Banking sector picks up, flaws remain

Banking sector picks up, flaws remain

Dadan Wijaksana, The Jakarta Post, Jakarta

It has been six years since the banking sector started its
restructuring efforts. Still, while improvement in its financial
health is undeniable, certain flaws remain -- indicating that the
recovery process is still a long way off.

On a year-to-year basis, key indicators to gauge the sector's
financial health are improving and on par, or even better in some
cases, than those posted by banks in other countries that were
also hit by the economic crisis in the late 1990s.

At the same time, however, the discovery of two massive fraud
cases at two state-owned banks is yet another blow to the sector,
which is still struggling to get back on its feet.

Lending fraud cases in state-owned Bank Rakyat Indonesia (BRI)
and Bank Negara Indonesia (BNI), the nation's fourth and second
largest banks respectively, have exposed weak internal controls
in each bank, and a poor supervisory mechanism of Bank Indonesia
-- two of the foremost reasons behind the sector's fall during
the 1997-98 financial catastrophe.

Many say that it is only the government's blanket guarantee
program that has prevented the sector -- or at least the two
banks -- from being hit by a massive rush. Under this program,
the government will cover all banks' public funds and other
liabilities when they go bust.

The BNI case revolves around the disbursement of about Rp 1.7
trillion (about US$200 million) last year, in what was claimed to
be export credit facilities to some exporters backed by
fictitious letters of credit from foreign banks, which are not
even BNI's foreign bank correspondents.

As for BRI, which has earlier successfully launched its
initial public offering, the case centered on irregular banking
transactions involving Rp 300 billion.

The alleged scams only confirmed that Indonesia had so far
learned little from the last banking crisis. As such is worrying,
as it could mean that the sector is back to square one despite
more than Rp 600 trillion worth of public funds injected by the
government.

Of equal significance is that the fraudulent practices could
weaken investor confidence in the sector, putting at risk the
government's drive to sell its stake in a number of banks. In
months to come, the majority stake in Bank Permata will be on
sale while the auction of the controlling block in Bank Lippo has
recently been relaunched.

Even if investors are not second-guessing their investment
plans in Indonesia just because of the scams, they might try to
take advantage of it by lowering their bidding prices, according
to experts, thus hurting the cash-strapped state coffers.

Another major concern overshadowing the banking sector's
performance this year was the slow growth in lending to the
corporate sector, albeit aggressive moves by Bank Indonesia to
reduce its benchmark interest rate.

According to the central bank's latest assessment, banks loans
to corporations have been so far growing by less than 2 percent
from last year, insufficient for the sector to play a significant
part in generating higher economic growth.

"Banks loans need to grow at between 20 percent to 22 percent
per annum to be able to push the economic growth to around 5
percent," Burhanuddin Abdullah, the central bank governor, said
recently, citing various economic surveys.

In their defense, bankers have said the country's corporate
sector remained risky, amid slow progress in the restructuring of
corporate debts. Most banks are consequently focussing their
loans more on consumers, which includes credits for individuals
and small and medium-sized enterprises (SMEs), rather than on the
real sector.

The slow lending activities were in contrast if compared to
other indicators to measure a bank's financial health. Among
other things, the sector has managed this year to improve its
capital adequacy ratio (CAR) and non-performing loans (NPLs).

Loans are categorized as non-performing if the interest
payments failed to be repaid in 90 days. CAR meanwhile measures a
a comparison between a banks capital against risk-weighted
assets, such as loans.

As of September, the average CAR level was around 23 percent
-- higher than some 21 percent posted last year and way above the
central bank's minimum requirement of 8 percent. Meanwhile, the
average NPL ratio stood at 7 percent as compared to 12 percent in
the same period last year.

According to data from the World Bank, CAR and NPL ratios of
Indonesia's banking sector were no less impressive than banks in
other crisis-hit nations such as Malaysia, Thailand, the
Philippines and even South Korea.

Such improvement has partly contributed in attracting the
interest of foreign investors on local banks, which resulted in
a series of fairly successful sales in both the majority and
minority stake in local banks.

This year, the sales of a controlling stake in Bank Danamon,
Bank Niaga and Bank Internasional Indonesia (BII) have all been a
success story. That adds to the more remarkable showing in the
sales of minority stakes (through the initial public offering
mechanism) in Bank Mandiri and BRI.

To this point, indeed progress has been made.

It is up to the authority now whether or not the momentum
would be maintained. To be sure, if the sector does not want to
lose the interest of investors, steps are needed to ensure that
banking scams similar to that of BRI and BNI would no longer
occur.

Improving the corporate governance, intensifying surveillance
systems, providing tougher screening process for bankers, are
part of a must-do list of actions Bank Indonesia needs to
undertake to speed up efforts and create a sound banking system.

There are also attempts by the central bank to help knock the
banking sector into better financial shape, especially in the
form of banks' prudential regulations. It plans to introduce a
wider range of the Basel Accord II principles to help it help
meet the international standard of best banking practices.

The success of such efforts would be crucial to maintain the
momentum, accelerate the banking reform and thus restore
confidence in the sector. It will also make the sector better
equipped to enter yet another year of restructuring process and
could probably end it on a high note.

Banking Indicators (trillion rupiah)

Indicator 2000 2001 2002 2003*

Total assets 1,030 1,098 1,112 1,130

Third party funds 699.1 794.4 835.8 863.5

New loans - 56.8 51.7 43.9

NPLs (%) 18.8 12.1 10.5 7.9

* As of September

Source: Bank Indonesia