Indonesia issues new bank rules to spur credit growth

JAKARTA: Indonesia’s central bank will give banks greater flexibility in managing liquidity and credit in new rules announced yesterday that are aimed at getting banks to lend more.

Bank Indonesia (BI) cut its benchmark policy rate 200 basis points in 2016 and 2017, but banks’ loan growth has remained well below the double-digit rates of earlier years. Annual bank credit grew 8.2% in February.

“The banking industry tends to follow an economic cycle and the new instruments will act as tools to help guide them to counter the cycle,’’ head of BI’s macroprudential department Filianingsih Hendarta told reporters yesterday.

In the current “lethargic condition”, Hendarta said credit growth would not reach BI’s 2018 target of 10-12% without the new rules.

“If you ask me if this could spur loan growth, we hope so by giving banks flexibility,” she said.

“The central bank has no more room to support growth in Southeast Asia’s largest economy by further trimming its benchmark rate, but it will try to do it with looser macroprudential policy,’’ deputy governor Mirza Adityaswara reiterated.

“But it does not mean BI is changing its neutral stance,’’ BI’s incoming deputy governor Dody Budi Waluyo said .

The central bank announced in January that it would relax its reserve requirements for banks and would apply similar averaging rules for foreign currency deposits.

The announcement has similar details to the one in January, but banks will get no interest on reserves they keep at the central bank. Banks now get 2.5% interest for the funds they park at BI that is above the required level.

“The new rules should encourage banks to put excess liquidity in financial market assets, while also reducing the volatility in the overnight money market,’’ Waluyo said.

However, Barclays’ economist Rahul Bajoria said this might not mean banks would lend more.

“It may increase liquidity in the interbank market, but not necessarily for credit growth itself due to the short flexibility period,’’ he said.

“BI also introduces a ‘macroprudential liquidity buffer’ that will replace rules on secondary reserve requirements,’’ Hendarta said.

Like existing reserve rules, a bank will still have to put 4% of its total savings in BI bonds or sovereign bonds. But the new regulation will allow the bank to repo 2% of those bonds to the central bank in the case of tight liquidity.

BI also revised rules on the loan-tofunding ratio and, instead, introduced the “macroprudential intermediation ratio (MIR),’’ Hendarta said, saying a bank’s holdings of certain good corporate debt would be counted as loans.

Banks must maintain MIR between 80-92% or face a penalty of increased reserves at BI.

Islamic banks will be given similar flexibility in managing both their liquidity and credit, but with different ratios for reserve requirements.

All changes, except the ones for Islamic banks and foreign currency reserve requirement ratio, will be effective on July 16. The others will take effect on Oct 1.