The Duties of BI’s Senior Deputy Governor
Paul Sutaryono
Indonesia Deposit Insurance Corporation (LPS) commissioner Destry Damayant, as the sole candidate to replace Bank Indonesia’s (BI) Deputy Governor Mirza Adityaswara, will soon undergo a fit and proper test at the House of Representatives.
What are the responsibilities and challenges of the new senior deputy governor? Even though the supervision of banks has been handled by the Financial Services Authority (OJK) since Dec.31, 2013, BI still plays an important role, such as in establishing and implementing monetary policies (such as interest rates, the rupiah exchange rate and inflation) and regulate and maintain a smooth payment system.
Duties and challenges
So, what are the responsibilities and challenges of the incoming senior deputy governor? What are the strategic steps that must be taken to deal with various duties and challenges?
First, even though the central bank’s role as banking supervisor has been taken over by the OJK, BI still has to establish good coordination with the OJK. Now, BI and the OJK have their own authority to carry out macroprudential and microprudential policies. Good coordination can create financial services that are more market-friendly.
However, the Fed’s decision went against President Donald Trump’s wishes. Previously, Trump had asked the Fed to lower the FFR to encourage and stimulate economic growth. The US economy grew 3.2 percent, compared to Indonesia’s 5.07 percent as of March 2019.
Related to this, BI should remain careful in anticipating any changes in the FFR because it can affect its benchmark interest rate (BI seven-day reverse repo rate/BI 7 DRRR) which has been maintained at 6 percent for the past five months — precisely since Nov. 15, 2018. Changes in the benchmark interest rate will affect the interest rate on deposits, which will then push up lending or credit interest rates.
How high are the existing lending interest rates? An Indonesian Banking Statistics (SPI) report released on April 26 report shows that the average interest rate on commercial bank loans rose slightly by 7 basis points (bps) from 10.51 percent as of November 2018 (when the benchmark interest rate was raised from 5.75 percent to 6 percent) to 10.58 percent as of February 2019 for working capital loans.
In contrast, investment loans fell 15 bps from 10.51 percent to 10.36 percent and loan for consumption also fell 12 bps from 11.80 percent to 11.68 percent in the same period. It indicates that the commercial banks still put a hold the increase in lending rates. That is a positive effort to stimulate business activities
in the real sector. However, the net interest margin (NIM) declined from 5.12 to 4.81 percent. Why? Because the increase in deposit rates was higher than the increase in lending rates. Unfortunately, the commercial bank\'s NIM is still bigger than those of other ASEAN banks, which range from 2 percent to 3 percent.
Third, there are some people who say that the relatively low benchmark interest rate is not effective enough in pushing up bank loans. It should be realized that the benchmark interest rate is actually a supply side. The thing that must be considered later is boosting the demand side, such as the weakening of people\'s purchasing power.
The weakening of purchasing power has led to a decline in demand for goods and services. This has prompted entrepreneurs in the real sector or industrial sector to hold back production. As a result, there is a delay in the disbursement of loans that have been approved.
The SPI report issued by the OJK indicates that undisbursed loans rose by 7.94 percent year-on-year (yoy) from Rp 1.473 quadrillion (US$103.73 billion) as of February 2018 to Rp 1.589 quadrillion as of February this year. However, on a monthly (month-to-month) basis, undisbursed loans decreased by 0.71 percent from Rp 1.601 quadrillion in January to Rp 1.589 quadrillion in February.
It is really good news as it indicates an increase in activities in the real sector. Moreover, the elections are also finished, which could lead to greater political certainty for the real sector so that its activities can be revived again after a wait-and-see period of almost 10 months.
Therefore, the government recently provided social assistance of around Rp 96 trillion and another Rp 40 trillion for holiday allowances and the 13th salary for civil servants, members of the military and the police. Of course, these are part of efforts to increase the people\'s purchasing power. The increase in the activities during Ramadan and Idul Fitri as well as during Christmas and New Year can further push up household spending, which then can contribute to a higher GDP growth.
Fourth, BI is also obliged to constantly inject banking liquidity, even though it once said that liquidity was not tight but uneven. It means that tight liquidity occurred at commercial banks in the BUKU 1 and 2 capital category.
