Monetary management

Monetary management

The new regulations issued jointly last week by the finance
ministry and Bank Indonesia (central bank) on finance companies
seemed at first glance to be designed mainly to further tighten
the monetary policy amid great concern over the overheating
economy. After all, the new rulings were enforced just one week
after the central bank moved to restrict credit expansion by
increasing the reserve requirement of banks from 2 percent to 3
percent of third-party deposits.

True, the regulations which close finance companies (leasing,
factoring, credit card and consumer financing) to newcomers and
impose restrictions on their lending, equity participation and
borrowing, will have a further contractive impact on the
aggregate credit growth.

However, the significance of the new regulations lie more in
the broadening of the central bank's supervisory power to include
finance companies, which were previously overseen only by the
finance ministry.

Finance companies began to develop rapidly after the 1988
banking deregulation package. As the finance ministry announced
last week, the number of licensed finance companies has reached
253, including 54 Indonesian-foreign joint ventures. Their
lending operations also have been expanding steadily, amounting
to an estimated Rp 25 trillion (US$10.8 billion) this year. That
sum almost doubled the Rp 14 trillion they lent last year.

The problem was that before last week's rulings, non-bank
finance companies were supervised only by the finance ministry.
That meant that monetary management was not fully in the hands of
the central bank, thereby limiting the effectiveness of its
control of the money supply. The dualism in the supervision also
resulted in different prudential regulations being imposed on
banks and finance companies.

With the volume of lending by finance companies increasing to
as high as 8.6 percent of total bank credit and with their credit
expansion likely to continue at a high pace, the central bank's
credit policy would probably have been rendered less effective if
their operations remained outside its supervision. The
centralized supervision of banks and finance companies has become
urgent because many finance firms, notably the joint ventures,
usually fund a great portion of their lending operations with
overseas loans.

Now that the finance companies are under the direct
supervision of Bank Indonesia, their lending and borrowing both
from domestic and foreign sources, like the operations of banks,
can be monitored and controlled by the central bank. The credit
squeeze and overseas borrowing restrictions which the central
bank is imposing on banks will no longer be neutralized by
uncontrolled lending or borrowing by finance companies.

There would likely have been another negative aspect if the
finance companies remained outside the central bank's
supervision. Banks, faced with the tougher credit policy, might
have used finance companies as their credit outlets to circumvent
their legal lending limits and credit ceiling, especially because
most finance companies are partly owned by banks, or are
affiliates of the business groups which also own banks.

So all in all, the new rulings on finance companies should be
welcomed as another effort to improve the central bank's overall
monetary management.