Bank Indonesia is in talks with Bapepam-LK to improve regulatory cover over financial instruments maturing at between one and three years to help create more competitive financial markets.
Bapepam-LK supervises capital markets and financial institutions.
Speaking before investors at a forum Wednesday, Bank Indonesia (BI) acting governor Darmin Nasution said it was not clear currently which body regulated and oversaw parts of the money market, despite the need to have more products and to make banks more efficient.
Banks are not yet efficient as indicated by the high spread between lending rates and deposit rates of above 5 percent in Indonesia's top banks, he said. As a result, the costs of borrowing here are now more expensive than in many neighboring countries.
BI is working to encourage banks to perform their intermediary functions better - that is, lending money and collecting funds - rather than simply focusing on making their profits as high as possible. BI has tried to push lending rates down. "Money market products are needed to enliven competition in financing, and would create pressures to make for more efficiency in banks," Darmin told reporters. "We need to see which *regulatory* body is most suitable to do this." BI data showed in August there was a maturity mismatch in banks, as they possessed more short-term liabilities, reaching 91.2 percent of their total third-party funds of Rp 1,847.04 trillion (US$195.82 billion), while channeling more long-term loans of Rp 1,400.37 trillion, or 70.75 percent of their total loans.
BI director of banking research and regulation Halim Alamsyah said that BI and Bapepam-LK were harmonizing regulations including dealing with financial instruments where the present rules were considered vague by the markets. "This is a gap which needs to be filled. Financial instruments maturing between one year and three years are considered to be not clearly regulated by the markets," he said.
"The more the products, the more the options. They can be used for investment, liquidity adjustment, hedging, and making the markets more efficient." Bank Mandiri chief economist Mirza Adityaswara gave the example that it was not clear which body regulated bonds maturing below three years. "Nobody regulates short-term instruments, usually called money market instruments, with a maximum tenure of one year."
Bank Danamon chief economist Anton Gunawan said banks in Indonesia were not as efficient as those in neighboring countries. The spread between lending rates and deposit rates is high because the cost of funds of is high, he said. "Every bank's business type and size varies. Some have expenses that other banks don't have," he said.
He added that BI's moves to intervene further to regulate the financial sector was the result of the global financial crisis, with central banks worldwide trying to evolve and implement unconventional measures to help protect the economy. Bank BNI chief economist A. Tony Prasetiantono said BI's moves were "repressive". He said it would be more effective to allow market mechanisms to work in the financial sector.
"Lending rates will go down eventually, but there will be compensations to banks," he said.