Although Indonesia has been an economic success story for more than a decade the combination of lower commodity prices – impacting one of the largest drivers of export growth – and slower policy implementation in the run-up to the 2014 elections has resulted in growth unraveling. To avoid a potential replay of the situation during the Asian economic crisis in 1998, Bank Indonesia (BI) the central bank has been proactive and has stepped up its use of policy tools through actions such as several interest rates since June.
While the banking industry has remained one of the country’s strongest engines of economic growth in this changing environment, the importance of the sector also means that it is under a magnifying glass more than ever. Banks are therefore working to enhance their preparedness by raising their own interest rates in the wake of the central bank’s proactive stance and ensuring that they have a sufficient liquidity buffer to reduce the impact of non-performing loan (NPL) issues they might face in a more challenging economy.
As local financial institutions (FIs) face the impact of compliance with US-driven regulation such as Anti-Money Laundering (AML) rules, the Foreign Account Tax Compliance Act (FATCA) and the Office of Foreign Assets Control (OFAC) requirements, as well as the challenge of performing well in this more difficult economic environment, taking advantage of new leading-edge tools and global knowledge can also improve FIs’ performance and help ensure compliance.
Liquidity Management Account
With the Basel III capital adequacy regime putting a price tag on the value of liquidity for the first time and with FIs wanting to grow operational account balances to ensure that they have a sufficient liquidity coverage ratio (LCR), banks are looking for leading-edge liquidity solutions. One response to the changing regulatory environment has been to introduce a liquidity management account (LMA), which allows clients to receive an enhanced rate of return on their operating cash balances. It pays term-like rates (up to six months) for balances that are stable in the account, allowing clients to enjoy same day liquidity and also receive enhanced rates for balances that are stable.
In the past, clients often used sweeps or invested overnight in commercial paper to increase their yield. LMA rewards clients for parking stable operating cash balances on a duration basis. By using LMAs, clients can enhance their yield based on stability of balances.
In the current economic environment, it is important for FIs to select their counterparty carefully and consider key differentiators such as the financial strength and credit rating of the global bank, and the reporting or other information the global bank can provide. With LMA, clients can view reports that clearly show various balance tiers established, fluctuation in balances and any resulting impact on tiers and yield. These types of reports provide valuable insights into changes in the account and enable better funds management.
While LMA is a relatively new concept, the take-up rate has been good and there is strong interest in the product given it enhances yields, assists with better forecasting while maintaining adequate liquidity at all times.
Managing Foreign Exchange Payments
As FIs face both an increase in cross-border transactions and a continued drive for efficiency, they are under pressure to develop greater capabilities to support their clients’ intra-regional and global growth more cost-effectively. These challenges would be significant at any time, and the advent of Basel III is making them more complex.
While global banks have invested significant sums in their foreign exchange (FX) and cash management platforms to meet the increasingly sophisticated demands of their customers, local FIs face significant cost pressures in offering similar solutions, particularly if cross-border FX capabilities are not part of their core offering. The costs associated with building and rolling out integrated FX and payment platforms can be high, and they need further resources to comply with new regulatory requirements, navigate clearing and settlement systems, and offer more language capabilities. Yet without these enhancements, local FIs’ ability to retain their business, let alone target new flows and opportunities, can be limited.
FIs can still target market share opportunities in this environment through an assessment of business operations and future plans. By addressing these obstacles with the help of global banking partners, Indonesian FIs can focus on building a stronger relationship with their clients, increase business performance and improve their market share. They can further differentiate their services through counterparty stability, access to global clearing networks, superior client service models, a wider range of currencies and more.
As Indonesian companies look further afield to sell their products and to source imports, and as they then require services that support international growth and cross-border transactions, domestic FIs need to adapt and be in a position to make their client’s international journey smooth and cost-effective. FIs face the challenge of balancing the cost and complexity of opening a multitude of new nostro accounts and developing technology with the opportunities of business from key corporate clients as well as from consumers.
An alternative solution for FIs is to establish a relationship with a global bank that can assist with management of cross-border flows and provide services which streamline processes, reduce overheads and extend services to more markets for their clients. For example, local FIs can leverage the existing technology of a global bank and quickly offer a US dollar (USD) payments service which provides the ability to convert single-currency USD payment instructions into payments in the currency of the beneficiary location, based on agreed parameters. A company can, for example, use this type of service to send a payment from their USD account to their counterparty in Germany, with the global bank converting the payment into euro on behalf of the local FI. Converting what would be a USD payment into a local currency payment offers an opportunity to reduce the payment delivery time and generate an additional stream of revenue from the FX, with no requirement to amend existing SWIFT instructions and with use of existing accounts. The overall lower costs for a majority of transactions, especially those under US$50,000, make such a service very attractive.
In selecting which global bank to use for this service, a key consideration is which bank the Indonesian FI uses for dollar clearing, since going to another bank would require them to open another nostro account and maintain additional balances at the second bank. While many large Indonesian FIs have already established such a facility, those banks that haven’t done so can also determine whether they will benefit from it by analysing whether their corporate or consumer clients have started requesting payments in local currencies and assessing their readiness to provide the service if the demand continues to grow.
Although imports and exports may have slowed, the continuing growth in demand for foreign currency payments, whether they are outbound payments for goods imported from overseas (or expenses such as school fee payments for students studying abroad), or inbound payments such as remittances from foreign domestic workers and for exports, there will always be a need for payments outside of Indonesia.
AML is as much an ongoing concern for FIs in Indonesia as in other countries, as Indonesian regulators continue to strengthen existing requirements and the impact of the increasing focus by regulators in the West continues to extend to FIs in Asian markets. As such, FIs in Indonesia need to ensure they continue to meet the requirements of their regulators and counterparties.
While Indonesian banks are strengthening their system and processes, and operations staff now clearly understand the rules and look out for anomalies, domestic FIs are also looking to share knowledge and best practices so that they can further strengthen risk control in the back office. Indonesian FIs can leverage the experience and expertise that global banks have developed in markets around the world through knowledge-sharing and by obtaining information about regulatory updates in other markets that may affect them in Indonesia as well, whether it is for OFAC or other requirements. To ensure that they keep up with global developments and implement consistent practices across their institutions, Indonesian FIs can engage their global bank to gain knowledge from other markets, obtain information about leading-edge practices in staying abreast of compliance updates, and learn how to manage the back office better to ensure compliance.
In a market that continues to grow rapidly despite occasional setbacks, Indonesian FIs can leverage new tools and expertise to optimise their business by working with a global bank, and tapping into new products and solutions as well as best practices that can further enhance their business competitiveness.
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