CENTRAL BANK'S NEW REGULATIONS TO BOOST REAL SECTOR

By Andi Abdussalam

Jakarta, Sept 20 (ANTARA) - The development of the real sector in the country which so far only runs at a snail's pace will find a new boost when newly-issued regulations of Bank Indonesia (BI/the central bank) are effective beginning next year.          Thus, the BI policies  regarding banks' minimum reserve requirement (GWM) and loan-to-deposit ratio (LDR) will in turn generate the country's economic development in the long run.          "If applied consistently, the BI policy on LDR will help develop the real sector," Chairman of the Indonesian Young Entrepreneurs Association (HIPMI) Erwin Aksa said in a press statement on Sunday.          Bank Indonesia Governor Darmin Nasution has earlier said that banks were facing a big problem with liquidity access by businesses, and if it was left unheeded it would create inflationary pressures that would endanger national economy.          In order to encourage banks' intermediary roles, Bank Indonesia issued a regulation of 8 percent minimum reserve requirement (GWM) based on loan-to-deposit ratio (LDR) ranging between 78 and 100 percent.          This regulation will be effective as of March 2011.          Bank Indonesia will also issue a new regulation on lending rates in November 2010. Based on the new regulation, banks will be required to make public the interest rates of their credits based on each sector.          In response to the central bank's policies, Erwin Aksa said that the financial sector would boost the real sector in the long run so that the big volumes of unpaid loans at banks could be absorbed by the real sector.          "With the new regulations, banks would lead to extend credits and create competition. They will compete to find big and potential customers. In the meantime, bank customers will also look for interesting credit schemes offered by banks," he said.          After all, he said, the transparent prime lending rate regulation will also make businesses easy to find competitive banks.          So far, businesses felt that banks covered up many things, particularly with regard to the percentage of their credit interest rates, he said.          "It seems that the big number of banks in the country is not yet able to produced a competitive market apart from the consumption sector," the HIPMI chairman said.          In the meantime, BI Deputy Governor Halim Alamsyah  said BI was upbeat its newly-issued regulation of minimum reserve requirement based on loan-to-deposit ratio would encourage sound competition among banks.          "Banks which raise their lending rates mean that they transfer costs to customers to prevent a shortfall in their margins. However, they will face competition from other banks which do not raise their lending rates and reduce their margins because their margins are already high. Let's see how the competition will look like," he said.          Halim said the increase in primary reserve requirement to 8 percent from 5 percent and the obligation to keep LDR at a range of 78-100 percent would likely raise banks' fund management costs.          However, banks should not transfer the costs to customers and should start reducing their high margins, he said.          He said the central bank had already considered all the possibilities as a result of the new regulation.          "Therefore, we have not as yet announced all of our policies. Our next policy is that we will ask banks to announce their prime lending rates," he said.           Hopefully, BI would issue the policy requiring banks to announce their prime lending rates later this year, he said.           Under the new regulation, banks that have LDR outside the target range will be subject to disincentives based on the difference between the LDR and the target range. If their LDR exceeds the target range with adequate capital they will deserve incentives.          The regulation will come into force as from March 1, 2011 to give banks a chance to meet the target range.          As regard to the loan-to-deposit ration,  Bank Indonesia  Governor Darmin Nasution said banks did not need to increase their lending rates to meet the new requirement.          "There are several ways to increase the LDR such as by reducing  third party funds. So I do not agree that the new reserve requirement is causing banks to bear higher costs," he said.          He said by reducing  third  party funds  banks would incur lower costs of funds so that they  could even cut their credit interest rates.          The objections to the new reserve requirement policy which was to be implemented in March 2011 did not come from all banks as some of them already had an LDR above 78 percent. According to BI data the average LDR of banks in the country in September reached 78 percent.          Objections to the policy, he said, only came from a number of big banks (BCA, Bank Mandiri and BNI) whose LDRs  were  below 78 percent because they had huge third party funds.          "These banks seem intent only on  collecting as many third party funds as possible. Just look at the prizes they are offering in their promotions," he said.          But, he said, BI was  hoping  the banks would be able to meet the lowest limit of the LDR next March. "I think they will be able to achieve it. If they cannot they should increase their reserves," he said.          He said BI had issued the policy to encourage banks to extend  more loans,  especially to productive sectors to help boost the country's economy and speed up development.          Darmin predicted the growth of credits this year would still be below 20 percent although early in September it had reached 21 percent as credits were predicted to drop from September to the end of the year.          Therefore,  he said, banks should follow the new LDR-based  reserve requirement so that their credit extension performance would remain high. ( T.A014/H-NG/f001  ) 20-09-2010 09:52: