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ndonesia’s largest bank by assets, Bank Mandiri, says it may increase its lending rates after placing more cash at the central bank, as demanded by the new reserve requirements, which will increase the costs of funds.

With excess liquidity in the banking system that could lead to higher inflation, Bank Indonesia announced last week that banks would have to keep more cash in reserve. The announcement came after August inflation figures reached a 16-month high.

As of Nov. 1, BI said, banks would need to keep 8 percent of their total deposits as a primary cash reserve requirement, up from 5 percent previously.

“One side effect of the new policy may be that banks increase lending rates, because not all banks are ready [to keep more cash at the central bank].

“Based on my calculations, [lending rates] could increase by 10 to 15 basis points,” Bank Mandiri risk management director Sentot A. Sentausa said.

Meanwhile, with its larger amount in deposits than loans, the nation’s largest private bank, BCA, said storing an additional 3 percent as a reserve requirement would be no problem.

However, BCA vice president director Jahja Setiaatmadja said he was concerned about the other new BI policy on banks’ loan-to-deposit ratios (LDRs).

The central bank had also announced that starting Mar. 1 Banks had to have LDRs of between 78 and 100 percent, otherwise it would penalize them by retaining more cash as an additional reserve requirement (of 0.1 to 0.2 percent for every percentage point difference in LDR).

With an LDR outside the set range, Jahja said, BCA planned to reduce its deposit rates to minimize the number of deposits and thus increase its LDR.

“Our LDR is currently between 53 and 55 percent, so we will not likely reach the 78 percent minimum BI requirement,” Jahja said, calculating that with its deposits of around Rp 220 trillion, BCA would have to set aside more than Rp 4 trillion for to its LDR-reserve penalty.

Of the 10 largest banks by assets in Indonesia, five have LDRs outside the BI range (based on their performance in the first half), but only three will likely be penalized next year, namely Mandiri, BCA and BNI.

Both BCA and Mandiri have said they are ready to set aside higher reserves if they cannot meet the new LDR range, especially with Mandiri increasing its lending rates. BNI, on the other hand, said it could make use of the six-month adjustment period to meet the 78 percent threshold.

Analysts have the two new BI policies were confusing, labelling them a “mixed-bag”.

“The LDR regulation pushes banks to boost lending, but the primary reserve requirements absorbs banks cash, which could affect their lending rates,” Mandiri Sekuritas economist Destry Damayanti said.

The policy could absorb around Rp 50 trillion of banks’ cash reserves, which currently stand at around Rp 300 trillion, BI deputy governor Budi Mulya said, adding that banks were seeing excess liquidity.

BI said excess liquidity could eventually lead to higher inflation, the main threat to Indonesia’s economy, around 60 percent of which is driven by private consumption.

Since early this year, the central bank has been pushing banks to lend more as part of its main aim to bolster growth in loans, in line with the government’s pro-growth agenda.

Banks, however, have said there has been limited demand for productive loans. On the other side, businesses have complained at “higher rates” they have had to pay to borrow. (est)