How do we choose a bank in more objective approach?<\/p>\n
Elvyn G. Masassya, Banking analyst, Jakarta<\/p>\n
Most of us, in one way or another, frequently make use of the
\nvarious services provided by a bank: time deposits, savings and
\ncurrent accounts and money transfers, just to name a few. In
\nshort, forming a relationship with a bank has very much become an
\nintegral part of our lives.<\/p>\n
However, some people go through some unpleasant experiences
\nwith their banks. Part of the nightmare or disappointment could
\nbe due to the liquidation of dozens of banks several years ago
\nand the unsatisfactory service provided by certain banks. Hence,
\nchoosing the right bank that matches your needs can be a problem
\nin itself.<\/p>\n
Currently, almost all of the 144 banks operating in Indonesia
\nlure customers with various offers, such as weekly prizes, a high
\ninterest rate and an array of personalized services. Are all
\nthese offered in the spirit of giving the best to their
\ncustomers? Is the high interest rate part of the bank's
\nbenevolence? Well, not entirely, as all these components are a
\npart of the bank's marketing strategy rather than to perform as
\nsome sort of a Santa Claus. The more a bank offers, probably the
\nmore watchful one should be.<\/p>\n
Why so? The answer is simple. Basically, a bank is an
\ninstitution of trust and operates on this principle. So, your
\nchoice of any bank as your financial partner must first be based
\non its trustworthiness and much less on its offers of a brand-new
\nMercedes Benz or BMW.<\/p>\n
Any bank you choose these days will not pose any financial
\nrisk, as all banks are guaranteed by the government, as long as
\nthey are paying the security-guarantee fees. This means that even
\nif a bank is liquidated, your money is safe as it will be paid by
\nthe government. However, this scheme will not last forever, as it
\nwill be reduced in stages by the latest in 2005, at which time it
\nwill be provided by an institution, Depositors' Guarantor
\nInstitution (LPS) or by some kind of deposit insurance. Even
\nthese institutions will have a limited guarantee, such as for
\ndeposits below Rp 100 million. In other words, major customers
\nwith huge deposits will have to face the risks on their own. To
\navoid any of the worst scenarios, prudence is, therefore, most
\nimportant.<\/p>\n
Choosing a bank is admittedly not that easy. Among the various
\nconsiderations, some base their choices on rational thinking, but
\nquite a number of people are emotionally driven. How should one
\nselect a bank in a more objective way?<\/p>\n
Basically, there are two ways in choosing a bank. First is the
\npsychological approach, which is similar to deciding on your
\nmarriage partner. What must be applied is the bibit, bebet and
\nbobot (Javanese words for lineage, rank, wealth and origins -- a
\ncriteria for evaluating a prospective son or daughter-in-law) of
\nthe bank.<\/p>\n
What is meant by bibit is the background of the bankers. If
\nthey used to be traders, most often they have trader's instincts
\nand apply these in running the bank. One must be careful about
\nthis, because a bank must be managed with utmost prudence, while
\na trader usually disregards risk factors just for the sake of
\nmaking quick profits. This kind of paradigm, if applied in banks,
\nwould be hazardous.<\/p>\n
Bebet is analogous to the quality of a bank's assets. A bank's
\nhealthy assets are reflected positively in its earnings. To
\nassess its assets, one has to analyze the percentage of the
\nbank's problematic or non-performing loans, which, to be healthy,
\nshould not be more than 5 percent of the total loans.<\/p>\n
Bobot refers more to the management skills or professionalism
\nin running the bank. Theoretically at least, bankers with years
\nof relevant experience perform better than the newcomers or, from
\nanother perspective, a bank that has been established for decades
\nshould be more solid than a newly born bank.<\/p>\n
Next there is a more scientific approach based on an empirical
\nstudy of a bank's performance.<\/p>\n
First, take a look at the bank's interest rate. The higher it
\nis, in comparison to another bank with a similar level of assets,
\nthe riskier the bank. The argument behind it is this bank is in
\nneed of more liquidity and that's why it dares to offer a higher
\ninterest rate. Either that, or the bank is afraid of losing its
\ncurrent customers. Another possible reason is the bank has given
\nlong-term loans, while its current sources of funds is short-
\nterm. To face their own problems in repaying short-term funds and
\nto retain them, the bank, obviously, has to collect fresh funds
\nby offering higher rates of interest. Therefore, one has to be
\nextra cautious about banks that offer interest rates much higher
\nthan their competitors.<\/p>\n
Second is the structure of ownership and management. Quite a
\nnumber of the problematic banks are those with a close
\nrelationship between its owners and the management. Take a bank
\nthat is run by a management team and which has close family
\nmembers of its owner. Here, there is a great probability that the
\nbank will be doing business mostly in the interests of its owner,
\nwhich is in contradiction to the principle of prudence. While not
\nall banks are managed in this manner, quite a number in this
\ncategory tend to face difficulties in the area of professional
\nbank management.<\/p>\n
Another category is banks with owners who are the sole or
\nmajority shareholders. With this kind of setting, it is
\nimaginable how easy it is for the owner to intervene for his own
\nagenda and \"milk the cow\" for his other companies. So, be on the
\nlookout.<\/p>\n
Third is asset growth. One should think twice about a bank
\nwith a super rapid growth of its assets. Assets should grow at a
\nnatural pace, so, more often than not, the bank's growth of
\nassets, say in tenfold, just within a year should set off some
\nquestions in your mind. Growth could be due to major steps of
\nexpansion, which are not a sure-fire sign of success. It could
\nalso mean that the bank has a large number of non-performing
\nloans and the debtors' unpaid interest has been turned into its
\n\"capital\" in the form of new loans for the existing non-
\nperforming clients, which make the asset look larger. This larger
\nasset is none other than a bubble asset. So beware of owners of
\nbubble assets.<\/p>\n
The gifts, prizes and other grand promotional activities are,
\nneedless to say, an implication of cost. To cope with these
\ncosts, the bank usually reduces its interest rates for your time
\ndeposits, savings and the like. The conclusion is try not to make
\nthe promotional activities the only parameter for choosing a
\nbank. Prudence is the key word.<\/p>",
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