Indonesia's new bank rules aimed at spurring credit growth

JAKARTA (Reuters) - Indonesia’s central bank will give banks greater flexibility in managing liquidity and credit in new rules announced on Thursday that are aimed at getting banks to lend more, officials said.

FILE PHOTO: People walk in the courtyard of Indonesia's central bank, Bank Indonesia, in Jakarta, Indonesia September 22, 2016.REUTERS/Iqro Rinaldi/File Photo

Bank Indonesia (BI) cut its benchmark policy rate 200 basis points in 2016 and 2017, but banks’ loan growth has remained well below the double-digit rates of earlier years. Annual bank credit grew 8.2 percent in February.

The banking industry tends to follow an economic cycle and the new instruments will act as tools to help guide them to counter the cycle, head of BI’s macroprudential department Filianingsih Hendarta told reporters.

In the current “lethargic condition”, Hendarta said credit growth will not reach BI’s 2018 target of 10-12 percent without the new rules.

“If you ask me if this could spur loan growth, we hope so by giving banks flexibility,” she said.

The central bank has no more room to support growth in Southeast Asia’s largest economy by further trimming its benchmark rate, but it will try to do it with looser macroprudential policy, deputy governor Mirza Adityaswara reiterated on Wednesday.

BI’s incoming deputy governor Dody Budi Waluyo said it does not mean BI is changing its neutral stance.

The central bank announced in January it would relax its reserve requirements for banks and would apply similar averaging rules for foreign currency deposits.

Thursday’s announcement has similar details to the one in January, but banks will get no interest on reserves they keep at the central bank. Banks now get 2.5 percent interest for the funds they park at BI that is above the required level.

The new rules should encourage banks to put excess liquidity in financial market assets, while also reducing the volatility in the overnight money market, Waluyo said.

However, Barclays’ economist Rahul Bajoria said this may not mean banks would lend more. “It may increase liquidity in the interbank market, but not necessarily for credit growth itself” due to the short flexibility period, he said.

On Thursday, BI also introduced a “macroprudential liquidity buffer” that will replace rules on secondary reserve requirements, BI’s Hendarta said.

Like existing reserve rules, a bank will still have to put 4 percent of its total savings in BI bonds or sovereign bonds. But the new regulation will allow the bank to repo 2 percent of those bonds to the central bank in the case of tight liquidity.

BI also revised rules on the loan-to-funding ratio and, instead, introduced the “macroprudential intermediation ratio” (MIR), she added, saying a bank’s holdings of certain good corporate debt will be counted as loans.

Banks must maintain MIR between 80-92 percent or face a penalty of increased reserves at BI.

Islamic banks will be given similar flexibility in managing both their liquidity and credit, but with different ratios for reserve requirements.

All changes, except the ones for Islamic banks and foreign currency reserve requirement ratio, will be effective on July 16. The others will take effect on Oct. 1.

Reporting by Gayatri Suroyo and Maikel Jefriando; Additional reporting by Ed Davies; Editing by Jacqueline Wong