Bank Indonesia boards announcing BI 7 Days Reverse Repo Rate (Photo: Bank Indonesia)

JAKARTA (TheInsiderStories) – Indonesia’s central bank (BI) has issued a new regulation on reserve requirements, which aim to stimulate lenders to pump liquidity into the market and disburse more loans.

Central bank governor elected Perry Warjiyo said commercial lenders having excess liquidity will get zero interest rate when they put the money on the central bank. Banks now get 2.5 per cent interest for the funds they park at BI that is above the required level.

The new rule is expected to encourage banks to put excess liquidity into the financial markets. This is also hoped to reducing the volatility in the overnight money market.

BI will also introduce a “macroprudential liquidity buffer” that will replace rules on secondary reserve requirements. The bank will still have to put 4 per cent of its total savings into central bank debt papers or government bonds.

But the new regulation will allow the bank to repurchase 2 percent of those debt papers to the central bank in the case of tight liquidity. Theoretically, it may increase liquidity in the interbank market and may help bank to lower cost of fund.

By the end of February, loans extended by Indonesian banks grew 8.2 percent from a year earlier, faster than the 7.4 percent growth in January, according to data given by the Financial Services Authority.

Loan growth in Indonesia has fallen to below 10 percent pace since the start of 2016, compared with more than 20 per cent during the commodity boom years before that.

Bank loan penetration in Indonesia, where only one in three adults have bank accounts, was around 34 per cent of gross domestic product (GDP) in 2015, among the lowest of Asia-Pacific countries according to the International Monetary Fund.

The President has made the call given the fact that the banking loan growth has been slow, despite easing policies applied by the central bank by reducing Bank Indonesia’s benchmark rate.

The country’s benchmark interest rate has averaged 7.23 per cent from 2005 until February 2018, reaching an all-time high of 12.75 percent in December of 2005 and a record low of 4.25 percent in September of 2017.

The central bank has kept the benchmark BI 7-Day Repo rate at 4.25 per cent since September last year. The lending and the deposit facility rates have also left steady at 5 per cent and 3. 5 per cent respectively.

The other reason for slow loan growth is that the source of funding is not only from the banking sector. Companies have also in the past two years or so have increasingly utilized the capital market to find fresh funds through issuing bonds, rights issue as well as medium-term notes due to favorable lending rates.

Loan growth is about supply and demand. Banks will increase the loans if there is an ample demand. Therefore, banks cannot solely be blamed for the slow loan growth. The government must also stimulate the productive sector to expand their business. More works are also needed to improve the whole business and investment climate.