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)