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)