THERE IS NO INTEREST RATE CARTEL

Sometime ago, the business competition supervisory commission (KPPU) has accused the banks of committing interest rate cartel. The commission’s allegation refers to the bank’s policy to maintain high prime lending rate (SBDK) when the BI rate has gone down.

               

Responding this, bank Indonesia views that so far it has not seen any indication of bank interest rate cartel. According to the central bank, every bank has reported the prime lending rate which reflects the bank’s actual condition and not a cartel.

               

In addition, the banks also did BENCHMARKING and PEER GROUP making the banks able to compete so that the interest rates which are relatively similar is not because there is a cartel. Efforts to make low interest rate are associated with three things.

               

First, control the inflation rate at a low level, at least below 5%. This relates to core inflation compenent, VOLATILE FOODS, and ADMINISTERED PRICE. It is certainly not the domain of banking to do so, but the central bank and the government.

               

Second, the determination of interest rates on saving indicates interest rate conditions in the financial market. With open competition in the banking industry with a number of players as much as 120 banks, it is unlikely the banks formed an interest rate cartel.

               

Clearly, the banking market is actually dictated by the fund owners, particularly large fund owners. They are the ones who determine how much the interest rate on savings is acceptable. The tendency is higher interest rates on savings will be their target. So, there is where the competition for the funds from depositors happens publicly.

               

Third, the efficiency of the banking system. This is reflected in at least two key financial ratios of banks, which is the ratio of operating expenses to operating income (ROA) and the ratio of operating expenses to net income (cost to income ratio/CIR). The lower the ROA and CIR, it shows the efficiency of bank’s operations. Efficient in terms of management cost is able to minimized as low as possible, it is also efficient in the allowance for losses. The latter is related to the quality of assets, primarily loans.

               

In the banking system, banks are required to establish loss reserve or provision for assets depending on the collectability of such assets. The lower the collectability of assets, the greater the provision established. To note, the provision for losses is “cost” for the bank. Thus, the lower the loss reserve, the better for the bank.

Of the three solutions, bank Indonesia will focus on the second and third aspects, namely the determination of interest rates depends on the market mechanism. The consumer society will determine which bank is an option for saving money or providing credit facilities.

The financial services authority (FSA) also held the same views. According to FSA, there are oligopolistic practices like that. So far, FSA see that competitions among banks in the country are still quite healthy. It can be seen from the competition between the top banks. It is recommended that the competent authority, in this regard, bank Indonesia, to coordinate with KPPU so that the bank cartel allegations could be straightened.

Either bank Indonesia or the FSA notice that some banks have lowered their interest rates down to single digit levels. But, if there are those who asked the interest rates to be lowered more, the two do not question, even agree. Therefore, the two authorities asked the banks in the country to further enhance their efficiency efforts.

For example. There are expenditure items that can be shared to be more efficient. Such as development of human resources or information and technology. Efficiency measures such as these will also be the concern of the authority or regulators.

In practice. Banks also compete in capturing public funds through a variety of strategies. Advertising media or promotions is one strategy to attract fund owners to save money. These activities are carried out by small-scale banks, medium and large scale banks. So if they are still competing openly, it certainly does not make sense that they form a cartel.

In the context of lending, the competition was still going on. Banks that provide lower interest rates would be an option for the debtors. However, in the context of syndicated loan involving several banks, the determination of credit interest rates will be the same. Such is certainly not in the category of cartel, because the pattern is a syndication or consortium.

To be sure, if there is an indication of cartel or oligopoly practices in the determination of interest rates, the central bank would have admonished the bank first before KKPU. Bank Indonesia certainly understand and know if there are indications of a cartel or not as it can conduct surveillance (off-site supervision) by examining bank’s report and documents.

If this is the case, before KKPU alleges the bank’s, it is better that the competition watchdog coordinate with the banking regulator, in this case bank Indonesia. With the way the commission proposed an indication of interest rate cartel without first obtaining confirmations from regulator, it could be interpreted that the commission ignored the banking regulatory authority. The proof is now the alleged cartel issues are being debated openly in the mass media.

As a fellow agency oriented toward regulating, monitoring and control, coordination and communication could be done to allow the exchange of data and information. If necessary, bank Indonesia and KPPU make a memorandum of understanding (MoU) so that the things that can be solved institutionally will not be sticking to a public space that reflects disco ordination between institutions. (E)

Business News - April 17,2013