Rates hike 'blow to banking industry'

Rates hike 'blow to banking industry'

JAKARTA (JP): The current high deposit rates are a further
blow to the beleaguered banking sector, which has very few
options for reinvesting the money, banking experts said
yesterday.

Commercial banks have practically ceased lending to the
private sector since the end of last year. The new rates make it
impossible for banks to resume normal lending practices because
banks must lend money at rate higher than they pay out on
deposits.

Following Tuesday's jump in deposit rates, lending rates have
become unaffordable for the country's blighted corporate sector.

Furthermore, almost all banks are currently offering deposit
rates higher than rates obtainable on Bank Indonesia promissory
notes (SBIs). This compounds the problem because it means that
banks can no longer invest excess funds in SBIs, banking experts
I Nyoman Moena and Sutan Remy Sjahdeni said.

"I hope the high rates will not last for any longer than one
month. Otherwise I'm afraid some banks will go bust," Moena told
The Jakarta Post.

Domestic banks have raised rates on one-month deposits to as
high as 67.5 percent following a rise in interest rates on
central bank SBIs.

On Monday, Bank Indonesia raised all SBI rates, except for
overnight SBIs which remained at 40 percent. Interest rates on
two-day SBIs were raised to 41 percent, three-to-six day SBIs to
42 percent, one week SBIs to 43 percent, two-week SBIs to 44
percent and one-month SBIs to 45 percent.

Rates on two-month SBIs were raised to 40 percent, three-month
SBIs to 30 percent, six-month SBIs to 20 percent and one-year
SBIs to 18 percent.

Bank Indonesia said that the increase in rates was intended to
absorb excess liquidity in the banking system which could lead to
higher inflation and further weakening of the rupiah.

Banking expert Riyanto said that following the increase in SBI
rates, some foreign fund managers had invested in one-month SBIs,
which offered a high return.

Director of state Bank Dagang Negara (BDN) E.C.W. Neloe
confirmed Riyanto's statement and said his bank had received a
lot of funds from foreign investors.

"It is important how we manage these incoming funds. But how
we use these funds is our secret," Neloe was quoted by Antara as
saying.

BDN rates the highest on offer to customers. One-month deposit
rates are 67.5 percent per annum.

Moena said the only way for banks use these excess funds would
be to channel them into the inter-bank money market. However,
only cash-strapped banks are usually willing to take inter-bank
loans, which carry interest rates of over 70 percent.

Moena said the high interest rates would especially punish
banks with liquidity problems and banks with large exposure to
corporate lending because almost no corporations currently had a
healthy cash-flow.

"Most corporations now face serious cash-flow problems due to
the economic crisis. This automatically effects their banks' cash
flow," Moena said.

He predicted bad debts from the corporate sector would rise.

When facing liquidity problems, the corporate sector needs
fresh funds to rejuvenate business. However, new funds cannot be
obtained because of the prohibitively high interest rates, said
Bank Artha Graha president Anton B.S. Hudyana.

"It is futile to lend money to companies on the verge of
bankruptcy. No single company can afford to borrow money at
current rates," Anton said.

He added that corporate loans accounted for some 20 percent of
his bank's lending portfolio.

His bank stopped issuing large loans to the corporate sector
last December, but still extends limited credit to small firms.
Anton said smaller firms usually have a better cash flow than
large corporations.

Bank Bali stopped lending to the corporate sector last August,
when Bank Indonesia raised SBIs rates to 30 percent. The bank
stopped consumer and retail loans in January.

State banks like BDN and Bank Negara Indonesia have also
stopped all lending since the end of last year. But they still
extend government-subsidized credits, such as credits for small
enterprises and cooperatives. (aly/das/rid)