate of credit expansion and the
increase in deposits raised by the banking system.

"The adjustments of interest rates to changes in the economic
fundamentals are simply normal and should be made," Soedradjad
noted, apparently referring to the recent rise of between one and
two percentage points in deposit rates.

"However, Bank Indonesia will not tolerate abnormal changes or
spiral rises in interest rates which may affect the monetary and
macro-economic stability," he warned.

He called on banks to cautiously manage their lending
operations so that the gap between their credit expansion and the
funds they can mobilize is soundly sustainable.

"The central bank will closely monitor the developments and
the ratio between credits and deposits at every bank to ensure
that all banks properly fulfill prudent banking practices," he
added.

Soedradjad said credit expansion in the next fiscal year
beginning in April will be checked at 19 percent and the growth
of money supply also at 19 percent.

He noted that despite the remarkable progress in the banking
industry last year banks should continue their consolidation
process.

As of September, he added, 92.9 percent of commercial banks
(about 240) had fulfilled the minimum eight percent capital
adequacy ratio (capital against assets).

"Overall, the average capital adequacy ratio of banks is now
10.9 percent."

Another encouraging development, he said, is the improvement
in the quality of credit. Collectibility has improved with the
proportion of credits rated as current on the rise while sub-
standard and doubtful credits are on the decline.

"But the amount of bad credits has not decreased," he said,
pointing out the urgent need for more concerted efforts to
resolve the problem.

Lending limits

Soedradjad further reminded banks of their obligation to fully
comply with the central bank-set legal lending limits by the end
of this year.

"At the end of this year, credit to one group of borrowers may
not exceed 35 percent of a bank's capital, and to a borrower
connected with the bank may it not exceed 12.5 percent," he said.

He said these proportions will gradually be reduced to a
maximum limit of 20 percent for one group of borrowers and 10
percent for a borrower connected with the bank by the end of
March, 1997.

"Although more and more banks have complied with the legal
lending limits, there are still many that have not," the governor
warned.

The government, he added, is very serious about enforcing the
legal lending limits because experiences have shown that a large
portion of the problem loans and other bank difficulties has been
caused by the violation of the lending limits.

The governor did not give further details on the problem loans
but recent official estimates put the amount of bad debts (not
including doubtful loans) at all banks at 3.8 percent of total
credits outstanding as of September.

Soedradjad cited several additional measures to prevent new
problem loans and to enforce prudent banking practices:

* The credit policy guidelines have been redesigned, the
credit information system and bad-debt list have been updated.

* Banks are required to provide a working plan and a report
from the board of commissioners (supervisors) on lendings to
debtors affiliated with the owners or management of the banks and
to large debtors.

* Criteria for banning persons from becoming bank shareholders
or members of bank management will soon be issued.

The central bank governor cited the increasing foreign
capital inflows as another imperative for continuing a cautious
monetary policy.

"We could also look into what happened in Mexico so that we
can prevent the same thing happening in Indonesia," he said in
warning against the dangers of financing the current account
deficit with short-term foreign funds.

He noted that short-term foreign funds are very sensitive to
market fluctuations. The behavior of trust fund managers who get
on the bandwagon can create massive over-reactions that lead to
crises.

"We must be aware of this and stay alert," Soedradjad said.

The central bank was forced to sell more than US$500 million
last week to defend the rupiah amid speculative attacks set off
by the financial chaos in Mexico soon after the devaluation of
its peso last month.

But the currency market returned to normal early this week and
the spot rate of the rupiah rate movements have stabilized within
the conversion band set by the central bank. (vin)