Living off of bank interest

Although I am no economist, I would like to touch upon several interesting points concerning the current banking situation. The fact that state banks have been offering extremely high time- deposit interest rates, hovering around 50 percent per annum, has induced many people to keep their life savings in state banks.

Small private banks cannot possibly compete against such high state bank interest rates. If private banks try to match state bank rates, then they must earn a higher profit than 50 percent by turning over their clients' money, which is, of course, questionable in this time of economic crisis.

I don't believe many companies or individuals would be willing to take out a private bank loan with an interest rate of 50 percent or higher. Even if there were some clients willing to accept such interest rates, the bank would be risking a nonperforming loan -- which is exactly why most banks are in trouble in the first place.

In order for private banks to survive and continue paying their employees, I believe they have little choice but to deposit their own capital into state banks to collect on the high interest.

The government's goal in creating such a high interest rate monetary policy is to prevent hyperinflation (mild inflation is beneficial for a country's economy) by absorbing excess currency in circulation.

However, if conglomerates also try to survive off of the interest they receive from state bank deposits, then the whole economy will come to a screeching halt.

If state banks are paying out huge amounts of interest, the possibility exists that the central bank would have to print new banknotes, thus creating a vicious cycle.

Can our economy really survive if companies and families throughout the country turn to interest rates as the best way to eke out a living?

A. DJUANA

Jakarta