Tight Liquidity in Banking System

KOMPAS/PRIYOMBODO

Bank Indonesia Governor Perry Warjiyo (left) talks with Bank Indonesia Deputy Governor Erwin Rijanto (center) and Rosmaya Hadi (right) in a press conference after the Bank Indonesia Board of Governors (RDG) Meeting in Jakarta on Thursday (21/3/2019). Bank Indonesia decided to maintain a 7-day Reverse Repo Rate of 6.00 percent, a deposit facility interest rate of 5.25 percent and a lending facility interest rate of 6.75 percent.

The tight liquidity still clouds the country’s banking industry, especially with regard to small banks. To overcome this, Bank Indonesia (BI) has launched a number of monetary operations and other policies.

According to the central bank, overall liquidity in the banking system is still adequate (Kompas, 3/25/2019). The problem is, though, that the liquidity tends to be concentrated on large-scale banks, especially the commercial banks in the capital categories BUKU IV (with core capital above Rp 30 trillion (US$2.1 billion)) and Buku III (with a core capital of Rp 5 trillion-Rp 30 trillion).

By contrast, small banks in the categories BUKU I and II with capital of less than Rp 5 trillion mostly suffer a liquidity problem. This condition should not be taken lightly. Based on experience, banking crises generally start with liquidity problems. Banks with a liquidity problem can trigger a crisis of confidence and have a systemic impact, such as in the 1998 crisis. As a consequence of the tight liquidity, banks compete for public funds (third-party funds/DPK) by offering higher interest rates that may trigger an “interest rate war” in the banking system.

This can put commercial banks with weak capital in danger. To prevent it, BI has taken several measures to ease liquidity through a mix of policies, including monetary and macroprudential operations. During the period of December 2018-January 2019, BI injected as much as Rp 195 trillion to increase liquidity.

The tight liquidity reflects in the banks’ loan-to-deposit ratio (LDR), which is above 92 percent, or above the upper limit set by BI. That means the banking sector has reached its maximum effort in carrying out credit expansion. The tight liquidity is a result, among other factors, of slow growth in third-party funds, particularly deposits, amid rising US interest rates last year. The stability of BI\'s benchmark interest does not help much in easing the liquidity in the banking system.

KOMPAS/PRIYOMBODO

Customers conduct banking transactions at BNI Digital Branch in Gandaria City, Jakarta, Saturday (16/3/2019). Digital banking services in shopping centers that remain open on weekends are crowded with customers.

Tight liquidity is also a result of banks competing fiercely with the government in attracting public funds through the issuance of bonds, especially to finance its infrastructure projects.

BI also mentions seasonal other factors – such as high liquidity needs for individual and corporate tax payments at the end of March and a repatriation of dividends of foreign companies in April – as other causes of the tight liquidity in the banking system.

According to a number of observers, the tight liquidity is also associated with the large number of banks in the country and the fact that many banks are still too conservative and too dependent on deposits to support their liquidity.

For this reason, in addition to efficiency and consolidation, banks are also required to be more creative and innovative in financing. The tight liquidity can hamper lending, so it can have an impact on the credit growth target, which is estimated to remain low in 2019. This, in turn, can affect economic growth.

KOMPAS/WAWAN H PRABOWO

Queuing for Transactions at the Bank - Residents line up to make transactions at Bank Jabar Banten (BJB) on Jl. Haji Juanda, Bekasi city, West Java, Monday (31/12/2018). The queue happened because it was the open day between weekend holidays and New Year 2019.