Firmer measures needed to consolidate banks<\/p>\n
The panel of economists urged the government to take firmer
\nmeasures against banks still failing to meet the minimum
\nprudential standards set by the central bank, otherwise the whole
\nbanking industry would remain highly vulnerable to shocks.<\/p>\n
\"The banks have been cleaned up of their bad assets and
\nrecapitalized, and their losses have been transferred to the
\nfiscal sector, yet they are still unable to resume proper
\nfinancial intermediation,\" one panelist noted.<\/p>\n
What the panelist was referring to was the fact that the
\ngovernment had recapitalized all state banks and seven major
\nprivate banks, reimbursed depositors and creditors of closed
\nbanks and taken over bad loans from banks at a total cost of
\naround Rp 650 trillion (US$65 billion).<\/p>\n
The government covered the huge cost by issuing bonds that
\ncost taxpayers almost Rp 60 trillion in interest charges
\nannually.<\/p>\n
Another panelist asserted that it would be better to close
\nweak banks now than continue to support them at the risk of
\nthreatening the whole banking industry.<\/p>\n
Closure, he added, would involve spending up front but would
\nreduce costs over the medium term and at the same time generate
\nmarket confidence in the whole industry.<\/p>\n
Further delays and indecisiveness would only increase the
\ncontingent liabilities of the government with regard to the
\nbanking industry, especially now that the government already owns
\nmore than 70 percent of the banking industry as a result of
\nmassive recapitalization in 1999 and 2000.<\/p>\n
Further delays would only postpone another, bigger banking
\ncrisis, which the government certainly could not cope with, since
\nthe public sector itself is already on the verge of default under
\na mountain of foreign and domestic debts.<\/p>\n
Though the massive restructuring decreased the number of
\ndomestic banks from 178 in 1997 to 120 at present, it is
\nconsidered still too many for the central bank to supervise.
\nWhile most other countries have raised the capital standards of
\ntheir banks to a minimum 12 percent, the capital adequacy ratio
\n(CAR) of most Indonesian banks is only 8 percent, the minimum
\nlevel set by Switzerland's Bank for International Settlement
\n(Basle).<\/p>\n
Given the highly risky business environment in the country and
\nthe lenient asset classification applied to banks, the minimum
\nCAR for Indonesian banks should at least be 15 percent to provide
\na stronger cushion for shocks.<\/p>\n
Most major banks, notably those recapitalized in 1999 and
\n2000, have been awash in liquidity but they still hesitate to
\nresume corporate lending, apparently due to the high risks of
\neroding their capital standard.<\/p>\n
Data at the central bank shows that bank loans outstanding as
\nof August totaled only Rp 287.8 trillion, compared to Rp 734
\ntrillion third-party deposits raised by banks. This means a
\nlending-to-deposit ratio of less than 40 percent.<\/p>\n
Worse still, nonperforming loans, though down from 36.14
\npercent in June 2000, to 20.60 percent in December 2000, remained
\nrelatively high at 15.50 percent as of September, still much
\nhigher than the minimum percent required by Bank Indonesia.<\/p>\n
Lack of significant progress in corporate debt restructuring,
\nfragile economic recovery and continued uncertainties seem to
\nhave forced banks to opt first for safety by investing the bulk
\nof their funds in central bank promissory notes or lending to the
\ninterbank market.<\/p>\n
As the CAR (the ratio between capital and risk-weighted
\nassets) of many major banks remain close to the minimum 8 percent
\nand the economic condition is worsening amid the gloomier outlook
\nof the global economy after the Sept. 11 terrorist attacks on the
\nUnited States, banks have been extra careful about new major
\nlending.<\/p>\n
The persistently tight monetary policy imposed by the central
\nbank to cope with strong inflationary pressures caused by the
\nweakening rupiah has made things even much tougher for commercial
\nbank operations, with their costs of funds often higher than
\ntheir lending revenues.<\/p>\n
Moreover, as the assets of the recapitalized banks are
\ndominated by government bonds, which are rather illiquid due to
\nan undeveloped secondary market, many banks are not really as
\nhighly liquid as widely assumed because they cannot easily
\nconvert their bonds to cash.<\/p>\n
Without a significant increase in new lending, most banks will
\nremain highly vulnerable to shocks since domestic banks, unlike
\nforeign banks which have developed a significant source of fee-
\nbased incomes, still depend mainly on net interest margin for
\ntheir incomes.<\/p>\n
However, the pace of corporate lending will be determined by
\nthe performance of the business sector. As long as most medium
\nand large business conglomerates remain in the care of the
\nIndonesian Bank Restructuring Agency (IBRA), being treated for
\ntheir huge bad debts, banks will find it difficult to get viable
\nborrowers.<\/p>\n
The panelists sharply criticized the central bank's
\npersistently tight monetary policy, arguing that since the fiscal
\nsector cannot provide any stimulus, Bank Indonesia should
\nsubstantially ease the money supply to fuel economic activities.<\/p>\n
They found it hard to comprehend the rationale behind the
\ncredit crunch at a time when most businesses are in bad need of
\ncredit financing and most other countries have sharply cut their
\ninterest rates.<\/p>\n
The tight monetary policy makes the environment inimical for
\nthe restructured banks to expand lending operations.<\/p>\n
The government would be well advised to sell as quickly as
\npossible most of the banks it now wholly owns or in which it has
\na majority stake to new investors to speed up their operational
\nrestructuring.<\/p>\n
Without operational restructuring -- the rationalization of
\nbranches and staffing level, improvements in credit practices,
\nrisk management and internal governance -- the banks will never
\nregain public confidence and will therefore continue to depend on
\nthe government blanket guarantee, under which the government has
\nguaranteed all depositors' money.<\/p>\n
People are still willing to keep their money at domestic banks
\nmainly because of the government guarantee. But even with the
\nsupport of this guarantee, domestic banks are still perceived to
\nbe highly risky, as reflected in the much higher deposit interest
\nrates they have to offer to attract depositors, compared to those
\ngiven by foreign banks.<\/p>\n
But the blanket guarantee is only an emergency measure that is
\nsupposed to be terminated within one or two years to allow the
\nmarket forces to screen out structurally weak banks.<\/p>\n
It is nonetheless widely expected that the pressures on the
\nrupiah will decline next year as political stability takes deeper
\nroot. A stable and stronger rupiah will decrease inflationary
\npressures, thereby enabling the central bank to relax its credit
\ncrunch.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/firmer-measures-needed-to-consolidate-banks-1447893297",
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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