1997 not good for bank expansion

By Laksamana Sukardi

JAKARTA (JP): To reach sustainable and prudent growth, Indonesian banking should be able to cope with pressures and consolidate its structure in the coming years. Is it capable of consolidating in a well-oriented and effective way? The process will apparently take a long time.

Acceleration in banking consolidation is strongly required to face a number of serious threats which impede sustainable and prudent growth of national banking.

National banking is going to face the threat of a reduced market share. The growth of credit portfolios especially will slow down, both in quantity and quality. 1. Threat from the capital market. Nearly all companies with high credit worthiness will abandon banking intermediary services. These companies will draw funds directly from the capital market in the form of equities and obligations. As a result, Indonesian banking will experience deterioration in the quality of its credits. 2. Threat from foreign banks. With the progress of information technology, foreign banks will dominate the field and increase their market share in Indonesia, without having to be physically present. Electronic banking technology to serve corporate customers is now being offered to retail customers and consumers. Thus, bank transfers by letter of credit and credit card can be completed electronically from the customer's residence. Likewise, deposit transactions with an offshore bank can be completed directly from somebody's home.

The two threats compel Indonesian banking to restructure their organization to enable them to survive. However, the endeavors come head to head with the following current problems: 1. Rumor sensitive. Indonesian banking is highly sensitive toward rumors. This is due to the lack of transparency and disclosure. Consequently, no bank has ever dared to issue a financial report, both in the interim report and the annual report, showing it has suffered a loss. Because of the vulnerability towards rumors, Indonesian banks feel compelled to do some window dressing. 2. Bank size. Indonesian national banks are relatively very small, both in assets and in equity, compared to foreign banks. Smaller banks are naturally compelled to take greater risks. This fact, which is further influenced by tight interbank competition and the economic boom of a few years ago, has led to the existence of problem banks, which constitute the main factor for the increase in inefficiency of national banking. 3. Liquidity gap. Liquidity of national banking is provided by short-term fund resources. More than 70 percent of the funds in banking mature within three months. This dominant liquidity gap compels national banking to accept high-interest deposits in order to survive.

The threats and problems being faced by the banks have become the main factor in anticipation of the growth of Indonesian banking in the coming years. If the money authority and the banking regulator do not take correct and timely measures in restructuring banking, it can be anticipated that the role of national banking in support of the national economy's growth will decrease continuously. Consequently, it is not impossible that it will be a disadvantage for Indonesia in the free trade era.

The three factors of impediment constitute a major factor which needs to be improved in the first place, if Indonesian banking is expected to consolidate itself. A very important and decisive factor for the improvement to succeed is to put the nonfinance and monetary sectors in order.

The increase in depositor confidence in entrusting his funds to a bank as a long-term deposit requires a concerted effort. The long-term confidence is a barometer for the degree of country risk. The G-7 countries generally have long-term fund resources in their banking systems.

When a customer decides on a long-term deposit, it is the result of economic and political considerations.

Countries with high political risk find it hard to develop long-term fund resources, which are very much required by financial intermediation institutions and banks. A secondary mortgage market is also hard to establish.

Political stability is the key to overcome the rumor-sensitive problems faced by national banks in order to enable them to increase transparency and disclosure. A good example is when Citicorp announced its loss. Its share price dropped, but it did not cause panic among its depositors to make a rush. For Indonesian banking to report a loss is suicide. It is even stranger that reporting of reduced profit is taboo.

The most the monetary authority and banking regulator circles can do is to step up bank requirements by compelling banks to merge. This is to increase the minimum capital requirement.

Other efforts for improvement should involve nonfinance, and nonmonetary sectors. It is mainly to increase depositor confidence in banks to place long-term funds and to show they are not easily affected by rumors. The only way to reduce the influence of rumors is to step up transparency and disclosure.

Because solutions to these problems take a long time, while the threats of the information technology progress of foreign banks and the development of the capital market cannot be avoided, the response of the banking industry is to give priority to the growth of the consumer banking sector. Consumer banking competition will be increasingly tight and if it is not controlled, it will push inflation as a result of high consumer spending. It is not improbable that in the long run, consumer bad debts will become an economic burden.

The banks' efforts to overcome the problem will apparently experience more difficulties in 1997. A general election year usually makes fund providers and the business world alert toward risks because business and investment are subject to more uncertainties. This applies not only to Indonesia, but to the entire world.

Considering the reality that national banking has a high sensitivity toward rumors, the conservative strategy adopted by national banking is to increase its resilience toward rumors, because there are usually more rumors in an election year.

For prudent bank management, 1997 is not a year for expansion.

The writer is a former vice president of Citibank, N.A. and managing director of LippoBank who is currently serving as CEO of ReFORM Consulting and director of the Econit Advisory Group.