Tight liquidity forces banks to raise interest rates

JAKARTA (JP): Increasingly tight liquidity and anticipation over the government's plan to adopt a currency board system (CBS) have prompted banks to raise interest rates, bank analysts have said.

Rijanto Sastroatmodjo, chief commissioner of Bank Servitia, said here yesterday both local and foreign banks in the country were in desperate need of funds to repay obligations, including paying depositors and servicing debts, as confidence in the banking sector had yet to fully recover.

"When confidence in private banks began to erode last year, leading to massive withdrawals of funds, Bank Indonesia injected liquidity into these banks," Rijanto told The Jakarta Post.

He estimated the fresh funds Bank Indonesia, the central bank, disbursed to help problem banks totaled Rp 10 trillion (US$1.05 billion).

Other estimates, however, put the figure at more than Rp 35 trillion.

With tight liquidity in the market, banks needing to pay back loans to Bank Indonesia and meet other obligations, including interbank debts, are offering high interest rates to attract more liquidity from the public.

In a bid to raise the badly needed funds, several banks have dramatically increased their rates to a range of between 22 percent and 27 percent per annum.

Bank Rakyat Indonesia and Bank Negara Indonesia, for instance, have raised their one-month to 12-month deposit rates to between 20 percent and 26 percent.

Bank Dagang Nasional Indonesia has also hiked their one-month to 12-month deposit rates to between 20 percent and 24 percent, while Bank NISP has increased rates to between 22 percent and 23 percent, Bank Subentra to between 18 percent and 27 percent, and Bank Putera to between 22 percent and 25 percent.

An executive at a joint-venture bank said the increasingly tight liquidity made it difficult for banks to obtain funds from the interbank money market. Most large banks, for instance, have been reluctant to lend to smaller banks.

"Segmentation among banks is still there despite the government's promise to guarantee all bank liabilities," he said.

Some state banks offered overnight rates of between 35 percent and 40 percent yesterday. At some small banks, the rates were as high as 70 percent, he said.

Goei Siauw Hong, a banking analyst and head of research at Socgen-Crosby Indonesia, said the high interest rates were also due to bank anticipation of the government's plan to establish a currency board, which could absorb rupiah liquidity in the market.

"If a CBS is implemented, rupiah liquidity would become even tighter as more and more people would withdraw their rupiah savings and exchange them with dollars," Hong told the Post.

A CBS is a monetary regime based on an explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate. The rupiah has slumped by over 70 percent against the U.S. dollar since July.

"The plan is hanging, we don't really know whether it will actually be implemented, and the uncertainty only worsens people's trust in banks. This situation forces banks to offer high rates to attract liquidity," he added.

A banking analyst at a joint-venture brokerage house said foreign banks started the increase in rates because they lost some rupiah deposits after the government guaranteed deposits at domestic banks.

Another banking analyst who requested anonymity, however, said much of the funds withdrawn by customers who lost confidence in the banking industry following the government liquidation of 16 private banks last year had not been redeposited in the country's private banks.

With the possibility of a CBS implementation, people are preferring to keep their rupiah away from the banks for fear that their accounts could be frozen while the system is put into effect, he said.

"The government has always said there won't be a freeze on bank deposits, but who really believes this? Not even a fool," he said.

He said the government could not really guarantee that there would be no freeze of bank accounts if a CBS were established.

The government would no longer be able to guarantee bank depositors, because the central bank would not have the same function after a CBS is established, he said.

The system does not allow the central bank to give loans or print new money without new dollar inflows, he said.

"CBS is a complete opposite of the bank guarantee. If the government implements the CBS, it will definitely not be able to guarantee bank deposits, and therefore it is a danger for the banking industry," he said. (das/aly/rid)