May 31, 2019 / 7:23 AM / 3 months ago

Banks in a bind as Indonesia looks to cut interest rates

* Benchmark rate cut on cards after 6 hikes in 2018

* Banks constrained by weak profits, tight liquidity

* “We want banks to lend” - BI chief tells Reuters

By Maikel Jefriando and Cindy Silviana

JAKARTA, May 31 (Reuters) - After aggressively hiking rates six times last year, Bank Indonesia (BI) signalled this month it could follow other central banks in Asia by easing in a bid to fire up flatlining growth in Southeast Asia’s biggest economy.

But tight liquidity and weak profitability could prevent local banks from responding with rate cuts of their own even if BI finds room to act, bankers and analysts said.

At its May 16 policy meeting, BI Governor Perry Warjiyo said BI would consider “room for accommodative monetary policy” if no external factor got in the way.

BI aims to boost bank lending growth to 10% to 12% this year as it looks to support economic growth that has been stuck at around 5% in the past few years.

Illustrating a breakdown in transmission with the policy rate, after hikes of 175 basis points in the benchmark rate in 2018, Indonesian borrowing costs have actually fallen 23 basis points in the past year, BI said.

Warjiyo attributes this to BI liquidity injections to the banking system to encourage lending amid tight monetary policy conditions.

“We want banks to lend. ‘Don’t worry about liquidity, if you have liquidity constraints, tell me and we will ensure liquidity will be there for you for financing’,” he told Reuters in an interview.

He also said BI was working closely with the Financial Services Authority (OJK) to ensure banks managed their costs efficiently so they could make profits and cut rates.

Even so, the Indonesian banking industry’s net interest margin (NIM), an indicator of profitability, fell 21 bps to 4.86% in the 11 months to March, OJK data showed.

Jahja Setiaatmadja, chief executive of Indonesia’s largest bank by market value, Bank Central Asia, said lenders had been forced to raise interest for savers to compete for funds, while also offering lower lending rates for “low-risk customers” whose demand for credit was picking up.

Accordingly, “if interest rates for deposits have not gone down, banks would not cut rates” immediately even if BI started to trim the benchmark, he told Reuters.

Meanwhile, bouts of capital outflows and competition with the government’s aggressive bond sales this year have tightened bank liquidity, bankers say.

The central bank has also held auctions to add and withdraw liquidity on a daily basis recently, after reports of fund shortages for smaller banks, even though it says that on aggregate there was “more than enough” cash in the system.

In a research note, ANZ Bank economist Sanjay Mathur said that among Asia’s most aggressive central banks in 2018 - Indonesia, the Philippines and India - the interest rate hike transmission was the least robust in Indonesia.

Thus, he argued that a switch to easing would also be the least effective in Indonesia.

“In Indonesia, the liquid assets of banks have meaningfully turned up whereas the more recent decline in NIMs suggests that banks are likely to rebuild profitability initially before lowering lending rates,” Mathur said.

Both the Indian and Philippine central banks have started to unwind last year’s hikes, while some analysts have pencilled in at least one rate cut in Indonesia before year end.

Achmad Baiquni, chief executive of Bank Negara Indonesia , said there were many factors determining borrowing costs and his bank did not look at BI’s benchmark alone.

“If the BI rate goes down, but the liquidity condition in the market is tight, banks wouldn’t be able to follow,” he said, while noting a rate cut would bring down borrowing costs in the long term. (Additional reporting by Fransiska Nangoy; Writing by Gayatri Suroyo; Editing by Ed Davies and Stephen Coates)

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