Friday, August 21, 2009

Force it down, eh?

As reported in Kompas (21/8), banks (mainly state-owned) agreed to cut deposit interest rates gradually to get closer to the BI rate. They think this will help "normalize" the movement of deposit and credit interest rates. I'm skeptical. First, as a depositor, one would seek for the highest real rate. If local banks set it low, she would transfer her money to some bank abroad, or convert it to other form of asset. Second, any agreement like this (between banks, in a moral suasion sort of way) is deemed to fail. One or two banks will eventually cheat and the rest will follow. Third, they miss the point. Banks' rates deviate from BI rate not because they just want to be different. It's because they still perceive a sizable risk. Attacking the rates is missing the culprit as it is the risk that needs to be minimized, through a more efficient credit bureau for example. Lastly, if the banks and the government and Bank Indonesia think that this forced rate is good for banks in general, they will be disappointed. Thus far, market has been segmented such that big depositors go to big banks and get interest rate higher than BI rate. The smaller depositors go to smaller banks and are paid interest below BI rate. Forcing big banks' interest down will attract the upper level of smaller depositors and therefore hurt the smaller banks.

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