INFLATION, INTEREST RATE AND CREDIT GROWTH

Bank Indonesia had asked the banking sector especially of the lower-middle level [BUKU business group] 1 and 2 to put brakes on credit extention. The reason was that BI saw the potential of liquidity restriction in line with unstable global economy. According to BI, increase of BI rate of 175 basic points lately, forced the banking industry to make adjustment in foxed deposit interest to 2339 points. Meanwhile credit interest rose by 49 bps per December 2013.

Therefore BI plat that the BUKU 1 and 2 banking group whose liquidity was limited not to be too aggressive in extending credit as the funding resources was limited. BI was also coordinating with OJK not to drive credit too aggressively.

For information BI had classified banks into four categories. BUKU 1 category were banks with core capital below Rp1 trillion. BUKU 2 with core capital between Rp1 to Rp5 trillion. BUKU 3 were banks with core capital between Rp5 – Rp30 trillion. BUKU 4 were banks with core capital more than Rp30 trillion.

Increase of BI rate made banks to rush for getting Third Party Fund [DPK] so as not to turn to foreign banks. The most common way was to increase fixed deposit interest which was expensive fund above increase of BI rate and Deposit Insurance Increase [LPS]. Inter-bank rush for liquidity drew BI’s attention for oveservation. BI rated that this year credit growth was ideally in the range of 15%-17%.

Unfortunately, in spite of warnings, some banks kept throwing credit amidst high third-party-fund competition. Under the circumstances BI could examine banks, systemic or non systemic banks while still coordinating with OJK. For example in case of high credit growth in a bank, BI would inspect the bank to check whether the bank was still playing by the rules.

Bankers admitted that the risk of Quantitative Easing in the USA was still there; this was on account of US economy which was in a process of recovery, although with sign of slowdown according to the latest US economic data. Moreover there was rumors that US Benchmark rate known as Fed Fund Rate would as soon as possible be increased by quarter IV-2014. Most probably the Fed would continue to expand the amount of tapering Off from December 2013 last to September 2014.

Previously OJK did revise credit growth target of 2014 from the previous 17% - 18% to below 17%. The revised bank’s credit growth target was included in BI’s target in the range of 15% -17%. OJK also asked the banking industry not to increase credit interest too high in the sense that net interest margin [NIM] of banks could be slightly “sacrifified” so credit could remain healthy.

All were based on the assumption that this year was, broadly speaking, a year full of challenges. Therefore, BI would continue tight money policy till end of 2014. However, BI was optimistic the condition of this year was better than last year such as in controlled inflation, Rupiah value still synchronous with fundamental economy and deficit in current transaction which would lessen.

Apparently this year the path was rough and stony. Probably BI would trod through the path with high BI rate to maintain economic stability. This was confirmed by BI’s observation this year in regard to three external risks in Indonesia’s economy which would influence the future course. The external risk would be BI’s consideration in maintaining BI rate this month but still observing economic condition, globally or locally. The three risks should be considering its direct influence on Indonesia’s economy:

Firstly, normalization of the Fed’s policy. Policy’s adopted in the USA would affect capital inflow but the Fed’s policy today was still rated as moderate. Evidently the Federal Open Market Committee [FOMC] adjusted benchmark rate of 1% to 0.75% in 2015 and 1.75% in 2016 which indicated that US economy was not too strong.

Secondly, the condition in China which in this year set economic growth of 7.5%. On the other hand, China was having problems in the credit sector like the shadow banking and overgrown credit growth. This brought anxiety to the Government of China who were wondering if they could meet the growth target. And yet China’s economic condition was sensitive to Indonesia’s export performance.

Thirdly, the condition of developing countries which would influence Indonesia’s economic course. All were definitely external risks to be anticipated. The conclusion: the year 2014 was not a friendly year for debitors, personal creditors or corporations. Not just because of the ever increasing credit interest but also because banks were getting more selective in pipelining credit. Above all, BI was beginning to call out banks to put breakers in credit flow.

Tight liquidity was a serious threat not ignorable by the banking sector this year. In fact, there was not much to be feared this year, as Indonesia’s economic condition kept improving. Soaring inflation was subsiding while Rupiah was strengthening convincingly. This was in fact BI’s signal to make a surefire strategy.

Increased BI’s benchmark rate triggered high inter-bank competition in obtaining people’s cheap fund. When BI rate increased, deposit interest, especially fixed deposit interest, increased accordingly. However, to keep inter-bank competition under control, banks could not loosely increase interest as they please. But the short of it was that since BI rate increased by 175 basic points in 2013, banks preferred to scarify their Net Interest Margin [NIM] rather than losing competition.

Other consequences was, to score good growth performance with thinned margin, bank must play on the volume side. In other words, thin margin must be compensated by increased amount of credit; but the dark side of it was that with high number of creditors and high amount of credit the fear of NPL turned just as high.

The only thing was that now there was other opinion that liquidity was something to be controlled by BI as monetary authority. Unfortunately, BI was using liquidity as parameter to put brakers on bank’s credit, which slowed down economic growth. To strengthen liquidity, BI could absorb money into the banking system. There were many ways do it; for example by bying bonds etc.; but it seemed that BI did not wish economy to grow high as seen in their tight credit policy.

Some analysts were made nervous by BI’s step as they were rated as not having a sound economic policy. In times when all economic parameter signaled that economy must expand, BI’s policy was not supportive to it. Foreign capital was also coming back, as seen from growing investment. So it was highly recommendable that BI review their monetary policy to respond to growing global opportunities.

As with fear that inflation might soar up and deficit in current transaction might swell, BI could foster coordinator with the Government, in this case the Ministry of Finance as holder of fiscal authority. Economic stabilization should not only through monetary strategy but also fiscal strategy.

If objectives were met, gradually tight credit policy could be eased so credit expansion could be enhanced to the level of 18% - 20% to support this year’s economic growth target to 5.8% - 6.2%. (SS)   

Business New - March 12, 2014