Watch out! Latent Danger of Crowding Out from Tight Liquidity in the Market

By Eko B. Supriyanto, Chairman of Infobank Media Group

Jakarta – Guard your bank vaults! The slightest mistake will be “crowded out” by neighboring banks. Bankers are already complaining about expensive liquidity. The fight between banks for funds in the community is common. However, the eternal competition in the last 10 years has involved the monetary authority, Bank Indonesia (BI) as well as the Indonesian Ministry of Finance (MoF), and the competition has become a bit brutal. If not resolved, this struggle for funds is actually the beginning of crowding out.

BI with its Bank Indonesia Rupiah Securities (SRBI) and the government with Government Securities (SBN) are the main competitors of banks. In fact, banks are also fighting each other over third-party funds (DPK). Moreover, at the end of last year, “money warehouse” institutions, such as the Employment Social Security Agency (BPJS-TK) and the Hajj Financial Management Agency (BPKH), also pressured banks to raise interest rates.

Is it true that now is the beginning of crowding out conditions, or is it because the DNA of the banking sector is very sensitive due to the shallowness of financial deepening, which is in the range of 38-39 percent, so it is easily shaken?

The shallowness of the financial sector makes the banking sector very sensitive to volatility. Interest rates easily fly up and are difficult to fall. It is like the behavior of snot when we have a cold. It goes down slowly, but if it goes up, it goes up instantly. Like the snot of a child with a cold.

Read also: BNI Values DHE Rules Can Increase Banking Liquidity

Crowding out is an economic phenomenon in which an increase in government spending or public investment leads to a decrease in private investment. This happens when the government borrows money to finance its spending. As a result, it can increase the demand for funds in the financial market. And, interest rates may increase, which makes borrowing more expensive for the private sector, thereby reducing firms’ ability and willingness to invest.

In Indonesia, crowding out can occur partly due to several factors. One, an increase in government debt, and that has already happened. See, the government increases its debt to finance infrastructure projects or social programs. This can reduce the availability of funds for the private sector.

In fact, it appears that Finance Minister Sri Mulyani Indrawati (SMI) is starting to take the “easy way out”. How to pay off the reckless debt of the Jokowi and SMI duo – which is starting to mature. Finally, a shortcut was taken, with a debt switch. Old debt securities (which are maturing) are exchanged for new debt securities. In the secondary market. This debt switch shortcut is not only with BI, but also with other investors.

Two, monetary policy. High interest rate policies by BI to control inflation and the exchange rate may make borrowing more expensive for the private sector.

Three, liquidity competition. There is already competition between banking products, such as deposits and loans, with SBN and SRBI which could lead to crowding out.

If this continues, and it is likely to continue, where investors prefer to buy SBN or SRBI due to attractive yields, then funds that could have been used for private investment will be reduced. So, it is true that competition for liquidity between bank products and SRBI and SBN can lead to crowding out. When a lot of funds flow into SBN and SRBI.

Eventually, it has the effect of reducing the amount of funds available for lending in the private sector, thus hampering private investment and economic growth. Meanwhile, SRBI that will mature in 2025 reaches IDR 922.4 trillion. That means, BI is also said to be issuing new SRBI to absorb the maturing ones. So, competition for funds in the community will continue to occur so that liquidity becomes expensive.

Read also: Government Foreign Debt Grows 5.4 Percent, to USD424.1 M as of November 2024

What is clear is that the early signs of crowding out are already visible. And, it will have an impact on the decline in investment, as well as the rising cost of credit. If this is the case, then the 8% economic growth target is just a “puff piece”. The economy will be unstable, and the allocation of resources will be inefficient. Plus, the bureaucracy is fat and expensive, which makes it harder for the economic engine to move.

And, banks have to be more diligent in looking at their loan portfolios to avoid bad debts. Credit risk is high. Banks must also maintain liquidity so as not to be “gobbled up” by neighboring banks. In 2025, even though BI announced the achievement of the lowest inflation in history, the reality is that the SRBI is still high. Rupiah continues to be “feverish”.

Banks must maintain their stance to avoid being swayed by the tsunami of crowding out that is already at the bank’s doorstep. Money is getting harder, and more expensive. (*)