Bank soundness
Bank soundness
Even in normal times banking, by its very nature, entails
taking an array of risks. Given this, one can imagine the
enormous risks banks run in Indonesia's current situation,
pregnant with political uncertainty, legal imbroglios and complex
economic woes. The banking industry, particularly the 15 major
banks recapitalized in 1999 and 2000, must run the gamut of risks
related to market competition, credit, interest rates, liquidity
and foreign exchange rates.
In light of this, we were flabbergasted by comments made on
Monday by Soebowo Musa, an official of the Indonesian Bank
Restructuring Agency, to the Dow Jones NewsWires. Musa, the head
of IBRA's bank restructuring division, said, among other things,
that Bank Universal would need fresh capital to meet the minimum
8 percent capital adequacy ratio (CAR) required by the central
bank by the end of this year. He also hinted that the bank might
have to merge with another bank to meet this 8 percent CAR level.
As the story resulting from the interview was short of details
on such elements as financial and operational ratios, which could
provide a more complete view of the overall condition of Bank
Universal, the statements could cause a disproportionate and
unnecessary misperception of the bank. As a senior executive of
IBRA, the controlling shareholder in all recapitalized banks,
including Bank Universal, Musa should have realized that the
financial industry is one of the sectors most sensitive to
information, particularly premature and incomplete information.
Fortunately, IBRA chairman Edwin Gerungan, fully aware of the
sensitivity of the bank to public perception, felt it imperative
to issue a statement on Tuesday to clarify any misperceptions
arising as a result of Musa's remarks before any damage could be
done.
Gerungan acknowledged that Bank Universal's CAR level was only
4.75 percent, but he added that the bank still had ample time
before the end of the year to meet the 8 percent CAR level. He
asserted that anticipatory measures had been taken by the bank's
management, together with controlling shareholder IBRA, to find
the optimum solution to raise its CAR to 8 percent by the Dec. 31
deadline.
To provide a better context to understand why Bank Universal's
CAR level is currently below 8 percent, Gerungan said that Bank
Universal had been quite aggressive in lending money, notably to
small and medium-scale businesses. Last year alone, it channeled
Rp 3 trillion in new loans. Obviously, as every loan contains
risks, and the capital standard is based on the ratio between
capital and risk-weighted assets, the bank has to put up
provisions for every credit it gives, thereby affecting its
capital reserves.
This is one of the dilemmas being encountered by most banks
still reeling from the 1997 financial crisis. They have to resume
lending at significant levels to generate income, but these new
loans will initially eat into capital until credit revenues are
generated. Moreover, as most medium and large-scale businesses
are still either being treated at IBRA's debt restructuring
"hospital" or are hostage to foreign debts, it is now difficult
to find major enterprises with reasonable creditworthiness.
No wonder many banks have chosen to maintain their CARs at
very high levels by parking their funds in Bank Indonesia's debt
papers, for which no provisions are needed, rather than lending
to provide sorely needed lifeblood to the economy. But by doing
this, the banks are failing to execute their basic function --
financial intermediation--, instead acting more as a treasury
office.
Given the credit crunch currently hitting Indonesia's weak
economy, it is imperative for banks to resume lending at
significant levels. Most importantly, though, is that they do
this with the least risk of incurring new bad loans.
IBRA officials should refrain from untimely comments,
particularly summary remarks, about the CAR levels of banks as
long as the capital standard is still above the prevailing
minimum level. Premature comments on and too much scrutiny of the
CAR levels, without assessing the other financial and operational
ratios of banks, may keep the economy acutely short of credit
financing because banks will remain inordinately preoccupied with
their capital to the neglect of their basic function.
With the central bank having assigned permanent supervisory
staff at recapitalized banks to ensure full compliance with
prudential regulations, we can rest assured that the "go-go
lending" practices that took place prior to the 1997 crisis will
not recur.