1997 not good for bank expansion

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.