Concern over banks

There was indeed a strong reason for President Soeharto to personally address this year's national conference of the Association of Private Banks (Perbanas) that convened last week. The banking industry is currently tied up in one of its toughest consolidation tasks ever to redress the sticky problem of huge amounts of non-performing loans.

Naturally, the President was wise to not refer specifically to the Bapindo loan scandal of around US$440 million which has further aggravated the public concern about the quality and professionalism of the banking industry. Such remarks might influence the current trial of two main suspects in the alleged corruption case.

Nonetheless, the basic points raised by Soeharto in his address rightly set the top priority agenda for banks to restore their business to a sound foundation and to regain the full confidence of the public.

He urged banks to make concerted efforts to settle their problem loans as soon as possible because the longer the problems drag on the greater the difficulties the banks will encounter in properly performing their basic tasks in mobilizing private savings and in fueling economic activities through their lending operations. Further delays in the solution of the bad loans will hamper the effort to bring down interest rates and to expand credit.

However, the President also is fully aware that the problem loans cannot be solved by bankers themselves. He therefore urged the National Land Agency, the Attorney General's Office and the State Claims and Receivership Agency to cooperate with banks in facilitating the settlement of bad loans by expediting the procedures for the execution of credit securities. Judging from past experiences, the execution of credit securities or collateral is quite arduous and often a frustrating exercise for creditors because it could take up to five years to complete.

But the execution of credit securities is only part of the contingency program to reduce losses from bad loans. That measure cannot prevent recurrence of unsound credit. Hence, the President urged banks to tighten their internal supervision procedures, improve credit analyses and increase their professionalism.

Of even more importance, is Soeharto's reiteration of the vital importance of not only technical competence but also high level business ethics for bankers. Indeed, since banks bear a fiduciary responsibility as the repository of the people's money, the bankers' basic asset is actually trust. In fact, as the preliminary investigations into the alleged Bapindo loan scandal have revealed, it was not technical incompetence but rather a corrupt mentality that caused the huge amounts of allegedly bad loans.

Further down the line, the President's advice could also be taken as moral encouragement to both private and state bankers to simply ignore credit references given by high officials or others in power. That further means that the political connections of businessmen should not in any way influence their worthiness with regard to credit applications. Loan approvals should instead be based on a very detailed appraisal of the projects to be funded and an evaluation of the history of and the character of the businessmen or companies involved.

The President's great concern over the bad loan problems is not exaggerated. An estimated US$7 billion in funds being tied up in bad or doubtful loans is a big waste of scarce resources. Moreover, banks do play a especially important role in the economy. The way they allocate their loans strongly influences economic activities. Their lending rates have a major impact on the costs of doing business and consequently the competitiveness of products. When banks suffer big losses from bad loans, the business sector gets " burned" as well because the costs of their funds will also increase.