Tight liquidity forces banks to raise interest rates

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)