New central bank law to limit BI's financing facility

JAKARTA (JP): The proposed central bank law, expected to be approved by the House of Representatives on Monday, will limit Bank Indonesia's support of banks facing liquidity problems, according to a central bank executive.

Achjar Iljas, a Bank Indonesia (BI) director, said on Thursday that based on the new bill, BI's "lender of last resort" role would be limited to providing a maximum 90 days of liquidity facilities.

He said the liquidity facilities must be backed 100 percent by high quality and liquid assets which means, during the current economic crisis, only the central bank's Bank Indonesia promissory note (SBI) is acceptable.

"So current facilities will no longer be available," he told reporters on the sidelines of a debate session on the new central bank bill between the government and the House of Representatives commission VIII on finance and the state budget.

He explained that the limited lending function of the central bank would guarantee that past weaknesses of BI would not be perpetuated.

"This is a built-in system to prevent past mistakes from reoccurring," he said.

BI's current financing facilities are divided into short-term liquidity financing and long-term facilities, including subsidized loans for certain economic sectors.

The central bank has been widely criticized because many of its facilities have been taken advantage of by errant bankers who were not made to provide sufficient quality collateral.

Analysts said the central bank might have difficulties in upholding its revised lending role, as banks, especially in this time of crisis, will continue to face liquidity problems and the danger of being rushed by depositors.

They pointed out that the quality SBI assets of many banks would not be enough to cover their loans from BI, which would be necessary as the sector continues to suffer from a negative interest spread due to higher interest paid on deposits than earned on loans.

They also said that only certain state banks and banks with capital adequacy ratios of more than 4 percent have relatively higher SBI investments as deposits were difficult to channel into an economy hit by such a serious recession.

"What happens if a bank runs out of SBIs while at the same time its reserves fall into the red and needs liquidity support, will it be defaulted? Or closed down?" questioned one analyst.

"I think BI must not be so rigid in implementing the new ruling," he said.

The House of Representatives is expected to approve the new central bank bill, which has undergone weeks of debating, on Monday.

The law, which will replace a 1968 law often criticized as ineffective, is designed to boost the independency of BI to allow it to become the country's highest monetary body, free of government intervention to design monetary policy and supervise the flow of payments.

Under the proposed law, BI's banking supervisory role would be transferred to a new independent body by the middle of 2000. This part of the proposal has been under intense debate between the government and the House, which wanted to retain the role with the central bank.

BI's role of providing subsidized loans would also be handed over to a new institution. (rei)