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)