Bank Indonesia Macroprudential Policy for Promoting Inclusive Financing

The main roles that include policies and instruments in maintaining the stability of the financial system of Bank Indonesia are divided into 5  tasks:

• First, Bank Indonesia has the task of maintaining monetary stability, among others, through interest rate instruments in open market operations. Monetary policy through the application of interest rates that are too tight will tend to kill economic activity. Vice versa,  therefore to create monetary stability, Bank Indonesia has implemented a policy called inflation targeting framework or commonly  known as the annual inflation target.
• Second, Bank Indonesia plays a vital role in creating sound financial institution performance. The banking sector has a dominant share in the financial system, so failure in this sector can lead to financial instability and disrupt the economy. To prevent such failure, an effective banking supervision and policy system must be enforced. This is intended to protect banks and stakeholders and at the same time encourage confidence in the financial system.
• Third, Bank Indonesia has the authority to regulate and maintain the smooth running of the payment system. Bank Indonesia is developing mechanisms and regulations to reduce the impact of risk in the payment system, which tends to increase and the complexity of the economic cycle, which is required to be faster, more practical, and less risky, especially in the current digital era, among others, by implementing a payment system that is real time or known as the RTGS system (Real Time Gross Settlement) & BI FAST which is valid 24 hours/7 days which has been launched & continues to be refined so that further improve the security and speed of the payment system. As an authority in the payment system, Bank Indonesia has the information and expertise to identify potential risks in the payment system.
• Fourth, research & monitoring function. Through macroprudential monitoring, Bank Indonesia can monitor the movement of the financial sector and detect potential surprises (potential shock) which has an impact on financial system stability. Through research, Bank Indonesia can develop instruments to recover if vulnerabilities or threats are detected in the financial system and macroprudential indicators to detect financial sector vulnerabilities. The results of the research and monitoring will then become recommendations for the relevant authorities in taking appropriate steps.
• Fifth, Bank Indonesia has a function as a financial system safety net through which the central bank functions as a Lender of The Last Resort (LoLR). This function is only given to banks that face liquidity problems and have the potential to trigger a systemic crisis. Under normal conditions, the LoLR function can be applied to banks that experience temporary liquidity difficulties but still have the ability to repay. Therefore, consideration of systemic risk and strict requirements must be applied in providing such liquidity.

Previously, it was explained according to Schinasi (2004) that the financial system in particular must be able to support the ease of implementation of the payment system or what we usually know as financial inclusion. Reported from the official website of the World Bank (2020) that financial inclusion is access for every person or business to be able to take advantage of financial products or services. This service plays an important role in being able to meet all human needs every day, such as payment transactions, savings, credit and insurance that can be carried out effectively and continuously. Meanwhile, based on the Regulation of the Financial Services Authority or OJK Number: 76/ POJK.07/2016, financial inclusion is the availability of access to various products, financial services and institutions.

Reported from the official website of Bank Indonesia. Bank Indonesia has 5 macroprudential policy instruments to support  financial inclusion, namely:

1.  Countercyclical Capital Buffer (CCyB)

Reported fromofficial pageBank Indonesia, Countercyclical Capital Buffer (CCyB) is additional capital that functions as a buffer to anticipate losses in the event of excessive credit growth and/or banking financing (excessive credit growth) thus potentially disrupting financial system stability. CCyB needs to be implemented in the demonstrated if credit growth and economic growth are directly proportional. In general, Bank Indonesia will increase the CCyB amount when the economy is expanding/fast growing, on the other hand, Bank Indonesia will decrease the CCyB amount in when the economy is contracting / declining or sluggish. The amount of CCyB is dynamic, ranging from 0% to 2,5% of the bank's Risk Weighted Assets (RWA).

2.  Loan to Value or Financing to Value Rasio (LTV/FTV)

Loan to Value or Financing to Value (LTV/FTV) ratio is the ratio between the value of credit/financing provided by Conventional and Islamic Commercial Banks to the value of collateral, in the form of property at the time of lending/financing based on the latest assessment results. The LTV/FTV policy also aims as a macroprudential instrument to encourage a balanced and quality banking intermediation function in supporting national economic growth while maintaining financial system stability. This Macroprudential policy instrument is countercyclical and can be adapted to changing economic and financial conditions. One of the objectives of the LTV/FTV policy is to maintain financial system stability and mitigate systemic risks stemming from rising property prices. The LTV/FTV policy also aims as a macroprudential instrument countercyclical and can be adapted to changing economic and financial conditions.

3.  Macroprudential  Intermediation  Ratio

The Macroprudential Intermediation Ratio (RIM) is a macroprudential instrument aimed at managing the banking intermediation function to match the capacity and target of economic growth while maintaining the principle of prudence. RIM's policy accommodates the diversity of forms of banking intermediation by including bank investments in securities. RIM encourages the creation of a balanced and quality intermediation function, so as to prevent and reduce risks and banking behavior that tends to be procyclical.

4.  Macroprudential Liquidity Buffer

Macroprudential Liquidity Buffer (PLM) is a minimum liquidity reserve in Rupiah that must be maintained by Conventional Commercial Banks and Islamic Commercial Banks in the form of securities in Rupiah that can be used in monetary operations.

5.  Short-Term Liquidity Loans (PLJP)

Short-Term Liquidity Loans (PLJP) are loans from Bank Indonesia to Banks to overcome Short-Term Liquidity difficulties experienced by the Bank. The PLJP provisions include several requirements including:

• PLJP/PLJPS interest rate adjustments,
• improvement of credit collateral requirements,
• addition of other collateral for collateral as a risk mitigation measure,
• acceleration of the process at Bank Indonesia, and
• completion of the verification and asset valuation process with independent parties prior to the PLJP application.

Based on the Regulation of the Financial Services Authority or OJK Number: 76/POJK.07/2016, financial inclusion is the availability of access to various products, financial services and institutions. Various financial services in it can be chosen according to the ability and needs of the community such as making loans, buying property and also accessing other finances. Bank Indonesia's macroprudential policies above always support financial inclusion where each policy is implemented for easy access for the public. The central bank, as the payment system authority, carries out macroprudential duties to prevent systemic risks, promote a balanced and quality intermediation function, and increase financial system inclusiveness and financial access, closely related to the central bank's task of creating a secure payment system, efficient, smooth, and reliable including the payment system, and prevent the occurrence of systemic risk. Financial inclusion as part of macroprudential policy objectives also has very good benefits for every level of society, namely:

1.  Help Improve Economic Equity

Financial inclusion has a very large effect because it can help increase financial equity in all levels of society. Everyone will be able to use financial products or services appropriately and will be able to help alleviate their economic problems. Such as by applying for a loan to a bank that will be used for capital to build a business venture. Even when they face financial difficulties, they can also sell their assets so that they will be able to save their financial condition.

2.  Providing Understanding to the Community

When people have access to financial products or services, it is certainly very beneficial for their lives. People will understand more about how to manage their financial condition well, such as opening a bank account if they want to save. In addition, people can also invest if they want to own passive income. Thus, financial inclusion is able to increase understanding and awareness of how people manage their finances.