The SPI reports shows that the loan to deposit ratios (LDR) of banks in the BUKU 1 category (with a core capital of up to Rp 1 trillion), BUKU 2 (Rp 1 trillion-Rp 5 trillion) and BUKU 4 (above Rp 30 trillion) were 83.81 percent, 90.40 percent and 90.41 percent, or at the 78-92 percent threshold, respectively, as of February.
Meanwhile, the LDR of banks in the BUKU 3 category (above Rp 5 trillion to Rp 30 trillion) actually reached 101.71 percent, above the threshold and the industry average of 94.12 percent. This indicates that banks under BUKU 3, which consists of a middle-sized commercial banks, actually experienced tight liquidity.
To increase the liquidity of the commercial banks, BI recently issued Board of Governors\' Regulation No. 21/5 dated 29 March concerning the third amendment to Board of Governors Regulation No. 20/11/2018 dated 31 May, 2018, concerning the macroprudential intermediation ratio (RIM) and macroprudential liquidity buffer (PLM).
The RIM of commercial banks and shariah banks will increase from 80-92 percent to 84-94 percent, effective on July 1. However, the imposition of sanctions related to changes in the RIM lower limit and
upper limit will be effective only on Oct. 1. Indeed, the RIM is the minimum primary reserve requirement to funding ratio (GWM-LFR) and extension of the LDR, while the macroprudential liquidity buffer is a secondary reserve requirement. Succinctly put, the RIM is the ratio of loans in rupiah and foreign currencies, plus corporate securities in rupiah and foreign currencies against third-party funds (deposits, demand deposits, savings) plus securities (Paul Sutaryono, Kompas 4/22/19).
Fifth, even though BI has eased the RIM level, commercial banks, especially those in the BUKU 3 and 4 category, still have to work hard to be able to maintain liquidity, especially when associated with the obligation to have a liquidity coverage ratio (LCR) of at least 100 percent for at least 30 days. This obligation is contained in OJK Regulation No. 42/2015 concerning the obligation to fulfill the liquidity adequacy ratio for commercial banks, effective on Dec. 23, 2015.
To be precise, BI is strongly advised to maintain the liquidity of national banks because it will remain an important issue in years to come.
Commercial banks should be further encouraged to raise their capital to face a variety of potential credit risks, operational risks, market risks and liquidity risks.
Private sector foreign debts
Sixth, the tight liquidity will encourage more corporations to raise funds outside the banking sector, namely the capital market or foreign debts. For this reason, BI needs to fortify the financial system from a variety of potential risks given the raise in the funding from the capital market and foreign debts. According to BI, foreign debts of the private sector rose by 10.8 percent yoy in February.
The foreign debts of the private sector mainly came from the procurement of gas, coal-fired, hydro and geothermal power projects, which increased 26.8 percent; projects related to mining and quarrying, which went up 26.8 percent; financial and insurance services, which increased 9.34 percent; and processing industries, which rose 0.5 percent (Kontan, 18/4/2019).
It\'s not just data. The point is that the interest rates on foreign loans are relatively lower than the loans in rupiah. However, there are hidden risks (inherent risks). For an example, when the rupiah exchange rate weakens, the value of foreign debts will automatically increase, especially when there is a risk of default and a decline in exports. Fortunately, exports increased 11.7 percent month-on-month to $14.03 billion in March.
Seventh, it will not only burden the private sector as a debtor, but also BI as a member of the Financial System Stability Committee (KSSK). Therefore, BI is also required to control the rupiah exchange rate, especially against the risk of weakening due to a slowdown in the global economy. Now, the rupiah exchange rate is still weak at Rp 14,200 to Rp. 14,300 per US dollar which, among other things, was caused by the decision of the Fed not to reduce its benchmark interest rate.
However, the announcement of the results of the presidential election by the General Election Commission (KPU) on May 22 should become an important driver to strengthen the rupiah. The result of the election should be able to remove the political uncertainty that has haunted the real sector or the business world.
Armed with such various strategic measures, BI will increasingly be able to maintain stability in the national financial system in order to foster economic growth.
Paul Sutaryono, The expert staff of the BUMN Study Center, banking observer, former assistant vice president of bank BNI
