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.