Higher interest rates could bleed banks

JAKARTA (JP): The country's major banks expressed fear on Tuesday that they could suffer financial bleeding again due to negative spread problem if domestic interest rates continued to increase.

In a working meeting with the House of Representatives commission IX on state budget and finance, bankers called on the government and the central bank to help resolve the problem.

Some legislators feared that the problem could lead to a worst scenario of a second banking crisis if the rising interest rate continued unchecked.

"If the SBI interest rate continues to move upward ... it has the potential to create negative spread or losses to BRI," said president of the state-owned Bank Rakyat Indonesia (BRI) Rudjito, referring to the Bank Indonesia SBI promissory notes.

Rudjito said that the negative spread problem would occur because the bank's recapitalization bonds carried a fixed interest rate of around 12.5 percent, as against the current SBI rate of 14.75 percent.

The assets of most of the recapitalized banks are dominated by government recapitalization bonds which carry variable and fixed interest rates.

Negative spread occurs if the interest income of a bank is lower than its interest cost.

"Bank Danamon currently doesn't suffer a negative spread problem. But if the central bank's benchmark interest rate continues to increase it can create negative spread because most of our recapitalization bonds carry fixed interest rates," said Arwin Rasyid, president of Bank Danamon, a major nationalized bank.

"The costs of fund of Bank Danamon currently range between 10- 12 percent. Since around 70 percent of our interest income comes from government bonds, of which some 65 percent carry a fixed interest rate, the upward trend in domestic interest rates is quite a serious threat to Bank Danamon," Arwin added.

Bank Indonesia is under pressure to allow the interest rate of SBI notes to further increase amid the anticipated inflationary threat from the government plans to raise fuel prices in April.

Bank Indonesia's Senior Deputy Governor Anwar Nasution hinted on Monday a further rise in interest rates amid the weakening of the exchange rate of the rupiah against the U.S. dollar due to ongoing political instability, ethnic violence in Central Kalimantan, and uncertainty over relations with the International Monetary Fund.

"Stable political and security conditions are very important," said president of the giant state-owned Bank Mandiri E.C.W. Neloe.

Bankers hoped the current problem would not lead to another banking crisis which would cost the government dearly as it would have to recapitalize the banking sector again or close down most major banks.

"A second bank recapitalization would be tragic. I hope this doesn't have to happen because the cost would be huge," Neloe said.

The government has issued around Rp 430 trillion (US$45 billion) worth of bonds to help finance the recapitalization program of major domestic banks.

President of the state-owned publicly listed Bank Negara Indonesia (BNI) Saefuddin Hasan said that to avoid a second banking crisis, the rupiah must be stable in order to allow interest rates to go down.

"We hope the legislature will help (to create political conditions) so that the rupiah doesn't continue to decline and interest rates don't have to increase," Saefuddin said.

"Otherwise, the pessimistic scenario of a second (bank) recapitalization could materialize," he added.

"If the time deposit rate remains at the current level of between 15-16 percent, there's hope (for us) to survive," he said, adding that if Bank Indonesia increased its interest rate again, BNI would try maintain its deposit rate to avoid negative spread.

Banks, however, have already designed measures to help avoid the negative spread problem. The measures include exchanging the fixed-rate bonds with the so-called "stapled bonds" carrying a combination of lower and higher interest rate of around 16.5 percent, or swapping the bonds with bank debts already restructured by the Indonesian Bank Restructuring Agency (IBRA).

IBRA has planned to allocate around Rp 10 trillion in restructured debts this year to be exchanged with bank recapitalization bonds. The restructured debt carries an interest rate much higher than the fixed-rate bonds.

But Danamon's Arwin urged IBRA to allocate up to Rp 50 trillion this year.

He said Bank Danamon planned to swap around Rp 3 trillion worth of current loans at IBRA with the bank's recapitalization bonds. (rei)