Ailing banking industry off the critical list<\/p>\n
By Reiner S.<\/p>\n
JAKARTA (JP): The financial condition of domestic banks has
\nimproved after the government completed its costly bank
\nrecapitalization program, but experts warn that the industry is
\nnot out of the woods yet as their internal condition is still
\nweak and external factors can still become a danger.<\/p>\n
According to Bank Indonesia, combined operational profits
\njumped to Rp 3.6 trillion (about US$387 million at the current
\nrate) in the third quarter of this year, compared to Rp 8.1
\ntrillion and Rp 500 billion respectively in losses in the
\nprevious two quarters.<\/p>\n
The central bank said that the return to profitability was due
\nto the increase in the net interest margin from Rp 4.8 trillion
\nin the second quarter to Rp 6.3 trillion in the third quarter.<\/p>\n
But banking experts say that external factors particularly the
\ncurrent weakening of the exchange rate of the rupiah against the
\nU.S. dollar, and rising interest rates could spell trouble for
\nthe banks.<\/p>\n
The weakening of the local currency would lead to rising
\ndomestic interest rates, both of which would create difficulties
\nin the restructuring of non-performing loans (NPLs). The failure
\nto resolve the huge NPLs would also then threaten the capital
\nsoundness of the banks as measured by the capital adequacy ratio
\n(CAR).<\/p>\n
Director for banking supervision at Bank Indonesia Djoko
\nSarwono said that the top agenda for domestic banks in 2001 is to
\nachieve the minimum 8 percent CAR level and maximum 5 percent NPL
\nlevel by the end of the year.<\/p>\n
Djoko said that the central bank had conducted a \"stress test\"
\nto measure how the banks would perform particularly in relation
\nto achieving the CAR and NPL requirements when the rupiah weakens
\nand the interest rate increases.<\/p>\n
\"Based on the stress test, some banks must improve their
\nperformance and operation to be able to meet the minimum 8
\npercent CAR requirement,\" Djoko said.<\/p>\n
\"We'll no longer bailout banks through another
\nrecapitalization program,\" he added, pointing out that banks
\nwhich fail to meet the new CAR requirement would be put under the
\nspecial surveillance for up to six months and if they still could
\nnot improve the CAR, the banks would be liquidated.<\/p>\n
\"The biggest challenge for the recapitalized banks is the
\nweakening rupiah and the rising interest rates,\" said head of
\nbank restructuring unit at the Indonesian Bank Restructuring
\nAgency (IBRA) Soebowo Musa.<\/p>\n
The government completed the bank recapitalization program in
\nOctober by issuing more than Rp 430 trillion in bonds to help
\nfinance the program. Some Rp 283 trillion worth of bonds have
\nbeen injected into the country's four state-owned banks, Rp 124.1
\ntrillion to four nationalized banks, Rp 22.1 trillion to seven
\nprivate banks, and Rp 1.2 trillion to 12 small provincial
\ndevelopment banks.<\/p>\n
The recapitalization program has brought the banks CAR level
\nto above the minimum 4 percent requirement.<\/p>\n
Djoko said that the CAR condition of the country's
\nrecapitalized banks varies from one bank to another, with some
\nalready above 8 percent while others were still below the 8
\npercent level but above 4 percent.<\/p>\n
He declined to name the banks with the lower CAR level.<\/p>\n
In addition to the group of recapitalized banks, there is
\nanother group of around 75 private banks which did not join the
\ngovernment recapitalization program because their CAR at the time
\nthe program was launched last year was already beyond the 4
\npercent level. But as the banking environment continues to
\nremain uncertain, the CAR of this smaller group of banks may
\ndeteriorate and they may have to merge with the stronger banks to
\navoid closure at the end of 2001.<\/p>\n
Difficult situation<\/p>\n
As part of the recapitalization program, banks must clean up
\ntheir balance sheets by transferring their bad debts to IBRA.
