Tuesday 3 June 2014

READING THE SIGNALS OF DEPOSIT INSURANCE INTEREST



Deposit Insurance Agencies [LPS] had increased insurance interest in rupiah by 25 basic points to 7.75% in publics banks and 10.25% in People’s Credit Banks [BPR]. LPS press release mentioned that for deposits in foreign currency the interest remained at 1.50%. The interest level would be effective per May 15 to September 14, 2014.

The stipulation of deposit insurance interest was based on some considerations like increase in interest rate of the banking sector as seen in benchmark rate monitored by LPS at 24 basic  points from January to April 2014.

Other consideration was that deposit insurance interest level must cover at least 90% of total number of customers in all banks. Besides, banks liquidity for the next few months could still be influenced by many factors.

On the one hand, the position overseas net asset at money in circulation was rated at relaxing, while on the other hand the domestic asset component was still tightening. According to LPS rule, in the event that deposit interest agreed between bank and depositor exceeded the interest level of deposit insurance, the customer’s deposit was no longer guaranteed.

In regard to the above, it was mandatory for banks to inform depositing customers on the effective interest level of deposit insurance by placing the information on easily accessible spots to customers.

Accordingly, LPS pled banks to protect customers and expand the scope of insurance interest level, LPS pled banks to be prudent and constantly observe the rules of insurance interest rate.

In running banking business, considering the liquidity condition in the future, banks were expected to observe the rules on liquidity management set by BI and the rules for bank controlling by OJK.

From LPS decision it was presumable that the condition of bank’s liquidity would still be tight. Bank’s liquidity in the next few months would still be influenced by many factors. On the other hand domestic asset was also showing sign of strengthening.

In fact increase of LPS rate was predicted to elevate cost of fund. There could even be interest war. Moreover lately the Government was busily seeking for State Budget [APBN] funding through release of promissory notes line Sukri and Saving Bonds Retail [SBR].

In Sukri Serie 006 and SBR serie SBR001, the Government stipulated size of coupon 8.75%. Automatically it would stimulate banks to increase their deposit interest rate so depositors would not liquidate their fund for buying Government bonds.

All in all the burden to be shouldered by banks would soar up. With the recent increase of LPS rate, definitely it would stimulate banks to increase deposit interest; eventually cost of fund would soar up. The result net interest margin [NIM] would be suppressed.

To keep NIM from being suppressed, chances were banks would increase credit interest. The trend was apparent this May when some debitors were beginning to be aware of lending rate increase. This increase was not a good thing in the eyes of debitors. However from the bank’s viewpoint, there was no other option but to do so to keep NIM from being burdened by cost upjump.

One thing was increase of LPS reflected a market condition having liquidity tightening especially on Rupiah deposits, moreover toward the month of Ramadhan when almost certainly liquidity would be tighter. Banks would consider to increase credit rate, although soon NPL ratio was the risk.

So there would be no interest war no the loose; advisably OJK played their role as controller. An interest was would not be sanctioned by banking authorities. Every bank had to sacrifice NIM which was constantly eroded by application of rate way above LPS rate.

If increase of credit interest was happening massively, moreover on productive credit, i.e. Credit for Working Capital [KMK] and Investment Credit [KI] the driving force to economic growth would lessen. It was debitors would suspend credit facilities or debitors were reluctant to liquidate their credit facility for fear of high interest. So undisbursed loan was expected to increase. In that case it was reasonable that economic growth assumptions would be axed by the Government from the previous 6% to 5.5%.

Even without LPS rate banks were already restricted in terms of credit expansion which could only grow at around 15%-17% according to BI’s direction. This was because inflation expectation was still high and Deficit of Current Transaction was still high. So it seemed reasonable that BI had to keep BI rate at 7.5%. This was clearly the clear implementation of tight money policy which had been constantly maintained by BI for the past year.

Now banking circles were still waiting if the increase of LPS rate would be BI’s consideration to increase BI rate in the next Board of Governors’s Meeting next June. Certainly they were not expecting BI rate increase but BI rate downturn instead. Considering inflation pressures and deficit threat would widen in Q-2 and Q-3 it seemed that BI would still maintain at 7.5% till end of year. (SS)

Business New - May 21, 2014

No comments: