Tempest at Bank Mandiri<\/p>\n
The protracted investigations into alleged lending fraud and
\nbad governance at state-controlled, publicly-traded Bank Mandiri
\nare aggravating the already negative market sentiment about the
\ncountry's largest bank.<\/p>\n
And in banking, sliding sentiment means serious money. The
\nincessant wave of negative media publicity that began after
\npublic prosecutors began questioning the bank's executives three
\nweeks ago, has thus far eroded the bank's market capitalization
\nby almost Rp 10 trillion (US$1.04 billion).<\/p>\n
A bank is an institution of trust and its operations are
\nfounded on public good faith and positive market perceptions.<\/p>\n
The piecemeal release of information by public prosecutors
\neach time Bank Mandiri directors were questioned at the AGO has
\nnothing to do with a transparent process. The bad publicity has
\nactually, it could be argued, created a distorted impression;
\nthat a large number of Bank Mandiri executives have committed
\nlending fraud or colluded with corporate borrowers. Meanwhile,
\nnot a single Mandiri executive has yet been declared a suspect in
\nany wrongdoing.<\/p>\n
However, the damage has been done. New lending has practically
\ndried up at the bank and many corporate clients have considered
\nmoving their accounts to other institutions. Potentially new
\ncustomers, concerned about the manner in which bad credit was
\ntreated at Bank Mandiri, have decided instead to choose other
\nbanks.<\/p>\n
Meanwhile, Bank Mandiri, according to its audited 2004
\nfinancial report, is a fundamentally sound bank. The bank's
\ncapital adequacy ratio almost tripled the minimum level set by
\nthe central bank and its non-performing loans of 7.1 percent were
\nway below the maximum allowed by a prudential ruling. The bank
\nbooked a net income of Rp 5.2 trillion last year, up almost 15
\npercent from 2003.<\/p>\n
We wonder, therefore, why the AGO did not coordinate with Bank
\nIndonesia, the supervisor of the banking industry, when it
\nfollowed up the findings of the Supreme Audit Agency's report on
\nBank Mandiri.<\/p>\n
The tempest the bank is now encountering would not have
\noccurred had the investigations been conducted without a
\nprearranged bang of media coverage.<\/p>\n
Having said this, we do not suggest that the auditors'
\nfindings about suspected reckless lending practices, lax risk
\nmanagement and fraud at Bank Mandiri should be treated lightly.<\/p>\n
On the contrary, the findings urgently require quick and firm
\naction on the part of the AGO regarding any white collar crime
\ncommitted, while Bank Indonesia needs to speedily identify and
\nrectify any problems with the bank's risk management system.<\/p>\n
The auditors' reports did raise great concerns and validate
\nour apprehension that state-controlled banks, after spending
\nbillions of dollars in taxpayers' money for their
\nrecapitalization, have yet to restructure their operations and
\ndevelop a strong system of good governance with an effective
\ninternal control mechanism.<\/p>\n
At issue here is the manner in which the AGO conducted the
\ninvestigations and the technical competence of many public
\nprosecutors assigned to the case.<\/p>\n
While auditors may have detected several bad loans at Bank
\nMandiri, they must carefully and thoroughly analyze them so that
\ninvestigators can distinguish between outright lending fraud or
\nimprudent lending practices and bad credit that has turned sour
\nbecause of unavoidable business risks.<\/p>\n
Effective risk management should be a vital component in the
\noperation of a bank because banking inherently entails taking a
\nwide array of risks because of credit, market, interest rate,
\nliquidity, operational and legal uncertainties. That is also why
\nbanks are subject to so many prudential regulations as set by the
\ncentral bank as the supervisory authority.<\/p>\n
Credit risk is one of the biggest of all the risks inherent in
\nbanking operations. Lending, which is the primary activity of a
\nbank and is its main source of income, requires careful judgment
\nof borrowers' creditworthiness, which may decline overtime.<\/p>\n
Credit-risk management at banks should therefore be based on
\nsound principles related to loan approval and administration
\nprocedures, internal loan grading and classifications. Connected
\nor collusive lending could cause bad loans and consequently erode
\na bank's capital base.<\/p>\n
Bank Mandiri, according to the auditors' reports, had been lax
\nin its assessment and monitoring of several big creditors. The
\nauditors also concluded that the bank was careless in monitoring
\nthe quality of their collateral.<\/p>\n
The AGO and Bank Indonesia need to cooperate to establish
\nwhether the lax risk management and reckless lending practices
\nwere caused by collusion between a few crooked credit officers or
\nanalysts and borrowers, or by inadequate system of risk
\nmanagement, including deficient internal controls.<\/p>\n
If the latter turns out to be the case, we then have another,
\neven greater worry -- the inadequate supervisory capacity on the
\npart of the central bank, stemming either from technical
\nincompetence or the questionable integrity of Bank Indonesia's
\nbank supervisors.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/tempest-at-bank-mandiri-1447893297",
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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