Tight Liquidity Problem
According to Bank Indonesia (BI), bank liquidity is generally not tight. Tight liquidity is affecting only commercial banks in the BUKU I category (up to Rp 1 trillion in core capital) and the BUKU II category (core capital of Rp 1 trillion-Rp 5 trillion).
This means that banks in the BUKU III category (core capital of above Rp 5 trillion-Rp 30 trillion) and BUKU IV (above Rp 30 trillion) are not experiencing any liquidity problems. Why? How we should cope with tight liquidity? How are commercial banks performing?
The Indonesian Banking Statistics (SPI) that the Financial Services Authority (OJK) issued on March 21, 2019 showed that commercial bank loans had increased 12.16 percent year-on-year, from Rp 4.4 quadrillion in January 2018 to Rp 4.98 quadrillion in January 2019.
Lending growth was thus higher than the 11.97 percent recorded in December 2018. In contrast, third-party funds (savings and deposits; DPK) rose "only" 6.35 percent from Rp 4.98 quadrillion to Rp 5.30 quadrillion, while DPK fell from 6.37 percent in December 2018 in all bank categories. This growth, therefore, represented average growth of corporate deposits.
Such deposit growth indicates tight liquidity in the market. Just look at the following data: The third-party funds of BUKU I banks grew 7.34 percent, while those of BUKU II banks shrank 4.33 percent, while the third-party funds of BUKU III banks and BUKU IV banks grew 7.30 percent and 8.06 percent, respectively.
The loan-to-deposit ratio (LDR) is also an indicator of tight liquidity. The LDR of commercial banks jumped from 89.10 percent to 93.97 percent, above the 78-92 percent threshold. BUKU I banks have an LDR of 84.71 percent, BUKU II banks 91.05 percent and BUKU IV banks 90.19 percent. This shows that these three BUKU bank categories did not experience tight liquidity. Unfortunately, the BUKU III banks had an LDR of 101.41percent in January 2019, indicating that they suffered tight liquidity.
Does tight liquidity affect profitability? The profit before tax (PBT) of commercial banks increased 12.28 percent from Rp 175.47 trillion in January 2018 to Rp 197.01 trillion in January 2019. This caused the return on assets (ROA) to increase from 2.50 percent to 2.59 percent, almost twice the 1.5 percent threshold, indicating improvement in the asset quality of commercial banks.
Following are the PBT of each BUKU category. BUKU I and BUKU II banks booked a decline in PBT, with BUKU I banks recording a plunge of 100.78 percent from Rp 1.026 quadrillion to Rp 511 billion, while BUKU II banks recorded a drop of 14.64 percent in PBT from Rp 15.71 trillion to Rp 13.41 trillion. This indicates that BUKU I and II banks were affected by the economic slowdown.
Only the BUKU III and IV banks saw an increase in pre-tax profits: BUKU III banks saw PBT growth of 9.85 percent from Rp 55.63 trillion to Rp 61.11 trillion, while BUKU IV banks saw PBT growth of 18.32 percent
from Rp 103.10 trillion to Rp 121.99 trillion. This shows that tight liquidity affected pre-tax profits at the beginning of 2019.
Various measures
So, what factors caused the tight liquidity, and what actions should be taken to overcome it? First, of course, the increase in Bank Indonesia’s 7-day reverse repo rate (7DRRR) was a factor that caused tight liquidity in the market. Why? Because the banks inevitably had to pay more interest to raise public funds (cost of funds).
In clearer language, banks had to offer higher deposit rates – whether they liked it or not – to raise public funds. The larger the deposits a bank needed, the higher the interest rates it had to offer.
Let\'s look at the deposit rates per BUKU category. BUKU I banks offered an interest rate of 7.90 percent for one-month deposits, 8.30 percent (three-month deposits), 8.20 percent (six months) and 8.10 percent (12 months), while BUKU II banks offered interest rates of respectively 7.20 percent, 7.87 percent, 7.97 percent and 7.47 percent.
Meanwhile, BUKU III banks offered interest rates of 7.17 percent, 7.46 percent, 7.34 percent and 7.15 percent respectively for deposits of one-, three-, six- and 12-month tenors, and BUKU IV banks offered respectively 6.46 percent, 6.32 percent, 6.15 percent and 6.36 percent.
