Deposit rates reduced to curb bank credit rates

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)