BI to hold monthly bill auction

The central bank plans to hold a monthly bill auction in place of the existing weekly auction, while focusing on the three-month and six-month bills, according to a statement issued Friday.

The monthly auction will begin in June following a three-month transition process starting March 10, Bank Indonesia BI said. The change is expected to support banks in managing liquidity in the longer term, it said.

According to BI, there is excess liquidity in the financial market now, as shown by the large amount of funds placed in BI bills. The ownership of BI bills was extended, making the financial market underdeveloped, it said.

"A well-functioning financial market can support monetary operation processes to increase the effectiveness of monetary policy transmissions. The maturity extension of BI bills is expected to increase financial depth and the effectiveness of monetary operations," acting BI Governor Darmin Nasution said.

BI said short-term bills caused its monetary policy to be ineffective in supporting monetary operations.

BI also said it would optimize other monetary instruments such as FASBI (BI's loan facility), overnight repurchase agreement and fine tune operations to maintain liquidity in the market to ensure stable rates.

It said the auction of BI sharia bills would follow the auction of BI short-term bills.

Danareksa Research Institute chief researcher Purbaya Yudhi Sadewa said BI should cut the amount of funds in BI bills. "This only spoils banks. They become profit-oriented and don't care about the economy," he said.

BI Deputy Governor Hartadi A. Sarwono said the total outstanding amount of BI bills reached Rp 303.6 trillion (US$32.5 billion) as of March 4.

Darmin has repeatedly said banks need to perform intermediary functions well - collecting and disbursing funds - rather than putting money in BI bills.

BI plans to draft new regulations to encourage banks to lend more to the real sector. According to a BI statement at the 2010 Bankers' Dinner in January, the amount of banks' reserve ratio stored in the central bank will be linked to their loan-to-deposit ratio.

Banks said they lent less last year on the back of higher risks and falling demand for loans from businesses amid the global economic downturn. But businesses said they were reluctant to borrow because of high lending rates.

Last week BI officials met officials from the Industry Ministry, the State-Owned Enterprises Ministry and state-run banks in an attempt to cut lending rates.

State-Owned Enterprises Minister Mustafa Abubakar said lending rates could be cut by 1 to 2 percent from the current average of about 14 percent.

BI's benchmark lending rate now stands at 6.5 percent.

Darmin said that last year BI and the Capital Market and Financial Institutions Supervisory Agency would regulate short-term money-market instruments with a maturity of less than one year to provide more liquidity in the financial market.