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How SRBI securities impact banking strategies and monetary transmission
The presence of SRBI provides banks with opportunities for diversification and risk reduction.
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Stakeholders meeting: Bank Indonesia (BI) Governor Perry Warjiyo speaks on Nov. 30, 2022, during the central bank’s annual meeting with its financial stakeholders in Jakarta. (Reuters/Willy Kurniawan)
T
he securities market plays a significant role in shaping banks' strategies and driving economic growth. The issuance of rupiah securities by Bank Indonesia (BI), known as Sekuritas Rupiah Bank Indonesia (SRBI), has a significant impact on banking business strategies, emphasizing the central bank’s contribution to economic growth. BI issues rupiah securities to manage liquidity and control the money supply in the country's financial system.
These securities, denominated in the local currency, facilitate the government's financing needs while nurturing the development of the overall capital market. The issuance of SRBI allows banks to access an additional avenue for essential liquidity management. Banks can purchase these securities as a safe investment option, balancing their liquidity needs between short-term and long-term assets. This strategy promotes stability in their operations by allowing banks to better manage their cash positions.
This can be seen by the movement of bank liquid assets components from reverse repo and short-term government bonds and securities (SBN) under 1-year tenor to SRBI. When BI issues these securities, it provides an opportunity for banks to invest their excess funds through safer and more stable instruments, such as SBN or reverse repo. Based on integrated bank financial report data from September – October 2023, there was a reallocation of liquid assets to SRBI, reflected in an increase in SRBI ownership, to Rp 119 trillion (US$7.67 billion), amid a decrease in the share of SBN in liquid assets by Rp 77 trillion and reverse repo by Rp 38 trillion.
This relocation was primarily observed in national private commercial banks. The presence of SRBI provides banks with opportunities for diversification and risk reduction. By investing in these instruments, banks can mitigate their reliance on interest rates, credit risk and foreign exchange fluctuations. This allows banks to allocate resources effectively and safeguards them against potential economic shocks, promoting a sound banking sector.
Moreover, the issuance of SRBI assists banks in bolstering their capital adequacy ratio (CAR). Banks can acquire these securities to meet the regulatory requirements set by the Indonesian Financial Services Authority (OJK), ensuring they maintain a sufficient capital base while supporting their lending activities. The issuance of SRBI does not have a negative impact on banking intermediation, supported by ample bank liquidity and the average outstanding interbank call money borrowing and interbank repo obligations in rupiah, which are still below the pre-pandemic level in 2019.
This is supported by BI's survey on banking, which stated that SRBI is not a substitute for credit, and SRBI purchases use idle funds and allocations from excess liquidity. The bank currently prioritizes credit disbursement, and placement in SRBI is intended to manage short-term liquidity needs. SRBI is indicated to push for a yield adjustment in SBN with a 1-year tenor. If the yield adjustment for all SBN tenors increases by 100 basis points in Q4-2023, the bank is estimated to potentially experience an unrealized loss of Rp 46.84 trillion in that quarter. However, the bank has a relatively high CAR to absorb potential losses from the yield adjustment and ensures their ability to support the country's economic growth.
The issuance of SRBI is one of the strategies employed by BI to expedite the transmission of monetary policy. The interest rate hike implemented in October 2023 was a measure taken to safeguard the stability of the rupiah exchange rate. The policy interest rate being higher than the Fed Funds Rate stimulates higher yields in Indonesia compared to the United States, attracting global investors to engage in the Indonesian financial market and fostering capital inflow. The existence of SRBI presents itself as an alternative investment opportunity for global investors to allocate their funds.