These figures indicate that the smaller the core capital, the greater the deposit interest rate offered. It makes sense. Therefore, as the US Federal Reserve continues to maintain the Fed Funds Rate (FFR), BI should reduce its benchmark 7DRRR from 6 percent to 5.75 percent. This is vital to prevent banks from encountering a liquidity problem, and they also don’t need to raise their deposit rates. A benchmark rate of 5.75 percent is still much higher than those of other ASEAN countries such as Singapore (1.66 percent), Thailand (1.75 percent), Malaysia (3.25 percent), and the Philippines (4.75 percent) – excepting Vietnam with 6.25 percent. Thus, we should not be afraid that foreign investors will run away due to a decline of 25 basis points (bps) in the investment margin.
Second, banks compete with the government in growing deposits as one of the more expensive sources of funding, compared to savings accounts and checking accounts. The government has recently issued a series of retail bonds with coupons of 1.75 percent (175 bps) to 2.15 percent (215 bps) above the 7DRRR of 6 percent.
Let’s check the data. The latest series of retail bonds, the SBR006, was launched on April 1-16, 2019, offering coupons with a 7.95 percent floating rate. The previous bond series offered even higher coupon rates of 8.75 percent for the SBR001, 8.05 percent for the SBR004 and 8.15 percent for the SBR005. Of course, at thtese high coupon rates, investors chose to place their money in retail bonds rather than in deposits at commercial banks. For this reason, the government – in this case the Finance Ministry – should make an effort to resolve the tight liquidity in the market for the sake of the national banking industry.
Funding gap
Third, commercial banks have been suffering a serious financial problem because they have to compete with the government in raising public funds to finance development. For this reason, the OJK and the Finance Ministry should sit down together to resolve the gaps in the various funding sources. Strictly
speaking, the government’s retail bond coupon rates should not be much higher than the average deposit interest rates of commercial banks.
In January 2019, the deposit interest rates (in rupiah) of commercial banks averaged 6.87 percent (one month), 6.90 percent (three months), 7.15 percent (six months), and 6.75 percent (12 months). It appears that banks obtained the OJK’s approval to raise their interest rates against the high coupon rate. The increased interest rates would certainly encourage an increase in lending rates, which will push up the cost of capital for the real sector.
Fourth, BI relaunched on March 29, 2019 its Board of Governors Regulation (PADG) No. 21/5/PADG/2019 on the third amendment to PADG No. 20/11/PADG/2018 of 31 May 2018 on the macroprudential intermediation ratio (MIR; RIM in Indonesian) and macroprudential liquidity buffer (MLB; PLM in Indonesian).
The RIM and RIM Syariah, were revised to 84-94 percent beginning July 1, 2019 from their original range of 80-92 percent. However, sanctions related to changes in the lower and upper limits of the RIM and RIM Syariah took effect on Oct. 1, 2019.
Indeed, the MIR is the minimum required loan-to-funding ratio (GWM-LFR) as an extension of the LDR, while the MLB is a secondary reserve requirement. The MIR is the ratio of rupiah and foreign currency loans plus rupiah and foreign currency corporate securities that meet specific requirements for deposits, demand deposits and savings plus securities.
Indeed, relaxing the RIM and RIM Syariah is expected to help banks to breathe better in the short term, and encourage commercial banks to expand credit. That\'s from the supply side.
Fifth, to the contrary, the government and regulators must take measures in the demand side of credit, for example by imposing base lending rates (BLR; SBDK in Indonesian) that does not really function. The BLR is the central bank’s interest rate reference it issued on Feb. 8, 2011 in Circular No. 13/5/DPNP on data transparency for basic credit interest.
This rule was primarily intended to increase transparency to provide clarity to customers in banking products, including benefits, costs and risks. The transparency was expected to reduce lending rates.
Sixth, tight bank liquidity does not affect cooperatives, which have solid liquidity.
According to PICU (Credit Union Information Center) magazine, loans provided by credit unions (CUs) dropped in November-December 2018 so that the loan outstanding averaged 65 percent, below the ideal level of 70-80 percent. As a result, idle funds are growing in credit unions.
This is an opportunity for banks and credit unions to join hands. The idle funds of credit unions can be placed in banks at high deposit rates, because the banks need funds. Therefore, the two parties should engage in a symbiosis of mutualism: Banks will gain additional liquidity, while credit unions will gain returns on their funds.
Such an approach would help banks emerge from their tight liquidity problem. This would also encourage banks to issue more loans to help spur economic growth.
Paul Sutaryono, Expert staff, BUMN (State-Owned Enterprises) Study Center; banking observer; former Assistant Vice President of Bank Negara Indonesia (BNI)