Monetary policy may affect banks' earnings: Soedradjad
Monetary policy may affect banks' earnings: Soedradjad
JAKARTA (JP): Bank Indonesia Governor J. Soedradjad Djiwandono acknowledged here yesterday that the government's prudent monetary policy could result in declines of commercial banks' earning growths.
"That is probably correct. In the banking industry, there are also ups and downs," he said in response to analysts' estimates on possible drops in the growth of banks' profits this year.
Soedradjad said that the consolidation taken by the banks to meet the central bank's prudential monetary policy -- such as the recent increase in the reserves requirement -- would effect their profitability.
"The consolidation, however, creates a good atmosphere, making banks' operations more solid," he told journalists after accompanying the visiting deputy managing director of the International Monetary Fund, Stanley Fischer, to a meeting with President Soeharto.
Bank Indonesia raised the minimum requirement of bank reserves from 2 percent to 3 percent of their deposits beginning in February as part of its efforts to cool down economic overheating.
The rise in the reserves requirement, designed to limit credit expansion, would certainly slow down earning growths in the banking industry, analysts said.
For example, the average rate of earning growth of the 22 listed banks, which rose to 30 percent last year from 20 percent in 1994, is projected to drop back to a range between 20 percent and 25 percent, they estimated.
Jasso Winarto, a director of a research company, said that commercial banks should be able to improve their efficiency and increase their fee-based incomes to offset a decline in their credits.
"Lowering operational costs and making more money from non- lending services are, therefore, essential," he said.
Morgan Guaranty, the commercial bank affiliated with the U.S.- based JP Morgan, noted that the rise in the bank reserves should curtail banks' ability to create new loans.
Morgan Guaranty, however, warned that Bank Indonesia could further raise the reserve requirement if its existing monetary instruments failed to curb the growth of credits.
A managed exchange rate regime and the absence of barriers to capital inflows limit Indonesia's alternatives of monetary policy instruments.
"If capital inflows pick up in the next few months, Bank Indonesia will likely attempt to hold down credits by relying on regulatory measures, such as moral persuasion and further reserve requirement hikes," Morgan said.
Soedradjad said recently that since the third quarter of 1995, the narrowly defined money supply (M1), comprised of cash and demand deposit, showed slowing down.
The narrowly defined money supply, which grew by 16.1 percent in December last year, declined to 14 percent in February. The broad money supply, comprised of M1 and quasi money, also declined to 26.79 percent in February after reaching its peak level of 28.04 percent in November. It is, however, still far higher than the 17 percent indicative target stipulated in the budget plan.
Soedradjad acknowledged that a continued increase in the broad money supply partly resulted from the rise in the inflows of short-term foreign funds.
Bank credits, reaching their highest annual growth rate of 27 percent in August, 1995, dropped to 23.6 percent in February this year, still far higher than the indicative target of 16 percent. (hen)