Bank closures to 'pave' future path
The Indonesian government announced Saturday what the nation saw as the largest number of banks liquidated at one time. In the following discourse, economist Kwik Kian Gie talks about the impact of the bold measure and the fate of the remaining banks.
Question: How do you feel about the liquidation of the 16 banks?
Answer: Excellent. I and many of my analyst colleagues have sounded an alarm for 10 years on the urgent need to cleanse our banking industry of bad banks. Now that it has finally started in a concrete manner I feel grateful.
Q: What do you mean? Is this only the beginning?
A: That's right. Based on the information I have, the number of bad banks is quite large, much larger than 16. Other banks will eventually get the liquidation axe if they cannot make drastic improvements.
Q: But Minister/State Secretary Moerdiono stated on Nov. 1 that the liquidation of the 16 banks was final in the sense that there would no longer be other banks closed. Why do you foresee some other banks being liquidated?
A: Moerdiono had to make that kind of statement, which I think was very wise. Without such assurance, other solvent banks might be hit by a run on them. Moerdiono's statement should at least calm the general public that no other banks will be closed soon. I am confident that at least within a year or two new banks will no longer be forced into liquidation. Therefore, people should not panic and withdraw their savings from the remaining banks. But after one year, people should make a reassessment.
Q: Don't you think it's better to close down all bad banks at the same time to assure people that the other banks will remain for a long period of time?
A: I and the banks' association prefer a bold, drastic measure once and for all. The problem, though, is that funds needed to bail out small depositors will be very large. A better way might be to close insolvent banks annually, with a full government guarantee for small depositors. But to garner public support for the use of taxpayers' money for such a bailout, the government must punish those responsible (management and shareholders) for the bad banks. Bad debtors should also be penalized to discourage borrowers from abusing loans.
Q: The bulk of bad credit is actually owned by state banks. Why have these banks remained untouched?
A: It's only a matter of time. The government's reform package announced Oct. 31 stated that "the privatization of state companies will continue and this measure includes state banks after their merger process is completed". My analysis is that the problem will be solved through a massive writeoff, merger and privatization (public listing) to raise fresh funds from the stock exchanges.