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BI eases implementation of new reserve requirement
Bank Indonesia (BI) will allow commercial banks to gradually increase their secondary reserves in accordance with its new reserves requirement to ensure the measure does not have a serious impact on their liquidity
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ank Indonesia (BI) will allow commercial banks to gradually increase their secondary reserves in accordance with its new reserves requirement to ensure the measure does not have a serious impact on their liquidity.
'We realize it would require a great effort for banks to place a higher amount of reserves,' BI spokesperson Difi Johansyah told reporters. 'Therefore, we allow banks to gradually adapt, before they are obliged to place 4 percent of secondary reserves in December.'
He said local lenders were allowed to increase the secondary reserves requirement by a half percent every month from October until December so that the higher reserves would not hurt their operations.
BI announced in its board of governors' meeting on Aug. 15 that it would increase the secondary reserves requirement (GWM) to 4 percent from a bank's third-party funds, from the current 2.5 percent.
The GWM determines the minimum reserves that local lenders must place in the central bank to manage liquidity in the banking system. The increase is needed in order to curb surging inflation.
Unlike the primary reserves, which come in the form of cash, the secondary reserves are in central banks in the form financial instruments and derivatives, such as government bonds, or the central bank's short-term promissory notes: SBI and SDBI.
'It's important for banks to diversify their portfolio not only in cash or credit, but also in securities,' Difi explained. 'It's become best practice in other countries, where banks normally place their funds in the form of government bonds and securities ' very few of them are investing in the form of cash basis.'
From October, the central bank will narrow the loan to deposit ratio (LDR) based reserves requirement to 92 percent from 100 percent.
Banks whose LDR level is higher than 92 percent will face penalties from BI ' encouraging banks to channel prudent lending and improve their liquidity position.
'The new leadership team at BI presumably believe commercial banks still have excess liquidity, which will find its way into the 'wrong' areas of the economy, particularly the frothy property market,' Credit Suisse economist Robert Prior-Wandesforde commented.
Indonesia's banking industry is known to be the fastest-growing in the region, with its credit expansion topping 22 percent as of July, compared to only single digit lending growth in most Asian countries.
Such a rate of lending growth ' once described by BI Governor Agus Martowardojo as 'too fast' and 'unsustainable' ' prompted concerns over a potential bubble in certain lending segments and potential overheating in the economy.
'This policy is good to put the brakes on banks' intentions to disburse credit,' Bank Central Asia (BCA) president director Jahja Setiaatmadja said, referring to the new GWM policy.
Bank Mega president director Kostaman Thayib said the policy would not have a negative impact on the operations of his bank, but warned of potential repercussions on lenders grappling with liquidity problems in their balance sheets.
'This will weigh on banks that have tight liquidity, ultimately driving up the cost of loanable funds,' he wrote in a text message.
