Concern over banks

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.