Government warned negative spread a threat to banks

Government warned negative spread a threat to banks

JAKARTA (JP): The House of Representatives finance committee
warned the government on Monday to immediately seek a solution to
the negative spread problem threatening some of the country's
major banks.

Benny Pasaribu, the chairman of House Commission IX for
financial and development planning affairs, said on Monday that
the negative spread problem could erode banks' capital adequacy
ratio (CAR) which in turn might force the government to spend
more taxpayers money on recapitalizing the banks once again.

"We have information that some banks are suffering from
negative spread problems which may erode their CAR," Benny told
reporters following an internal meeting.

"We'll summon the finance minister and IBRA on Thursday to
discuss strategies to resolve the problem ... We want to know the
details," he added.

Several bankers had earlier expressed concerns that their
banks would suffer negative spread problems due to continuing
increases in Bank Indonesia's benchmark interest rate.

Bankers said that the increasing benchmark rate was putting
upward pressure on the time deposit rate, but unfortunately the
banks could not pass this on through new lending with higher
interest rates due to the still high risk attached to the
country's real sector. These conditions were triggering the
negative spread problem.

The problem is much greater in banks which hold a larger
proportion of government bonds carrying a fixed interest rate of
12.5 percent as these banks' main source of revenue is still the
interest on government bonds.

The government has issued a massive Rp 430 trillion worth of
bonds to recapitalize around 27 banks. The bonds carry fixed and
variable rates linked to the interest rate on Bank Indonesia SBI
promissory notes. But some of the recapitalized banks, including
the huge Bank Mandiri, Bank Danamon, Bank Negara Indonesia and
Bank Rakyat Indonesia, accepted a greater proportion of fixed
rate bonds.

In a bid to avoid the negative spread problem, some banks had
reportedly made a deal to keep the interest rate on time deposits
unchanged, but it did not succeed.

Bank Indonesia has continued to increase the interest rate on
its one-month SBI notes over the past couple of months in a bid
to help curb the inflationary threat and defend the ailing
rupiah.

The one-month SBI rate is currently at 16.26 percent. Although
deposit rates of some banks are still lower than the SBI rate,
the banks cannot fully take advantage of this by investing all
their funds in the notes because the central bank only offers the
notes in very limited amounts.

The rupiah dropped to a 31-month low of more than Rp 12,000
per U.S. dollar last month due to a combination of domestic
political uncertainty and economic woes.

But although the rupiah managed to strengthen to near the Rp
11,000 per dollar level last week, top Bank Indonesia officials
have said that the central bank would maintain its tight monetary
policy until expectations of high inflation had receded.

Bank Indonesia deputy governor Miranda Goeltom recently said
that inflationary pressure was high as reflected in the year-on-
year inflation rate of around 10 percent over the past few
months.

The government has called on the independent Bank Indonesia to
stop increasing the interest rate to avoid greater state budget
expenses. The state budget covers the interest cost of the bank
recapitalization bonds.

Every one percent increase in the SBI rate causes additional
budget expenses of around Rp 2.5 trillion, finance minister
Prijadi Praptosuhardjo has said.

The rising SBI rate has become one of the factors forcing the
government to revise the current 2001 state budget. (rei)