LPS asks banks to avoid rate competition

JAKARTA. The Deposit Insurance Corporation (LPS) has called on domestic lenders to exercise prudence in their banking practices to avoid the “bust” risk that may arise in the near future.

LPS executive chairman Kartika “Tiko” Wirjoatmodjo said that the banking industry might experience a bust in 2015 triggered by the US Federal Reserves’ plan to increase its interest rate.

“The rate increase is actually expected, but we are hoping that banks will take precautionary measures, so that possible capital outflow will not have severe impacts,” Tiko said on the sidelines of a LPS seminar entitled “Befriending with ‘Boom-Bust’ Cycle”.

The “boom-bust” terminology is popularly used to describe an economic cycle marked by periods of growth followed by a declines, slowdowns, or contractions.

The prospects of a bust period seems increasingly likely for the Indonesian economy, as the Fed is estimated to begin jacking up the rate next year. Bloomberg reported that Fed officials had raised their median estimate of the rate hike to 1.37 percent at the end of 2015, up from the current 0.25 percent.

The rate would continue to increase until reaching 3.75 percent by the end of 2017, the Fed said in its Summary of Economic Projections, according to Bloomberg.

Analysts have said that higher rates would prompt capital outflow from emerging markets, including Indonesia, to the US. The outflow risk in Indonesia is even more pronounced, as foreign investors hold 37.4 percent of total government bonds in the secondary market.

Tiko said that banks must adapt to the situation by adjusting their lending and funding growth rates. “The adjustments will prevent banks from engaging in time-deposit interest wars, just like we saw from January to July,” he added.

The “war” has led to banks offering interest rates that are higher than the benchmark set by the LPS, which is 7.75 percent. Some lenders have offered interest rates as high as 10.7 percent.

Prudence is also needed because the LPS had not yet obtained the required amount of funds to cover customers’ funds, according to Tiko.

Currently, the holding requirement is set at 2.5 percent of total third-party funds, meaning that the LPS should have at least Rp 95.8 trillion (US$7.99 billion). However, data from the LPS showed that the current funds amounted to just Rp 42 trillion.

The LPS’ recommendation echoed a recent call issued by the Financial Services Authority (OJK) who on Monday, the OJK summoned 19 major banks for a special discussion aimed at softening the interest rate competition. (Tassia Sipatuhar)