Rendi A. Witular, Jakarta – The liquidity squeeze in the domestic banking industry hit a "moderate" level for the first time in three years this month with the global financial turmoil yet to reach its worst point, a senior central bank official says.
Bank Indonesia (BI) deputy governor Muliaman Hadad said Sunday the pressure on liquidity in the banking sector had reached a point where the interest rate for borrowing money between banks had soared to between 9 percent and 10 percent on average.
"We categorize the range as 'moderate'. This is the first time in three years. We believe the liquidity squeeze level will remain that way in the near future," said Muliaman, adding that a "high" level was when the cost exceeded 11 percent.
He said the liquidity squeeze hitting local banks had been triggered not by a lack of available funds, but rather because of low confidence between banks in lending money to each other, causing more jitters among banks keeping a tight grip on their cash.
Banks account for 79 percent of assets in the financial sector, of which some 70 percent is controlled by the 15 largest banks. There were 126 banks operating in the country as of September.
To fund banks in need of liquidity without raising legal problems, BI recently issued a regulation allowing it to bail out banks and provide overnight funds to commercial lenders.
Controlling shareholders of banks seeking the facility will have to provide assets as collateral.
BI has also extended the emergency lending assistance period from 90 days to up to six months.
Muliaman also said there would be a rising trend in nonperforming loan (NPL) in banks to within a psychological level of 5 percent next year from the average 3.89 percent recorded in September because of the possibility of some companies collapsing.
"But we are still gauging the risk in order to get the exact picture of the NPL risk next year," he said.
The central bank requires banks to have an NPL tolerance level of less than 5 percent of their outstanding loans. According to BI, the rate of NPLs in September stood at 3.90 percent of the total Rp 1,287.40 trillion (US$111.22 billion) in loans. Third-party funds stood at Rp 1,601.50 trillion, putting the loan-to-deposit ratio at about 80.39 percent.
Another risk forecast by the central bank is the low profitability of the banking sector despite an estimation that lending growth will remain fairly robust at 22 percent next year, lower than the 33 percent growth forecast for this year.
Local banks posted operational profits of Rp 39.50 trillion (US$3.43 billion) in the first nine months of the year, up from Rp 37.28 trillion in the same period last year.