New interest rate policy will force bank innovation

JAKARTA (JP): Bank Indonesia's (BI) latest move to control interest rates will force commercial banks to be more innovative, analysts have said.

Jusuf Arbianto Tjondrolukito, a commissioner of Bank Danamon, said yesterday the measure would force banks to improve services and efficiency to attract customers rather than only advertising high interest rates.

"The purpose of this measure is to return stability to the country's banking sector," Jusuf told The Jakarta Post.

Another bank executive who requested anonymity shared Jusuf's view, saying private banks must formulate strategies to attract customers.

"Hopefully, with all banks offering equal rates and with the government's guarantee of all deposits, there will be no more practices of elbowing each other aside by offering high interest rates," the banker said.

Banks must now compete through the quality of their services and products, he said.

This could be achieved by specializing in certain market segments, a strategy little explored by local banks, he said.

He said banks which provide specialized services, such as Islamic banks, would likely survive.

"For example, certain international banks, such as Citibank and Chase Manhattan, have an Islamic banking division in many Moslem countries," he said.

In its latest move to reform the country's frail banking sector, BI has limited interest rates to no higher than 0.25 percent above the Jakarta Inter Bank Offered Rates (JIBOR) for rupiah denominated deposits.

JIBOR is the average interest rate of the country's 20 largest banks.

Yesterday, the interest rates of three-month deposits offered by the 20 banks ranged between 19 percent and 23 percent per annum.

All the banking executives interviewed here by the Post said, however, they were not fully informed on the interest rate restriction.

Banking analyst Rijanto Sastroatmodjo said that even with decoys such as high interest rates, private banks would not be able to enjoy large deposits because customer confidence had severely eroded.

"The main problem is that public funds have become a scarcity in private banks now," Rijanto, the chief commissioner of Bank Servitia, said yesterday.

"No interest rate level can really bring the funds back to the banks," he said.

He said many small banks had few deposits.

Despite a series of measures announced by the government to rehabilitate local banks, public confidence has remained low since the government forced 16 insolvent banks into liquidation last November.

Jusuf said banks must project a sense of trust by providing full and satisfactory customer services. He said they must establish good interpersonal relations with their customers.

They must study their market and, if necessary, shift to a more suitable and receptive market segment, he said.

Banks must also provide more options to their customers, such as a cross selling of their products, he said.

Banks should offer services for housing and business loans and other instruments such as securities and mutual funds, he said.

Banks which provide convenience and easy access to their services and information would likely be able to win customer satisfaction, he pointed out. Better information technology systems and banking automation would be an added value, he said. (das)