Lessons of Lippo<\/p>\n
A clearing loss of a mere Rp 10 billion (US$4.4 million) for a
\nbank with assets of more than Rp 7.6 trillion ($3.3 billion) and
\na pre-tax profit of Rp 65.3 billion in the first half of this
\nyear should not have caused such a big fuss. Neither should such
\na one-off mismatch of cash in the clearing of checks have
\ncommanded the front-page of several newspapers for several days.
\nBut that was the irrational reaction to Lippo Bank's clearing
\nloss of about Rp 10 billion early this month.<\/p>\n
Lippo Bank, one of the country's five largest private banks,
\nis traded on the domestic stock exchanges and is therefore
\nsubject to stringent disclosure requirements. Its latest report,
\ncovering the first semester of this year, shows that the
\nfundamentals of the bank are solid. Its financial ratios are
\nquite sound. Private savings and demand deposits, for example,
\naccount for 63 percent of the bank's total assets. That reflects
\nits broad customer base.<\/p>\n
The puzzling question then is why such a one-time mismatch of
\nfunds could have caused such a big stir. We are inclined to think
\nthat the problem was blown out of proportion by negative rumors.
\nSince the basic asset of banks is the public's trust, rumors can
\nhurt their operations.<\/p>\n
Why has Lippo Bank been the target of such negative rumors? We
\nagree with Laksamana Sukardi, a former executive director of
\nLippo Bank, who blamed the irrational reaction to the clearing
\nloss on the Lippo group's high profile in the property
\ndevelopment sector. All bankers and analysts should know that the
\ncycle of the property business from boom to bust is very short.
\nThe biggest cause of bad debts of banks in Indonesia, as in most
\nother countries, has been lending to property developers.<\/p>\n
Lippo has been very aggressive in property development in
\nGreater Jakarta. The group is simultaneously developing three
\nsatellite towns for middle- and high-income people in Tangerang
\nand Bekasi. The nature of the property business forces the group
\nto have a high profile in order to market its luxury houses and
\nother modern amenities through advertisements in the mass media.<\/p>\n
Lippo's huge investment in property development has
\nunavoidably raised eyebrows among analysts. So when word got out
\nthat Lippo Bank had suffered a clearing loss of Rp 10 billion on
\nNov. 2, the rumor mill began running at a full speed.<\/p>\n
Fortunately, the rumors were short-lived, thanks to the speed
\nwith which the management of Lippo Bank acted to counter the
\nirrational claims being made. We also greatly welcome the support
\nprovided by four other major private banks: Bank Danamon, Bank
\nCentral Asia, Bank Bali and Bank Internasional Indonesia. That
\nsupport accelerated, we think, the restoration of the public's
\nconfidence in Lippo Bank. Had the rumors and jitters lingered, a
\nrun on the bank could not have been avoided and such a
\ndevelopment could have affected the whole banking system.<\/p>\n
Hardly any bank, however big it may be, is capable of handling
\na massive run. And a bank failure, unlike a company bankruptcy,
\nalways has far-reaching repercussions because banks are engaged
\nin a multiplicity of transactions with one another (inter-bank
\ndeals) and with each others' customers.<\/p>\n
We think the Lippo Bank episode contains a reminder to the
\ncentral bank (Bank Indonesia) and the monetary board that they
\nmust always monitor closely the activities, not only of banks,
\nbut also of their subsidiaries and affiliates. The incident also
\nserves as a reminder to Lippo Bank and other banks that they
\nshould refrain from activities which can lead to
\nmisunderstandings and negative rumors.<\/p>",
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"sponsor": "Okusi Associates",
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