Banking system remains fragile<\/p>\n
The People's Consultative Assembly recommended last week that
\nthe government take firm measures against banks that fail to meet
\nthe December 31 deadline for achieving the prudential standards,
\nnotably the minimum capital adequacy ratio of 8 percent and
\nmaximum nonperforming loans of 5 percent.<\/p>\n
The recommendation reflects greater concerns about the
\nviability of the banking industry after the closure late last
\nmonth of the insolvent, publicly listed Unibank, and because a
\nnumber of banks, including those recapitalized in 1999 and 2000,
\nmay not be able to meet the prudential standards.<\/p>\n
As the economic condition worsens amid the gloomier outlook of
\nthe global economy after the September 11 terrorist attacks on
\nthe United States, banking operations now face greater risks of
\nbad credit.<\/p>\n
True, banking, by its nature, entails a wide array of risks
\neven under stable macroeconomic conditions, let alone in
\nIndonesia, which has been mired in a multi-dimensional crisis
\nsince 1998. That is why, despite the massive deregulation
\ncampaign around the world, the banking industry remains the most-
\nregulated sector in all countries, subject to prudential
\nregulations and tough supervision.<\/p>\n
But as the case of Unibank shows, Bank Indonesia's supervisory
\nmechanism seems ineffective. Worse still, the Indonesian Bank
\nRestructuring Agency (IBRA) has not done any better in overseeing
\nthe 11 recapitalized (nationalized) banks under its management.<\/p>\n
After its restructuring and recapitalization by the
\ngovernment, which cost taxpayers almost US$65 billion or 50
\npercent of the country's gross domestic product, the banking
\nindustry remains fragile as most banks have yet to reassume their
\nintermediation role to pump lifeblood into the economy.<\/p>\n
More worrisome is that it was only last month that the IBRA
\nset up a special task force to examine and decide what to do with
\nthe recapitalized banks that are most likely unable to achieve
\nthe prudential standards set.<\/p>\n
Yet another troublesome development was how the central bank
\nmishandled the closure of Unibank. Bank Indonesia has often
\nclaimed that its supervision mechanism is fully based on the core
\nprinciples for effective banking supervision of the Basel,
\nSwitzerland-based Bank for International Settlement.<\/p>\n
Nonetheless, the cause of Unibank's insolvency was the same
\ndiseased violation of legal lending limits to connected parties
\nthat was mainly responsible for making Indonesia's banking crisis
\nin 1998 the worst implosion of a financial system any nation has
\never suffered over the past 50 years.<\/p>\n
Whatever the argument raised by the central bank to justify
\nits latest action, Bank Indonesia failed to conduct sound and
\nprompt intervention when Unibank's financial condition was found
\nto be alarmingly fragile.<\/p>\n
The same degree of delay and indecisiveness also seems to have
\nheld up firm actions on several other distressed banks and put
\noff badly-needed improvement in the government's blanket
\nguarantee for banks' deposits and claims.<\/p>\n
True, the blanket guarantee has to be maintained, otherwise
\nnational banks would collapse. Yet we wonder why the government
\nhas not yet lowered the interest rate ceiling for guaranteed
\ndeposits to force depositors to judge for themselves the risk
\npremium of banks. Why have interbank loans remained covered by
\nthe guarantee? If a bank is not able to judge the viability of
\nother banks, is there still a single reason to help support the
\nsurvival of such a bank?<\/p>\n
All these delays and indecisiveness have increased the
\ncontingent liabilities of the government with regards to the
\nbanking industry, especially now that the government already owns
\nalmost 80 percent of the banking industry as a result of massive
\nrecapitalization in 1999 and 2000.<\/p>\n
The government is now facing a great dilemma. Compromising on
\nthe prudential standards means letting a time bomb continue
\nticking within the banking industry. Closing below-standard banks
\nmay further damage public confidence in the industry. Forcing
\nmergers among weak banks would only make a bigger time bomb.<\/p>\n
It is needless to reemphasize, therefore, that firm action
\nmust be taken next month. Below-standard banks that will not
\ncause big claims on the blanket guarantee fund should be closed
\ndown once and for all, while medium-size banks under IBRA must be
\nconsolidated with bigger ones.<\/p>\n
Further delays would only postpone another, bigger banking
\ncrisis, which the government could certainly not cope with, as
\nthe public sector itself is already on the verge of being
\ndefaulted under mountains of foreign and domestic debts.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/banking-system-remains-fragile-1447893297",
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"sponsor": "Okusi Associates",
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