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)