Banking sector makes progress, challenges remain<\/p>\n
Dadan Wijaksana, The Jakarta Post, Jakarta<\/p>\n
It has been six years since the banking sector started its
\nrestructuring efforts. Still, while improvement in its financial
\nhealth is undeniable, certain flaws remain -- indicating that the
\nrecovery process is still a long way off.<\/p>\n
On a year-to-year basis, key indicators to gauge the sector's
\nfinancial health are improving and on par, or even better in some
\ncases, than those posted by banks in other countries that were
\nalso hit by the economic crisis in the late 1990s.<\/p>\n
At the same time, however, the discovery of two massive fraud
\ncases at two state-owned banks is yet another blow to the sector,
\nwhich is still struggling to get back on its feet.<\/p>\n
Lending fraud cases in state-owned Bank Rakyat Indonesia (BRI)
\nand Bank Negara Indonesia (BNI), the nation's fourth and second
\nlargest banks respectively, have exposed weak internal controls
\nin each bank, and a poor supervisory mechanism of Bank Indonesia
\n-- two of the foremost reasons behind the sector's fall during
\nthe 1997-98 financial catastrophe.<\/p>\n
Many say that it is only the government's blanket guarantee
\nprogram that has prevented the sector -- or at least the two
\nbanks -- from being hit by a massive rush. Under this program,
\nthe government will cover all banks' public funds and other
\nliabilities when they go bust.<\/p>\n
The BNI case revolves around the disbursement of about Rp 1.7
\ntrillion (about US$200 million) last year, in what was claimed to
\nbe export credit facilities to some exporters backed by
\nfictitious letters of credit from foreign banks, which are not
\neven BNI's foreign bank correspondents.<\/p>\n
As for BRI, which has earlier successfully launched its
\ninitial public offering, the case centered on irregular banking
\ntransactions involving Rp 300 billion.<\/p>\n
The alleged scams only confirmed that Indonesia had so far
\nlearned little from the last banking crisis. As such is worrying,
\nas it could mean that the sector is back to square one despite
\nmore than Rp 600 trillion worth of public funds injected by the
\ngovernment.<\/p>\n
Of equal significance is that the fraudulent practices could
\nweaken investor confidence in the sector, putting at risk the
\ngovernment's drive to sell its stake in a number of banks. In
\nmonths to come, the majority stake in Bank Permata will be on
\nsale while the auction of the controlling block in Bank Lippo has
\nrecently been relaunched.<\/p>\n
Even if investors are not second-guessing their investment
\nplans in Indonesia just because of the scams, they might try to
\ntake advantage of it by lowering their bidding prices, according
\nto experts, thus hurting the cash-strapped state coffers.<\/p>\n
Another major concern overshadowing the banking sector's
\nperformance this year was the slow growth in lending to the
\ncorporate sector, albeit aggressive moves by Bank Indonesia to
\nreduce its benchmark interest rate.<\/p>\n
According to the central bank's latest assessment, banks loans
\nto corporations have been so far growing by less than 2 percent
\nfrom last year, insufficient for the sector to play a significant
\npart in generating higher economic growth.<\/p>\n
\"Banks loans need to grow at between 20 percent to 22 percent
\nper annum to be able to push the economic growth to around 5
\npercent,\" Burhanuddin Abdullah, the central bank governor, said
\nrecently, citing various economic surveys.<\/p>\n
In their defense, bankers have said the country's corporate
\nsector remained risky, amid slow progress in the restructuring of
\ncorporate debts. Most banks are consequently focussing their
\nloans more on consumers, which includes credits for individuals
\nand small and medium-sized enterprises (SMEs), rather than on the
\nreal sector.<\/p>\n
The slow lending activities were in contrast if compared to
\nother indicators to measure a bank's financial health. Among
\nother things, the sector has managed this year to improve its
\ncapital adequacy ratio (CAR) and non-performing loans (NPLs).<\/p>\n
Loans are categorized as non-performing if the interest
\npayments failed to be repaid in 90 days. CAR meanwhile measures a
\na comparison between a banks capital against risk-weighted
\nassets, such as loans.<\/p>\n
As of September, the average CAR level was around 23 percent
\n-- higher than some 21 percent posted last year and way above the
\ncentral bank's minimum requirement of 8 percent. Meanwhile, the
\naverage NPL ratio stood at 7 percent as compared to 12 percent in
\nthe same period last year.<\/p>\n
According to data from the World Bank, CAR and NPL ratios of
\nIndonesia's banking sector were no less impressive than banks in
\nother crisis-hit nations such as Malaysia, Thailand, the
\nPhilippines and even South Korea.<\/p>\n
Such improvement has partly contributed in attracting the
\ninterest of foreign investors on local banks, which resulted in
\na series of fairly successful sales in both the majority and
\nminority stake in local banks.<\/p>\n
This year, the sales of a controlling stake in Bank Danamon,
\nBank Niaga and Bank Internasional Indonesia (BII) have all been a
\nsuccess story. That adds to the more remarkable showing in the
\nsales of minority stakes (through the initial public offering
\nmechanism) in Bank Mandiri and BRI.<\/p>\n
To this point, indeed progress has been made.<\/p>\n
It is up to the authority now whether or not the momentum
\nwould be maintained. To be sure, if the sector does not want to
\nlose the interest of investors, steps are needed to ensure that
\nbanking scams similar to that of BRI and BNI would no longer
\noccur.<\/p>\n
Improving the corporate governance, intensifying surveillance
\nsystems, providing tougher screening process for bankers, are
\npart of a must-do list of actions Bank Indonesia needs to
\nundertake to speed up efforts and create a sound banking system.<\/p>\n
There are also attempts by the central bank to help knock the
\nbanking sector into better financial shape, especially in the
\nform of banks' prudential regulations. It plans to introduce a
\nwider range of the Basel Accord II principles to help it help
\nmeet the international standard of best banking practices.<\/p>\n
The success of such efforts would be crucial to maintain the
\nmomentum, accelerate the banking reform and thus restore
\nconfidence in the sector. It will also make the sector better
\nequipped to enter yet another year of restructuring process and
\ncould probably end it on a high note.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/banking-sector-makes-progress-challenges-remain-1447893297",
"image": ""
},
"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
}