\nOnly loans below the bad debt category, which may still be non-
\nperforming, remain at the banks.<\/p>\n
According to Bank Indonesia, as of end of September this year,
\naround Rp 54.1 trillion of NPLs owed by nearly 17,000 debtors had
\nbeen restructured.<\/p>\n
It said that in the third quarter of this year, the NPL level
\nof the banking sector had declined to 27.9 percent from 30
\npercent in the second quarter and 32.1 percent in the first
\nquarter.<\/p>\n
\"According to my calculations, the NPL level in the banking
\nsector is still around 34 percent, but even at 27 percent, the
\nNPL level is still quite high,\" said banking analyst Elvyn
\nMasassya.<\/p>\n
\"The weakening of the rupiah and higher interest rates will
\nput the borrowers and bankers in a difficult position to reach a
\nrestructuring deal,\" Elvyn added.<\/p>\n
The rupiah has weakened to around Rp 9,500 per U.S. dollar
\nrecently, which is more than a 25 percent drop from the level
\nearlier in the year due to a combination of domestic political
\ninstability and the weakening of the other currencies in the
\nregion. The government had initially targeted an average
\nexchange rate level of Rp 7,000 per dollar for this year, but so
\nfar the actual average level was at around Rp 8,500.<\/p>\n
The lower exchange rate level and inflationary pressure has
\nprompted the central bank to allow interest rates to further
\nincrease. The interest rate of Bank Indonesia one-month SBI
\npromissory notes has been hovering at more than 14 percent
\ncompared to the government target of around 12 percent.<\/p>\n
In addition to the high external risk, analysts also warned
\nthat domestic banks are still operating at a very low earning
\ngrowth.<\/p>\n
Analysts pointed out that around 70 percent of the banks
\nassets were in the form of government bonds which carry both
\nfixed and variable interest rates. They said that such an asset
\nstructure was not healthy because a banks earnings should
\nnormally comes from its lending operations.<\/p>\n
\"Although Bank Indonesia said that banks have returned to
\nprofitability, they're actually still running at a loss if you
\nconsider their financial intermediary operation,\" Elvyn said.<\/p>\n
\"The profit so far has only come from the interest rates of
\nthe government bonds they hold. So the improvement is only
\nartificial,\" he added.<\/p>\n
Indeed, new bank lending to the real sector has been
\nrelatively low. Out of the total third party funds of Rp 652
\ntrillion raised as per end of September, outstanding credit was
\nonly Rp 280.6 trillion.<\/p>\n
Bank Indonesia said that new lending only started in July, and
\nuntil end of September, total new lending only reached Rp 15.1
\ntrillion, mostly channeled to the industrial and trade sector.<\/p>\n
\"With such conditions, we can't say we're happy with the
\nbanking performance in 2000,\" Elvyn said.<\/p>\n
Analysts have said that the relatively high risk associated
\nwith the real sector due to the huge NPLs was one factor
\ndiscouraging banks from resuming lending particularly as banks
\nhave to meet the minimum requirement of 8 percent CAR by the end
\nof 2001.<\/p>\n
\"Banks have now to be extra careful in channeling loans
\nbecause the environment is still not yet conducive particularly
\nwith the high NPL level,\" said chairwoman of the national private
\nbanks association (Perbanas) Gunarni Soeworo, adding that it was
\ndifficult for banks with a minimum CAR level to expand their
\nlending.<\/p>\n
\"It's also difficult to find good customers out there,\" she
\nadded.<\/p>\n
The government and Bank Indonesia have recently allowed 14
\nbanks to exchange their fixed rate bank recapitalization bonds
\nwith new government bonds carrying a higher fixed coupon rate to
\nattract investors to purchase the bonds so that the banks can
\nraise cash for financing lending activity.
\nIBRA banks<\/p>\n
The group of banks which are currently under the most scrutiny
\nare the 11 recapitalized banks under IBRA which include the
\npublicly listed Bank Central Asia (BCA), Bank Niaga, Bank
\nDanamon, Bank Bali, Bank Lippo, Bank Internasional Indonesia
\n(BII), Bank Universal, and non-listed Bank Artha Media, Bank
\nPrima Express, Bank Bukopin and Bank Patriot.<\/p>\n
The first four banks are the so-called nationalized banks in
\nwhich the government via IBRA owns up to more than a 90 percent
\nstake in the bank, while the government only owns between 50-80
\npercent in the remaining group of banks.<\/p>\n
The CAR condition of the IBRA banks also varies, with BCA
\nrecording the highest CAR level of around 44 percent.<\/p>\n
According to IBRA's Soebowo, BII and Bank Universal had to
\nwork harder to meet the 8 percent CAR requirement by the end of
\n2001.<\/p>\n
In terms of NPL, BCA also has the lowest level, while Bank
\nNiaga has the highest level of around 72 percent. \"The debt
\nrestructuring process has been moving slowly. The NPL level is
\nstill at an average of 30-40 percent which is still very high
\naccording to international standards,\" Soebowo said.<\/p>\n
\"We can say that our bank restructuring program is not
\ncomplete yet. We have just started by strengthening the capital
\ncondition, but we haven't moved into the core restructuring
\nprogram,\" he added.<\/p>\n
In terms of loan to deposit ratio (LDR) -- which reflects the
\naggressiveness in channeling loans -- BCA has the lowest level of
\n5-6 percent compared to its massive deposit base of more than Rp
\n100 trillion. BII has an LDR of 57.36 percent and Niaga around
\n45.24 percent.<\/p>\n
Soebowo feared that some domestic banks including those
\noutside IBRA might not be able to meet the new CAR requirement by
\nthe end of next year.<\/p>\n
He suggested that the weaker banks with a low CAR be merged
\nwith the stronger banks with a higher CAR level. He said that
\nonce the banks merged, the resulting bigger bank could be sold to
\ninvestors to improve its capital condition and financial
\nsoundness.<\/p>\n
IBRA divestment<\/p>\n
IBRA is planning to divest its remaining ownership in BCA and
\nBank Niaga in the first quarter of this year. The divestment
\nprogram was supposed to be implemented at the end of 2000 but has
\nbeen delayed due to unfavorable market conditions. The agency
\nsold 22.5 percent of its ownership in BCA through an initial
\npublic offering in May this year.<\/p>\n
Another major bank sale planned next year would be the
\nprivatization of state-owned giant Bank Mandiri sometime in the
\nfourth quarter of 2001.
