Current banking controls counterproductive: Analyst<\/p>\n
JAKARTA (JP): Indonesia's increasing control over the banking
\nsector and lesser control on accountability can be
\ncounterproductive for the industry, a foreign banking analyst
\nsaid.<\/p>\n
Ross H. McLeod, a research fellow for the Indonesian Project
\nat Australian National University, said that government
\nintervention has been making a strong comeback since 1991, three
\nyears after the country liberalized the banking industry.<\/p>\n
\"Misunderstanding of the cause of inflation is leading to a
\nnew proliferation of controls,\" McLeod said at a seminar
\norganized by the state-owned Bank Negara Indonesia 1946 here last
\nweek.<\/p>\n
Although inflation is relatively under control, its rate has
\nalways been higher than the government's current five-year
\ndevelopment target of 5 percent per annum.<\/p>\n
Thus, there is mounting pressure on Bank Indonesia, the
\ncentral bank, to curb inflation, especially by reducing the
\nsupply of money. However, Bank Indonesia has taken a wrong
\nmeasure, controlling bank lending through what it calls \"moral
\nsuasion\" instead of really reducing money supply.<\/p>\n
McLeod contended that commercial banks do not create inflation
\nbecause their increased intermediations relocate, not add to the
\ntotal of, spending power.<\/p>\n
In turn, he continued, inflation is the result of Indonesia's
\nexchange rate policy, which has generated balance of payments
\nsurpluses throughout most of the last 25 years.<\/p>\n
\"As the result of the surpluses, Bank Indonesia is forced to
\nbuy them with rupiah, which cause the supply of base money to
\ngrow too fast. This causes inflation, which offsets
\ndepreciation,\" McLeod said.<\/p>\n
The market solution for the matter, McLeod suggested, is to
\nadopt a flexible exchange rate, instead of controlling bank
\nlending. He acknowledged that the central bank has been moving
\ntowards that direction. However, its approach is not well-focused
\nas it tries to cut capital inflow to reduce the payments surplus.<\/p>\n
\"This is anti-protection. Domestic firms (banks) are not
\npermitted to compete with foreign firms (offshore banks) and it
\nignores the fact that capital inflow is beneficial to growth and
\nincomes,\" he argued.<\/p>\n
To increase demand for base money relative to supply, Bank
\nIndonesia has increased banks' reserve ratio to 3 percent from
\nthe previous 2 percent. However, it has been reducing banks'
\nintermediation capability, McLeod said.<\/p>\n
Although the increase seems to be trivial, only by one
\npercentage point, the real increase is much larger since the
\ndefinition of the reserve requirements is changed.<\/p>\n
\"I just don't see any reasons at all for Bank Indonesia to
\nincrease the reserve requirements,\" McLeod said.<\/p>\n
The alternative to increasing bank reserve requirements is to
\nissue central bank certificates. \"But this is costly to Bank
\nIndonesia because it has to pay the interests,\" he said.<\/p>\n
By contrast, the reserve ratio amounts to a tax collected by
\nBank Indonesia, with a negative impact on intermediation. By
\nincreasing reserve requirements, Bank Indonesia saves up to $260
\nmillion annually.<\/p>\n
In addition to controlling lending and increasing reserve
\nratio, Bank Indonesia has also imposed controls on banks'
\ninvolvement with commercial paper issues.<\/p>\n
\"It tries to hold back the spread of new financial
\ntechnologies, such as commercial paper. This is like holding back
\nthe spread of savings deposits prior to 1988, by preventing bank
\nbranching and restricting banks to Tabanas,\" McLeod said
\nreferring to national development saving deposits.<\/p>\n
Competition<\/p>\n
Besides, Bank Indonesia has extended controls to non-bank
\nfinancing services and held back the expansion of different kinds
\nof financial institutions.<\/p>\n
\"Again, this ignores the obvious benefits of competition,\"
\nMcLeod said.<\/p>\n
\"To me, all of these backtracking steps are counterproductive.
\nThey are in conflict with our understanding of the economics of
\nfinance, and they ignore what we have learned from our experience
\nwith deregulation,\" he continued.<\/p>\n
He noted that the challenge now is to hold back the tendency
\ntowards renewed counterproductive government intervention in the
\nbanking industry.<\/p>\n
He commended, however, that Indonesia has a very good
\nscorecard over an extended period, with only one bank failure
\nresulting in losses to depositors, Bank Summa. The bank went
\nbankrupt in 1992, with over $800 million in liabilities.<\/p>\n
However, he noted that losses to the public caused by state
\nbanks have vastly exceeded those of private banks. And prudential
\nregulation is probably not capable of solving the problem of
\nstate banks.<\/p>\n
McLeod suggested that the government expose the state banks
\nmore to competition as there is now a lack of strong incentives
\nfor state banks to improve their efficiency and profitability.<\/p>\n
\"As the Bapindo-Golden Key Group case suggests, they are still
\nsubject to political interference in their management,\" McLeod
\nsaid, referring to the $430 million loan scandal at state-owned
\nBank Pembangunan Indonesia (Bapindo), which involved the chairman
\nof the Golden Key Group, Eddy Tansil.<\/p>\n
Therefore, he noted that moves to list state banks on stock
\nexchanges are to be welcomed because there is no real substitute
\nfor private sector owners to put pressure on managers to perform
\nas prudential regulations cannot force them to do so.<\/p>\n
Currently, the government is preparing state-owned Bank Negara
\nIndonesia to float shares on domestic stock markets.<\/p>\n
Speaking on prudential regulations, McLeod mentioned rulings
\nin New Zealand, as a comparison with those in Indonesia.<\/p>\n
In New Zealand, the regulators simply require that detailed
\nfinancial statements be posted in all branch offices -- and bank
\nofficials face very severe penalties if they provide misleading
\ninformation.<\/p>\n
The onus is on the public -- depositors and other creditors --
\nto monitor the risk of placing their funds with banks, and act
\naccordingly.<\/p>\n
In contrast, Indonesian banks are required to publish highly
\ncondensed financial statements, with very little information to
\ninform depositors and creditors about risks.<\/p>\n
And the practice seems to give them the dispensation not to
\npublish when they are in trouble -- the only time at which the
\nfinancial statements would really be of interest to depositors
\nand creditors.<\/p>\n
In effect, the public is asked to trust the central bank and
\nthe bureaucracy to look after its interests.<\/p>\n
\"But problems at Bank Duta (because of a US$420 million
\nforeign-exchange scandal), Bank Summa and Bapindo -- not to
\nmention bank failures in other countries such as the United
\nStates, Japan, France, Britain and Thailand -- suggest that
\nbureaucracy sometimes lets the public down,\" McLeod said.<\/p>\n
Moreover, he continued, Bank Indonesia's present system for
\nevaluating bank soundness is poorly designed. Soundness is
\nmeasured as a composite of performance scores in a number of
\nareas, including some that have nothing to do with risk, such as
\ncredit extended to small enterprises, and some that have very
\nlittle to do with it -- for instance, the loan to deposit ratio.
\n(rid)<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/current-banking-controls-counterproductive-analyst-1447893297",
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