Bank Indonesia (BI) had just lowered BI Rate from 7.75 to become 7.5% at the Meeting of the Board of Governors last week. The step was response to inflation expectation which was low and deficit of current transaction being under control in 2015.
Inflation was expected to be low because the Government had adopted the fixed subsidy policy for oil, while price of world’s crude oil was now low. For 2015, inflation was targeted at 3% - 5%. Deficit ratio by end of 2014 was still around 3% of GDP and in 2015 the condition in 2015 would not be too far different.
However, there would be significant change on product pattern. Deficit would be governed by import of productive goods for infrastructure building, not consumptive goods like oil in vast volumes.
Downturn of BI rate been going on for long. Lately, BI rate was down by 25 basic points in February 2012 to become 5.75%. Regardless of polemics over benchmark rate, interest rate for monetary operations which was supposed to be bank’s reference in determining deposit interest, was not much discussed.
Bank interest for monetary operations was reflected in overnight deposit in banks with reference to deposit facility and reverse repo for deposit up to one month with State Promissory Notes (SBN) as instrument.
Deposit facility was facility for Rupiah at BI facilitated by banks, while Reverse Repo was transaction of share buying with promise of resale at stipulated time and price.
In case of three months and six months, the instrument was BI Fixed Deposit Certificate (SDBI) while 9 months deposit was SBI.
In response to BI rate stipulation which was down by 25 bps last week, many economist believed that BI was already growth orientated. Understandable because, unpredictably BI dared to lower BI rate although annual inflation (January 2014 – January 2015) was high enough, i.e. around 6.9%. it seemed hat future expectations was BI’s main consideration in lowering BI rate. Moreover deficit ratio had moved down to 2.9% against GDP by end of 2014 last.
Many economist reckoned BI’s step was inspired by central banks of other countries who lowered benchmark rate with the objective of depreciating their currencies to stimulate export. Now the Mid-rate phenomenon war was getting worldwide, indicated by act to weaken national currencies like in China, India, Australia and Singapore.
It seemed reasonable if anyone believed that BI’s step to lower BI rate would downpress rupiah amidst anxiety over possible rate increase by the Fed this year.
In this case BI argued that through monetary operations, BI interacted directly with banks. Although the micro-prudential management has shifted to OJK by command of the Law the “heart of bank” was still in BI. Monetary operations was needed because banks possessed liquidity excess which was sometimes not absorbable by the moneymarket.
The liquidity excess was then placed at BI. Banks placed their excess of liquidity in a different way, so BI offered the option of one-day, two weeks, one months, three months, and nine month deposit. There must be reason why liquidity excess could not be absorbed by the market. i.e. instruments at the moneymarket was still limited.
As banks turned deeper, the banks who placed liquidity excess at the moneymarket, could anytime convert their instrument into fund, especially for short term purposes. As long as the moneymaket was not too notably developing, banks would place excess of liquidity at BI.
In managing liquidity, BI seemed to be adopting a too tight liquidity policy. Such a perception came up because what judgement was only focused on BI rate which through 2014 resisted at 7.59% and up again to 7.75% in November 2014. And yet from the angle of monetary operations, the bank interest was way below BI rate.
For example in 2014 last, overnight interest referred to deposit facility amounting to 5.75%. bank interest reverse repo for 3 months tenure was 6.5% and 6 month tenure was 6.8%. In the case size of bank interest was imposed for a period of one year. If bank placed for just one day, meaning interest was proportionally set at 1/360 of interest; the same calculation was applicable for fund placement of one month, three months and six months
Only problem was that big depositors referred to BI rate to demand high interest from banks, or even special rate. So the perception that interest war was going on was actually real. If banks could think rationally, they should refer to monetary operation rate, not BI rate.
There was no doubt that lowered BI Rate had its effect on interest of monetary operations. Monetary operation interest was bound to be down, although not as much as reference interest. Monetary operation interest went down close to 25 basic points.
Net Interest Margin/NIM went down not because downturning credit interest but because of increasing cost. So bank should be wise in stipulating deposit interest and be keen eyed in judging which customers deserved high, medium or low interest. Accordingly, bank must have the wisdom to see which fund was cheap and which fund was costly, be re structuring the fund.
Banks must be able to procure cheap fund more than costly fund; banks must not even try to offer high return to deposit products of cheap fund category. In that case banks would have to face NIM’s pressure; pressures could also be from other profitability ratio.
For that matter banks must be eagle eyed to managed people’s fund through effective strategy in either acquisition or retention platform. Expansion of retail customer bases became important compared to corporate customers as most retail customers were not demanding high interest as typical corporate or institutions.
The more individual retail customers enlisted, the better for banks because dependency on one or two big customers could be minimized. With big individual customer’s population, firmness and stability of deposit volume would be better secured. In that case whether BI would lower BI rate or not it would not affect banks too significantly. Bank’s managerial capability was the key solution to maintain bank’s liquidity whereby they could play their roles ad intermediary agency. (SS)
Business News - March 4, 2015