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BI discharges silver bullet to reduce market volatility
Bank Indonesia (BI) has discharged a silver bullet, which it claims will help reduce market volatility and spur lenders to explore other investment tools
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Bank Indonesia (BI) has discharged a silver bullet, which it claims will help reduce market volatility and spur lenders to explore other investment tools. Lenders, however, say that what they need is something else.
The central bank issued on Friday BI Regulation (PBI) No. 19/6/PBI/2017 on primary reserve requirement ratio (GWM) that requires lenders to keep at least 6.5 percent of their total customer deposits — consisting of savings accounts, time deposits and current accounts — at BI at the end of a two-week period.
The regulation is known as “GWM averaging” and will take effect starting July 1.
BI economic and monetary policy executive director Dody Budi Waluyo said the change would provide banks with respite and flexibility because they would no longer have to meet the overall ratio on a daily basis, as stipulated by the previous regulation.
Dody, however, was quick to add that it would implement the regulation partially in the first phase.
Of the 6.5 percent, banks will still be required to maintain minimum 5 percent deposits at BI every day, but will have the “freedom” to channel the remaining 1.5 percent elsewhere.
“We may implement full GWM averaging someday. Banks will be allowed to manage all of their reserve requirements in other instruments, but it will take time before we go down that road,” he said, adding that banks currently had different capacities in managing liquidity.
At present, the lenders turn to the interbank money market facility (PUAB) to gain liquidity if they are on the brink of failing to meet the 6.5 percent ratio.
That often leads to volatile market movement and BI expects the new regulation will calm the market.
The central bank insists that new flexibility does not change its neutral-to-hawkish monetary stance as financial risks, both domestic and global, remain.
It also dismisses the notion that the banking industry is now suffering from tight liquidity, as voiced by several banks.
“There is a liquidity surplus at the moment, but the distribution is not equal from one bank to another. Major banks still have an abundant amount of funds,” Dody said.
Latest banking statistics published by the Financial Services Authority (OJK) show that the loan-to-deposit ratio (LDR) stood at 89.1 percent as of February.
The ratio means that 89.1 percent of all customers’ funds had been disbursed as loans, but the figure was still lower than the 92 percent benchmark.
A number of banks have expressed concerns that liquidity will dry up in the second half as they compete for financing against the government and its massive infrastructure projects.
Some have called for a reduction in the GWM ratio, while some others request a complete elimination of the reserves requirement, arguing that the reserves will be better spent to finance loan expansions.
Largest private lender Bank Central Asia (BCA) estimates liquidity will continue to tighten after September.
“It’s tight enough already. If there are loan demands, including for road infrastructure, liquidity will tighten even more,” BCA president director Jahja Setiaatmadja said.
Bank Mandiri president director Kartika Wirjoatmodjo said the new regulation did not offer much solution to the liquidity problem.
At the moment, the state-owned Mandiri is involved in numerous infrastructure projects, including those initiated by the government.
More than 40 percent of its loan portfolio was dominated by corporate, with electricity, manufacturing, roads and bridges listed among the top 10 sectors.
“But it [the new rule] is better than nothing,” he said. “We can save costs and manage a bit more loosely. We don’t have to [worry] about the short reserves at the end of each day.”
Meanwhile, Maybank Indonesia global markets head I Made Budhi P. Artha pointed out the one downside of the regulation.
According to the new PBI, lenders that fail to maintain the 5 percent bottom ratio on a certain day will not be eligible to obtain interest income from the central bank.
Made said it would discourage banks from venturing into other investments and argued the interest income calculation should be adjusted biweekly as well.
