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Sources of cheap financing: From loans to bonds
Corporate sector is more actively engaged in issuing similar commercial bonds or securities.
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A view of Bundaran Hotel Indonesia, Central Jakarta. (Shutterstock/Andreas H)
B
ank Indonesia (BI) is still looking for the most appropriate policy for the macroeconomic conditions in the future. The easy monetary policy in the form of the benchmark interest rate cut from 4.75 percent to 4.5 percent last month on the first anniversary of the BI seven-day reverse repo rate implementation is likely to continue.
The above signal can be captured from the BI’s statement that it will release the monetary stimulus from the macro-prudential area. The loan to funding ratio (LFR) will be relaxed by incorporating corporate bonds. The LFR concept is then shifting toward the financing to funding ratio (FFR).
The lower demand for bank loans seems to be the trigger for the FFR policy. As of June, for example, the banking intermediary function through loans grew at a slower pace of 7.6 percent year on year (yoy) compared to 8.6 percent yoy in May, due to the domestic economic downturn.
The economic downturn seemed to prompt households to withhold their consumption spending and hold on to their funds in the form of savings and deposits in the banking system.
As a note, the growth of bank third-party funds in May 2017 reached 11.18 percent yoy which was much higher than that of loans.
For corporations, the new policy is positive to find a cheaper alternative source of financing. Hence, the corporate sector is more actively engaged in issuing similar commercial bonds or securities.
As a result, the financial market deepening is another goal that aims to relax the LFR.
