Govt to blame for state of banking industry<\/p>\n
The government has decided to take over shares in four ailing
\nbanks under its scheme to restructure the country's banking
\nindustry. Economist Kwik Kian Gie discusses unfairness in the
\nvaluation of the banks' assets.<\/p>\n
JAKARTA (JP): The banking industry started to decay in 1990
\nbut the government, in spite of repeated warnings from analysts,
\nfailed to take the necessary measures to prevent it from further
\ncollapse.<\/p>\n
Now that the damage has been done, the government must take
\nlegal measures as fairly as possible against all personnel
\nresponsible for the damage, without distinguishing whether they
\nare bankers or debtors, indigenous or nonindigenous, cronies or
\notherwise. Legal treatment should also be fair for both privately
\nowned and state-owned banks.<\/p>\n
The latest phase of the industry's free fall has been partly
\ncaused by the government's failure to tackle head on the sharp
\ndepreciation of the rupiah against the U.S. dollar since July
\n1997.<\/p>\n
Instead of directly addressing the exchange rate system, the
\ngovernment dealt with matters surrounding the system, as if it
\nwere just dancing around the real problem.<\/p>\n
As a result, the rupiah lost more than 80 percent of its value
\nand industrial companies, particularly those largely dependent on
\nimports, collapsed one after the other. In such a situation, they
\nfailed to service their debts and their creditor banks,
\ntherefore, began to face financial difficulties.<\/p>\n
With the liquidation of 16 banks last November by the
\ngovernment without any guarantee for the repayment of deposits
\nand savings, depositors no longer trusted the banking industry
\nand rushed to withdraw their deposits from domestic banks.<\/p>\n
Bank Indonesia, the central bank, then printed a lot of money
\n(up to Rp 140 trillion or US$11.6 billion) and injected it into
\nbanks affected by the rush. Such a measure caused inflation to
\nsurge.<\/p>\n
In response to the high inflation, the central bank raised
\ninterest rates on its promissory notes, SBI, up to 58 percent per
\nannum, driving commercial banks to increase their lending rates
\nup to 70 percent per year. The high interest rates further
\naffected industrial companies, particularly those highly
\ndependent on bank loans.<\/p>\n
So, the blame for the damage to the banking industry should
\nnot be put on the banks or their borrowers but on the government,
\ninstead, which has no capability to manage the country.<\/p>\n
Another problem is now also being encountered by shareholders
\nof publicly listed banks whose operations the government have
\nsuspended. Public investors holding the shares of Bank Dagang
\nNasional Indonesia (BDNI), for instance, have suddenly found that
\nthe value of their shares is now less than that of toilet paper
\nbecause the Jakarta Stock Exchange has suspended their trading,
\nwhile the funds of shareholders are not guaranteed by the
\ngovernment.<\/p>\n
Frustrated that a lot of its funds could not be recovered from
\nthe ailing banks, the government decided to take over their
\nassets instead. But the government was surprised to find out that
\nthe banks' assets were worth only about 4 percent of the value
\nthey had claimed. The government, therefore, decided to acquire
\nthe assets of companies affiliated to the banks.<\/p>\n
Will the government be able to manage all the banks and their
\naffiliated companies? Yes, because its ownership of the banks and
\ncompanies will be temporary and it will soon sell them again (at
\ndiscounted prices?) to foreign investors.<\/p>\n
Why did the government find that the value of the banks'
\nassets was so small? That is because it hired foreign accountants
\nwho are not necessarily clever or wise. The accountants, using a
\ncertain method, valued the assets as nil or merely 10 percent.<\/p>\n
Differences in the valuation of assets can occur because the
\nbanks and their affiliated companies have been using Indonesian
\naccounting standards for years, while the government's foreign
\naccountants use a different standard which has never been
\ndisclosed transparently.<\/p>\n
However, some sources said that the government's accountants
\nhave arbitrarily adopted a discounted cash flow method -- under
\nwhich the value of assets is calculated on the basis of the net
\npresent value of their future cash flow -- without considering
\nthat Indonesia is now experiencing a very serious economic
\ndepression and stagflation (a combination of growth stagnancy and
\nhigh inflation).<\/p>\n
In determining future cash flow, the accountants just
\nextrapolated the current cash flow, which is surely very bad due
\nto the economic depression. The estimated future cash flow of a
\nhigh-rise office building on Jl. Sudirman, for example, is
\nconsidered nil because its current cash flow is nil during this
\nperiod of economic inactivity.<\/p>\n
There are actually many different ways in valuing the assets
\nof companies, depending on whether they are still operating,
\nwhether they will be liquidated\/sold out, whether they will be
\nsold through normal marketing procedures or auctioned off and
\nwhether the assets will be sold as a whole in a package or
\nseparately.<\/p>\n
The discounted cash flow method is commonly used to value the
\nassets of companies' going concerns but the determination of the
\nfuture cash flow is not based on the extrapolation of the current
\ncash flow which is affected by economic depression. If a company
\nis no longer in operation, its assets should be valued on the
\nbasis of liquidation prices agreed upon by a potential buyer who
\nwill be able to revive it.<\/p>\n
If the government wants to recover its funds from the ailing
\nbanks or convert the funds into shares, it should regard them and
\ntheir affiliated companies as corporations which are going
\nconcerns on the assumption that the economy will improve in the
\nmedium to long term and that different treatment should be
\ndetermined on a case-by-case basis.<\/p>",
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