Indonesia cbank tightens via bank regs, holds key rate

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The central bank raised primary bank reserve requirements -- cash that has to be put aside with the central bank -- to 8 percent from 5 percent, effective Nov 1.

It also set lending targets by stipulating that banks must use at least 78 percent and as much as 100 percent of their deposits for lending, effective March 1.

Banks that fail to meet the loans-to-deposit (LDR) ratio will be punished with additional reserve requirements.

Only two of Indonesia's top five lenders -- Bank Rakyat Indonesia and Bank CIMB Niaga -- currently meet the LDR, analysts said.

They have questioned if the regulations will have the desired effect of boosting loan growth since the more conservative banks, including Bank Central Asia, have already said they would prefer to pay the penalty than risk higher non-performing loans.

A senior bank official at BCA said the penalty for not meeting the LDR would add just 20 bps to its cost of funds which are currently 291 basis points.

Still, Made Suardhini, a banking analyst at Mandiri Sekuritas, said the measures would hurt banks.

"This will have a negative impact on banks' NIM (net interest margin) as well as profits, although there is still time until next year," she said. "This should have a negative impact on the banking sector."

BCA and state-owned Bank Mandiri are seen as most vulnerable of the top 5 banks to the new measures because they have the lowest LDRs of 51 percent and 64 percent respectively.

However, the news did little to move the rupiah or shake bullish stock investors, who pushed the Jakarta Stock Exchange index .JKSE to a record high. Both BCA and Mandiri shares rose.

INFLATION CONCERNS

The central bank has maintained for months that it could hold its key policy rate at 6.5 percent all year if year-end inflation fell within its target range of 4 percent to 6 percent.

The central bank said it still hoped to achieve that target, but it acknowledged rising inflationary pressures as the economy emerged from the global downturn.

Indeed, annual inflation in August hit a 16-month high of 6.44 percent, data showed this week, mainly because of higher electricity tariffs, while core inflation moved up to 4.53 percent.

"Considering the potential of inflationary pressures ahead, the board of governors considers the importance to raise the primary minimum reserve requirement from 5 percent to 8 percent of total rupiah deposits, considering a quite huge amount of excess liquidity in the banking sector," Bank Indonesia said in its policy statement.

Most analysts said the move took the central bank a step closer to raising its interest rates and so catching up with other central banks in Asia that have started to push policy back towards normal levels following the global financial crisis. Most analysts see a rate rise in the fourth quarter.

"The reserve requirement rise in itself is not a huge move on liquidity, but it's an indication that the central bank will be on the tightening mode fairly soon," said Wellian Wiranto, economist at HSBC in Singapore.

However, some economists interpreted the decision differently, arguing the reserve requirements suggested the central bank would remain reluctant to increase rates.

"What is clear at this point is that the BI seems to remain of the view that a move on the BI rate is to be only the last resort to fight inflation," said Gundy Cahyadi, economist at OCBC in Singapore.

"The pace of growth in domestic demand is seen to be well above that seen on the supply side, and the central bank is committed to working its best to bring inflation down towards the target. This seems to be a signal to the market that while the chances of seeing a rate hike has diminished following the reserve requirement rate hike, BI leaves open the option of a rate hike later on."