\nOther agenda<\/p>\n
Another important agenda for the government and Bank Indonesia
\nnext year is to complete the necessary preparations to create a
\nnew agency that would supervise the country's banking industry
\nand other financial operations excluding the stock market.<\/p>\n
But Bank Indonesia's Djoko said that the finance ministry,
\nwhich represents the government, has so far not yet held any high
\nlevel talks with the central bank over the plans.<\/p>\n
\"The talks so far are at the working committee level,\" he
\nsaid.<\/p>\n
The finance ministry and the central bank have been occupied
\nthis year in trying to resolve the dispute over the government's
\nmassive bank emergency loans channeled via Bank Indonesia to
\nailing banks between late 1997 and early 1999 during the height
\nof the country's financial crisis.<\/p>\n
According to the Supreme Audit Agency (BPK) around Rp 80
\ntrillion of the Rp 144.5 trillion loan had been misused by the
\nrecipient banks and this was particularly due to the weak
\nsupervision of the central bank. Bank Indonesia finally agreed
\nlast month to be responsible for financing Rp 24.5 trillion of
\nthe emergency loan.<\/p>\n
Djoko also said that the transfer of the supervisory role from
\nthe independent central bank to the new agency was not related to
\nthe weaknesses in Bank Indonesia's supervisory role.<\/p>\n
\"The transfer is a global trend, it is not because our
\nsupervision has been weak,\" he said.<\/p>\n
The country's banking authority must also immediately complete
\nthe map for the country's new banking landscape. Since the
\nfinancial and banking crisis hit the country in the middle of
\n1997, the government has closed down around 67 out of more than
\n200 banks.<\/p>\n
There are currently more than 150 banks operating in the
\ncountry's still crowded banking industry, which comprises 88
\nprivate banks (including nationalized banks), four state-owned
\nbanks, 39 foreign and joint venture banks and 26 provincial
\ndevelopment banks.<\/p>\n
The remaining number of banks is still huge. \"We don't need
\nso many banks, but what we need is an extensive network of
\nbranches that can efficiently cater to customers throughout the
\ncountry,\" Elvyn said.<\/p>\n
But the government and Bank Indonesia seem to have a different
\nview on what the new banking landscape would be.<\/p>\n
The government has said that it wanted to see only a number of
\ncore banks and some smaller focus banks by 2005. But Bank
\nIndonesia has said that it wants to see a few huge domestic banks
\nthat can penetrate regional and international markets, and a
\nnumber of banks that focus on the national market, and yet
\nanother group of banks that focus on rural areas.<\/p>\n
There seems to be also no consensus on how the new banking
\nlandscape would be achieved. Some experts have said that banks
\nmust be forced into a merger process, but finance minister
\nPrijadi Prapotosuhardjo has said that the merger process must be
\nbased on market forces.<\/p>\n
Another crucial agenda for Bank Indonesia next year is the
\nplan to gradually introduce the banking supervision system from
\nthe current compliance-based mechanism to the risk-based system.<\/p>\n
Djoko said that the new measure would strengthen the country's
\nbanking supervision system.<\/p>\n
\"This is a change in paradigm,\" he said, pointing out that in
\nthe compliance based-system banks must meet Bank Indonesia's
\nprudential requirements such as legal lending limit, net open
\nposition and minimum reserves requirement.<\/p>\n
He said that in the new risk-based supervision system, banks
\nwould be forced to also calculate and manage the risk they were
\nfacing including the credit risk, and market risk.<\/p>\n
But Djoko said that the compliance-based system would not be
\nabandoned although the central bank had implemented the risk-
\nbased supervision system.<\/p>\n
\"Banks must still meet Bank Indonesia's prudential
\nrequirements,\" he said.<\/p>",
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