Deposit rates reduced to curb bank credit rates

JAKARTA (JP): The initiative of state and private banks to gradually lower deposit rates starting this week is aimed at stabilizing the banking industry and reducing credit interest rates, a leading banker said yesterday.

Widigdo Sukarman, chairman of the Association of State Banks, told The Jakarta Post that deposit rates should first be cut to allow for a gradual decrease in the prohibitively high lending rates at present.

"But we should make short-term funds available through the interbank market to encourage banks to lower deposit rates," added Widigdo, who is also the president of Bank BNI, the first state bank listed on domestic stock exchanges.

The Association of State Banks and its private sector counterpart -- the Federation of Private Domestic Banks -- agreed Monday evening to immediately start lowering their deposit rates and to help each other through easier access to the interbank market.

State banks agreed to lower their deposit rates to 19 percent for one-month deposits, 17 percent for three-month and 14 percent for six- to 12-month deposits. Major private banks were committed to cutting their interest rates in a range of 16 percent to 21 percent.

The objective of the initiative was to gradually cut credit interest rates from more than 30 percent a year to a maximum of 25 percent, he said.

Widigdo acknowledged that liquidity in the banking industry had been easier after the central bank cashed in a large number of its SBI certificates, thereby injecting more money into the market.

The monetary authorities ordered several state agencies and companies in August to convert their deposits into SBIs in a bid to soak up liquidity and curb speculative attacks on the rupiah.

"But liquidity has not been evenly spread among the banks, especially after the recent government move to close 16 insolvent private banks," he added.

The bold measure on Nov. 1 shook public confidence in private national banks, prompting many people to transfer their savings to either state banks or foreign bank branches.

"Therefore, state and private banks have agreed to offer short-term funds through the interbank market to those who urgently need them to improve liquidity," Widigdo said.

He agreed that the initiative could be seen as industrial solidarity to help restore calmness and public confidence in the national banking industry.

"We, state and private banks, are players in the same market. And the market isn't healthy if many of the players are in financial distress," he said, citing the rationale of the agreement.

The BNI chief executive officer saw the restoration of confidence in private national banks as crucial in making the entire banking system sound.

"We should keep it in mind that private national banks now hold almost 60 percent of the banking market," he pointed out.

He was confident that once banks were assured of easier access to short-term funds they would no longer be forced to offer steep deposit rates to raise funds.

"Banks offer unusually high deposit rates only when they are desperate for funds," he said.

Widigdo suggested that the initiative of the two associations was also to help reinvigorate the business sector in general because businesses could not operate in a viable manner if the cost of capital was abnormally high.

"The banking industry cannot grow healthily if businesses remain burdened by the prohibitively high cost of capital," Widigdo argued.

Moreover, he added, high interest rates increased credit risks as the possibility of bad credit rose. (vin)