Banking liquidity is shrinking. The customer funds collected by banks from savings and deposits are depleting due to massive lending. Therefore, banks are desperate to find ways to get funds in order to meet high demand for loans.
Based on data from the Deposit Insurance Corporation (LPS), banking deposits or third party funds (DPK) only grew 6.88 percent as of September 2018. Meanwhile, the loan growth was 12.12 percent, rising 3.86 percent compared to September last year. This makes banking liquidity tighter.
Tight liquidity can be seen from the loan to deposit ratio (LDR), which has reached 94 percent last August. It has entered the strict limit according to the regulator, which is in the range of 93-102 percent. “This must be watched out, because the safe limit is 92 percent," said Member of LPS Board of Commissioners Destry Damayanti in Jakarta, Tuesday (10/30).
Banks in BUKU III category have the tightest liquidity, with an increase in LDR to 103.3 percent as of September 2018 from 94.9 percent in September 2017. The lenders in this category are banks with core capital between Rp 5 trillion and Rp 30 trillion.
The LDR of banks in BUKU II (core capital between Rp 1 trillion and Rp 5 trillion) rose to 89 percent from 86 percent. Banks in BUKU I (core capital below Rp 1 trillion) also noted LDR increase to 84.1 percent from 75 percent. Meanwhile, the LDR of major banks in BUKU IV (core capital above Rp 30 trillion) fell to 89.6 percent from 90.4 percent.
Bank Indonesia (BI) predicts the growth trend in deposits will still rise at the end of the year, in line with changes in economic conditions and people’s needs. Although it is still slow right now, the DPK growth until the end of the year is estimated to remain within the BI’s target range of 8-10 percent.
On the other hand, most corporations are aggressively borrowing funds from banks to finance their capital expenditure (capex). Therefore, the loan growth is predicted to remain high. BI predicts a growth of 10-12 percent this year, while the Financial Services Authority (OJK) estimates the growth to exceed the target, reaching 13 percent.
With the prediction of higher loan growth than DPK, banking liquidity from the LDR side will remain tight until the end of the year. Destry fears the liquidity issue will lead to reduction of banks’ secondary reverse. High loan growth further shrinks the funds owned by banks to channel loans. Banking capital might even be eroded to serve loan.
OJK Chairman Wimboh Santoso is aware of the current decline in banking liquidity, but this condition is considered not dangerous. Banks can also manage their liquidity from other funding sources. OJK noted that banks still have access to reserve funds of Rp 453.5 trillion. “Its liquidity is still adequate,” he said.
Just like OJK, BI believes the high LDR does not necessarily make banks underfunded. BI Deputy Governor Erwin Rijanto argued that the Capital Adequacy Ratio (CAR) was around 22.8 percent in August 2018, higher than the safe limit of banking CAR at 8 percent.
The ratio of liquid assets to third party funds is also still high at 18.3 percent. “So, they [banks] only need to lower that ratio if they need funding. It will not be a problem for their loan financing,” Erwin said at the BI Building Complex in Jakarta, Tuesday (10/23).
BI provides various instruments that help manage banking liquidity, including through term repo operation and standing or lending facility. Currently, there is even an additional instrument called Macroprudential Liquidity Buffer (PLM). With this instrument, banks are required to provide a liquidity tool of 4 percent of the DPK. When the liquidity is tight, banks can repay 2 percent of the funds to BI.
BI does have an instrument in accommodating excessive liquidity funds in banks through monetary operations. The funds can be a reserve to be used by banks during liquidity difficulties. However, the fund portion in BI’s monetary operations has been greatly reduced since the beginning of the year.
The total funds of the monetary operations at the beginning of this year reached Rp 482.37 trillion, where Rp 436.84 trillion came from open market operations (OPT) and Rp 72 trillion from standing facility. Meanwhile, the position of monetary operations as of 30 October 2018 was only Rp 305 trillion, consisting of Rp 275.54 trillion (OPT) and Rp 57.42 trillion (standing facility).
According to Erwin, banks can now better manage their liquidity as they have various tools. Previously, banks could only optimise the instrument of monetary operations in overcoming liquidity issue. Many banks have now used other instruments, such as Government Securities (SBN). Currently, the two instruments are still liquid and can be used at any time if required, both through interbank repo transactions and BI.
Destry admits the LDR is not the only indicator to measure banking liquidity. “There is a loan to financing ratio (LFR) now. Loan financing can be done with the issuance of bonds and other instruments. But with high bond yields, banks will re-think about issuing them,” Destry said.
According to LPS Head Fauzi Ichsan, banks can hold back loan growth to face the liquidity issue, but they tend to be reluctant to do so amid high demand for loans. Another way is to boost low-cost fundraising. Banks are currently competing to pursue customer funds through deposits. Thus, deposit interest rate war ensued.
The low liquidity forced banks in BUKU III and IV categories to raise special deposit interest rates to 7.17 percent and 6.95 percent, respectively. It exceeded the similar deposit interest rate of banks in BUKU I and BUKU II categories, which were 6.9 percent and 6.91 percent respectively. “The problem with banking is not only capital, but also challenges in raising liquidity,” Fauzi said.
The competition to collect customer funds was further complicated by the government’s move to issue government retail bond (ORI) 015. The coupon offered at 8.25 percent per year has improved the movement of deposit rates because the market uses this instrument a reference rate.
Net interest margin (NIM) obtained by banks also shrunk because it has to provide large interest in raising funds. OJK noted the average NIM of commercial banks was at the level of 5.14 percent as of August. It fell from 5.35 percent in the same period last year. Meanwhile, LPS’ research to several reference banks as of September 2018 showed the average NIM of commercial banks fell to 4.4 percent from 4.6 percent.