Banking industry reform needs hard efforts

The government last week announced a banking policy reform guaranteeing all the claims of depositors and creditors of locally incorporated banks. Economist Kwik Kian Gie discusses the prospects for its implementation.

JAKARTA (JP): The government's decision to guarantee all the claims of depositors and creditors of locally incorporated banks, including letters of credit, has been widely welcomed as good and appropriate but it has come too late.

The policy, which is part of reforms aimed at restoring confidence in the banking industry, will help reduce the movement of deposits from private domestic banks to state and foreign banks, but the time taken by the government to reach this decision makes it unlikely that it will completely succeed.

The Indonesian Bank Restructuring Agency (IBRA), the newly established autonomous body designed to implement the reforms, will have a difficult task due to the messy conditions of Indonesian banks.

A large number of banks will have to be treated at IBRA's "intensive care unit" because their depositors have massively drawn down their savings, making the banks technically bankrupt.

As the condition of these banks is worse than the 16 insolvent banks liquidated by the government last October, Bank Indonesia has assisted them by providing fresh money without any prior research. This means that revenues of many banks have been overpowered by loans from the central bank.

Because the large number of bad loans in many banks have also offset their equities, they have been forced to exclude bad loans from balance sheets. Sooner or later the public will discover that financial losses in the banking sector are very large and that the poorly performing banks will need to be salvaged with public money collected through taxation.

So, it will be unfair if the government does not take any action against the people responsible for the collapse of the banks. For fairness, the government should also guarantee the claims of depositors who saved money in the 16 banks liquidated before the announcement of the new banking reform on Jan. 27.

A question may also be raised as to why the new policy does not mention any guarantee to the claims of secondary banks. The government is not acting justly if it excludes secondary banks in the new policy only because they are too small and their bankruptcies of little consequence to the economy.

The decline of the banking industry stems from the government's October 1988 policy decision (introduced by the then Bank Indonesia governor Adrianus Mooy) liberalizing the industry.

Prior to the introduction of this policy, Mooy's predecessor, Arifin Siregar, encouraged banks to merge themselves by offering incentives, including a license to operate as a foreign exchange bank for five banks merging into a single entity. He did this because he knew that Indonesia had too many banks and that a successful bank required large amounts of capital.

Following the changes of 1988, which allowed investors to establish new banks with capital of only Rp 10 billion (less than US$1 million at the current rate), hundreds of banks were set up by businesspeople, ignorant of banking practices, who recruited incompetent executives to lead their new banks. Such founders regarded their banks merely as trading companies and used a large proportion of depositors' money to finance the projects of the banks' sister companies.

A banker once told me that he had bought new offices in strategic areas so that he could sell them again when their price increased.

Worse still was that a major bank encouraged home owners in strategic locations to open branch offices under its name on a fee-paid basis. Surprisingly, the bank had sold many of its assets to companies with strong political connections and its founder fled the country just before the bank was liquidated last October.

A major bank owner once became furious when I criticized the bank's loan-to-deposit ratio, which was too high. The majority of the bank's fund was derived from state-owned finance companies. The bank is now facing financial difficulties, but Bank Indonesia has assisted it by injecting trillions of rupiah, while its ownership is restructured.

These anecdotes suggest that IBRA executives may have difficulties in dealing with bankers whose knowledge, orientation and way of thinking are so primitive. The executives must not hesitate in taking any necessary action against violators. The agency may face difficulties recruiting a sufficient number of competent personnel, due to the low caliber of many recently graduated accountants.

Because IBRA's activities are financed by the state budget, its executives should be fair and impartial in making decisions. The government needs to make an all out effort to restore the banking industry because, like the heart of a human body, banks are institutions which transport deposits to investors and productive sectors.

The characteristics of deposits and investment activities vary considerably. Matching the level and characteristics of deposits and credits is an important undertaking for banks. If the banking industry is in trouble, the economy will be in trouble too.

Editorial -- Page 4