Banks remain fragile<\/p>\n
Two years after the restructuring of the domestic banking
\nindustry that cost about Rp 653 trillion (US$65 billion), most
\nanalysts, including government economists, remain greatly
\nconcerned about the soundness of most national banks, amid the
\npolitical uncertainty and economic woes.<\/p>\n
A number of the remaining 122 domestic banks, including
\nseveral newly recapitalized ones, may be unable to achieve the
\nminimum 8 percent capital adequacy ratio (CAR) by the December
\ndeadline. These undercapitalized banks either have to merge with
\nstronger banks or face closure.<\/p>\n
Some analysts have even warned of a new bout of banking crisis
\nthat prompted an increasing number of the upper middle and top
\nincome group to move their savings to foreign bank branches or
\noverseas for safety.<\/p>\n
To the affluent and businesses active in international
\ntransactions, the government's blanket guarantee on deposits in
\ndomestic banks seems to matter less when it comes to ensuring the
\nsafety of their money as the tumultuous political condition, the
\nsharply declining credibility of the government and the weakening
\nposition of President Abdurrahman Wahid are increasing the
\ncountry's sovereign risks.<\/p>\n
As the central bank has been steadily raising its benchmark
\nshort-term interest rates to curb inflationary pressures and
\ncurrency speculation, caused by the weakening rupiah, we now see
\ntwo strikingly different groups of banks; the first group
\nconsists of national banks that are perceived to be fragile and
\nhighly risky, and the second group consists of foreign bank
\nbranches that are seen to be sound and strong -- a safe haven for
\nfinancial assets.<\/p>\n
The wide difference in the risk factor puts national banks in
\na great disadvantage in raising funds or getting prime customers.
\nOn the other hand, although foreign bank branches offer interest
\non deposits as low as 8.50 percent, compared to between 13
\npercent and 15 percent from national banks, they are able to
\nattract many large depositors. They also become the preferred
\nbanks among export-oriented businesses, currently considered the
\nmost bonafide corporate customers and borrowers.<\/p>\n
Even though their lending operations have not yet returned to
\nthe precrisis (1997) level due to the large number of big
\nbusinesses still reeling under huge debts, foreign bank branches
\ncan still earn a lot of money simply by parking their excess
\nliquidity in the risk-free central bank's SBI promissory notes
\nthat now gives a 15.80 percent interest. This way, these banks,
\nwithout any risk or doing anything else, can book a gross
\ninterest margin of more than 6 percent.<\/p>\n
No wonder many domestic bankers have been complaining that as
\nlong as the business climate remains murky and the political
\ncondition uncertain, foreign bank branches will continue to make
\na windfall profit from the central bank's tight money policy --
\nat the expense of Indonesian taxpayers.<\/p>\n
The future prospects of the domestic banking industry are
\nworrisome indeed. The longer the present political uncertainty
\nlingers, the more hostile will be the environment for banking
\noperations. The recapitalized banks, which account for more than
\n80 percent of the industry's assets, will remain fragile as they
\nare facing a multitude of risks related to market competition,
\ncredit, interest rate, liquidity and rupiah exchange rate.<\/p>\n
Consequently, the economy will remain deprived of badly-needed
\nlifeblood as most domestic banks will have to use their resources
\nto maintain or achieve the minimum CAR standard. Most banks are
\nrefraining from big lendings, preferring to put their funds in
\nBank Indonesia's SBI debt papers because every loan is a risk
\nwhile the capital standard (CAR) is based on risk-weighted
\nassets. The dilemma though is that the financial market has not
\nyet reached such a depth as to allow for a wide variety of fee-
\ngenerating transactions. Lending remains the biggest source of
\nbank revenue.<\/p>\n
These predicaments once again testify that no amount of
\nfinancial reform will be able to help the banking industry,
\nespecially the recapitalized banks, to fully recover, and become
\nsound and strong institutions unless the macroeconomic condition
\nbecomes stable. But such a condition can only be achieved if
\nthere is a minimum level of social, political and legal
\ncertainties that allows for reasonable calculation of business
\nrisks.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/banks-remain-fragile-1447893297",
"image": ""
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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