Bank move may cause more worries

Bank move may cause more worries

The government has suspended the operation of seven banks and
taken over the management of seven others. Economist Kwik Kian
Gie discusses the impact of the drastic measure.

Question: Do you think the latest measure will help restore
public confidence in the banking industry?

Kwik: Not at all. Such a measure will even rock public
confidence because people are now becoming more aware that the
banking industry is seriously flawed. They have been assured by
the government that their deposits are safe because of its recent
guarantee on commercial bank liabilities. But since the
government's capability to cope with bank liabilities is limited,
the public remains worried that the government may eventually be
forced to convert their deposits into bonds if it can no longer
afford to cover the shortfalls of bank liabilities.

Many depositors, therefore, now prefer to put their money in
foreign bank branches even though they are offering lower
interest rates than domestic private banks. Foreign banks can
make big profits just by investing their surplus funds in Bank
Indonesia's promissory notes (SBIs) which offer high interest
rates (of up to 45 percent).

Q: But don't you think such a measure is necessary to strengthen
the banking industry?

K: It was necessary but too late because the measure was taken
only after the central bank had tried to bail out the unhealthy
banks by injecting trillions of rupiah in the form of liquidity
credits. Government officials said that the liquidity credits
provided for the unhealthy banks had totaled only Rp 50 trillion
(about US$5.9 billion) but some sources put them at Rp 115
trillion.

Furthermore, the Indonesian Bank Restructuring Agency (IBRA),
an autonomous agency established in late January to help improve
the operations of commercial banks, has become over-burdened
because it must supervise more than 50 unhealthy banks.

Q: If the central bank has printed so much money for financing
the liquidity credits, how will it influence inflation, which has
direct consequences for the people?

K: Very seriously. The central bank's recent move to increase
interest rates on its SBIs to extraordinary levels, said to be
aimed at reducing rushes on dollars, is also resulting in
inflationary pressures.

Q: Do you see that the government is planning legal actions
against bank shareholders and executives who have intentionally
indulged in unsound banking practices for their own interests?

K: The authorities are apparently trying to enforce laws
selectively, meaning that they will take actions against those
who are politically weak, while leaving others with strong
political connections untouched. I dare not mention the names of
the politically well connected people, but their bad debts to the
problem banks are huge -- in the trillions of rupiah.

My bigger concern is that many police personnel and
prosecutors are using this opportunity to enrich themselves by
extorting money from borrowers allegedly involved in the misuse
of bank credits and bank executives allegedly engaged in unsound
banking practices.

There are actually many more problems that should be addressed
in cooperation with the International Monetary Fund (IMF). These
include mounting bad loans and unprofessional management
practices. I wonder whether the authorities will be willing to
disclose these problems, particularly the ones involving bad
loans owed by politically important people.

Q: Can the banking reform measures be carried out thoroughly if
all the problems are not disclosed to IMF officials?

K: The reform can never be comprehensive and complete because
many things are not disclosed to IMF officials. If the IMF has no
access to accurate data on the debt problems, it will surely face
difficulties when it has to report its US$43 billion bailout
program for Indonesia to its shareholders, particularly the
United States where laws are strictly enforced.

Q: What do you think about the 40 other banks which are now under
the direct supervision of IBRA?

K: Many of them will have to be converted into state banks
because most of their assets already consist of liquidity funds
from Bank Indonesia. If the liquidity credits are converted into
government equity, the government will be left with a lot of
poor-quality banks. This would be contradictory to the
government's current program to reduce the number of its
banks. (riz)