Banking industry reform needs hard efforts

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