Currency crisis exposes RI's bank shortcomings<\/p>\n
By Marike Stellinga<\/p>\n
JAKARTA (JP): The recent currency crisis has put the focus on
\nthe weaknesses of Indonesian banks. Although none of the problems
\nseem as severe as in Thailand, the World Bank and the IMF have
\npointed out that Indonesia's financial sector is in bad need of
\ncorrection as well.<\/p>\n
Research shows that although a collapse in the banking sector
\ndoes not necessarily cause a recession, it definitely makes an
\neconomic downturn worse. Banks are at the heart of economic life,
\nwhile overcoming the lack of information that small investors
\nhave, they form an important stimulator for economic growth in
\ndeveloping countries.<\/p>\n
Since the 1980s, banking systems in 56 countries have
\nexperienced a low or negative net worth -- meaning that losses on
\nloans were larger than capital. Among these countries were six
\nAsian economies, including the Philippines and Thailand in the
\nmid-1980s. The IMF estimates that over 130 countries were hit by
\nsignificant banking problems in this period.<\/p>\n
Since the banking sector plays a dominant role in developing
\ncountries where financial markets are shallow, the costs of these
\ncrisis are much higher in developing economies -- reaching over
\n10 percent of GDP. In addition, it is estimated that emerging
\nmarket governments spent over US$250 billion in bailing out banks
\nin the past ten years.<\/p>\n
Research of banking troubles show that the main causes are a
\ndrop in the terms of trade, a recession, poor bank supervision
\nand regulation, deficient bank management, political interference
\nand connected lending.<\/p>\n
Looking at this list, how do Indonesian banks stand?<\/p>\n
The banking sector still forms the largest source of funding
\nto companies -- for instance capitalization of the stock market
\nconsisted of about 21 percent of bank credit in May. Finance
\ncompanies' assets were about 6.5 percent of bank assets in 1995.
\nOn top of that, more than 60 percent of these companies are owned
\nby banks.<\/p>\n
At the end of last year, the ratio of capital equity to total
\nassets was 9.7 percent at Indonesian banks. Non-performing loans
\n(NPLs) stood in April at 7.6 percent of total assets. The
\nprovisions banks make for these loans are highly dependent on
\ncollateral. This does not constitute an immediate problem.
\nHowever, if the recent rupiah crisis caused these NPLs to turn
\ninto bad debts along with a fall in real estate prices, bank
\ncapital could be eaten away to dangerous levels.<\/p>\n
The fall of the rupiah does mean a decline in the terms of
\ntrade, as imports become more expensive and exports cheaper. The
\ndecline in the price of exports is unlikely to have any
\nstimulating effect on the economy as Indonesia's main competitors
\nhave experienced a currency depreciation as well. Overall,
\neconomic fundamentals are very likely to show lesser performance.<\/p>\n
As to the state of bank supervision in Indonesia, Bank
\nIndonesia (BI) itself admits that it has problems with enforcing
\nregulations. The share of banks not complying with required
\nratio's -- as for instance the ratio of risk-weighed capital to
\nassets -- is about 8 percent. In addition, the situation of 17
\nbanks is unclear as they have not published a report in the past
\ntwo to four years. Among these is state bank Bapindo.<\/p>\n
Around 20 bank scandals since 1990 -- including recently Bank
\nPerniagaan, Arta Prima and Dwipa -- involving outright fraud with
\ncommercial paper, collusion and connected lending, give the
\nimpression that BI has a hard time controlling the illegal
\nbehavior of banks. There even have been reports of involvement of
\nBI officials in some bank scandals.<\/p>\n
Since 1988, not one bank -- not even Bank Summa -- has
\nactually been liquidated, even though about 10 percent of banks
\nreportedly have crossed the line to insolvency. With this policy,
\nBI signals to the market that the risks of misconduct are small
\ncompared to the possible gains.<\/p>\n
Since the deregulation of entry in 1988, it seems that many
\nbanks are lacking human resources and expertise in assessing
\nrisks. The fact that over 70 percent of private banks in
\nIndonesia are owned by conglomerates adds to the probability of
\nbanks failing to correctly assess risks.<\/p>\n
Moreover, a large number of these banks seem to be violating
\nthe legal lending limit requirement of BI that restricts
\nconnected lending to 20 percent of bank capital. This violation
\nhas concentrated the exposure of banks to a small group of
\nborrowers, increasing their vulnerability to a change in the
\nperformance of the companies.<\/p>\n
In addition, some banks are expanding credit by 50 percent to
\n150 percent a year. Even the most developed banks lack the
\nresources to accommodate credit expansion that rapid. Banks with
\nthis kind of policy can expect to encounter a large amount of bad
\ndebts in the future.<\/p>\n
Political interference into credit allocation is widespread in
\nIndonesia. The recent selective postponement of big projects by
\nthe government does not give much hope for a change in this
\nsituation. Loans like those for the national car seem exempt from
\ncommercial evaluation -- often deterring money from better
\ncommercial projects. This could reduce bank profits as well as
\nincrease bad debts, putting a strain on the banking sector.<\/p>\n
The market for bank credit is highly concentrated in Indonesia
\nand is a reflection of the largest private business groups and
\nstate companies. Not only that, the private sector itself is
\nhighly concentrated with a lot of hazy cross-holding and
\nalliances. This means that problems in either the banking sector
\nor the private sector are tightly connected.<\/p>\n
The resilience of the banking sector ultimately depends on the
\nability of its borrowers to service debt and the ability of banks
\nto absorb portfolio losses. It seems that companies are now
\nexperiencing some trouble with large unhedged dollar liabilities,
\ndue to the previous rupiah peg to the dollar. Private capital
\ninflows to Indonesia increased from $1.1 billion in 1993 to $17.9
\nbillion in 1996, showing the increased dependence on foreign
\ncurrency denominated debt.<\/p>\n
Of course the picture is not all bad. BI has tried to curb
\nbank exposure to the property sector, encourage the merger of
\nbanks by raising capital and reserve requirements, and legal
\nactions have been initiated against bank managements involved in
\nfraud and collusion.<\/p>\n
The rupiah fall may be a blessing in disguise by rocking the
\nbank boat now, when there still is time to solve problems. The
\nball is now in the court of the financial authorities to make
\ngood on their recent promises for hard action.<\/p>\n
The writer is an MA student at the International Financial
\nEconomies Department at the University of Amsterdam, Holland,
\npresently conducting research on financial stability in
\nIndonesia.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/currency-crisis-exposes-ris-bank-shortcomings-1447893297",
"image": ""
},
"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
}