Econit urges restructuring of state-owned banks

JAKARTA (JP): The government should overhaul the management and capital structure of non-performing state banks to improve their performance and competiveness, the Econit economic research group has advised.

Econit's associate director, Laksamana Sukardi, said yesterday that the performance of state banks has continued to worsen since 1970s.

"Their market share has been eroded, and if the government does not overhaul them now, they will burden the country's banking industry within the next two to three years," Laksamana said while presenting Econit's Economic Outlook 1997.

The seven state-owned banks control 40 percent of Indonesia's bank total assets but contribute only 26 percent of total banking profits.

The seven banks are Bank Rakyat Indonesia, Bank Negara Indonesia (BNI) 1946, Bank Bumi Daya, Bank Dagang Negara, Bank Ekspor Impor Indonesia, Bank Pembangunan Indonesia (Bapindo) and Bank Tabungan Negara.

By comparison, the nine largest private banks control only 27 percent of the country's total banking assets but contribute 31 percent of the total banking profits.

The state banks' share of funds raised from the public has also declined, from 37.7 percent at the end of 1994 to 35.5 percent in early 1996 and 33.8 percent last July. The seven banks' share in credit extensions dwindled from 41.6 percent in July 1995 to 38.2 percent by July 1996.

Laksamana said the best way to restructure state banks is through a privatization program, which involves selling shares to the public which will monitor their operations.

"BNI's plans to go public this year will open paths for other state banks to go public to improve their performance," Laksamana said.

He noted that Indonesia's banking industry is still plagued with problems of inefficiency, non-performing loans, inadequate management and reckless banking practices.

The problems are reflected in the high concentration of credits in certain economic sectors and regional areas. Eighty- six percent of total national credits have been extended to projects in Java, up from 80.8 percent in 1991.

Most of the credits go to large businesses. "The public now demand that the government improve the uneven distribution of credits," the Econit report said.

About 70 percent of the total credits in Java are extended for projects -- especially property projects -- in Greater Jakarta. Similarly, an estimated 70 percent of total national credits are extended for property projects.

"Concentrated allocation of credits to certain sectors exposes the banking industry to credit risks, which can lead to bad debts," the report said.

Growth

Laksamana projected that banking credits will grow by 20 percent to 25 percent next year, while profitability will increase by 20 percent. Most of the growth will be contributed by private banks.

Banking competition will become more vigorous, especially in the retail sector, and the market will force the state banks to enter retail banking.

"Competition in retail banking business will be tougher next year with the entrance of more state banks into the sector," Econit predicted.

Econit said state banks have no other choice but to enter retail banking because they have lost most of their good corporate clients.

Established corporate businesses no longer rely on state banks for financing because of increased financing alternatives, such as from their own banks, offshore loans and bonds issuance.

"However, it will not be easy for state banks to compete with private banks in retail banking because the latter have all the infrastructure, including extensive branches, to support their retail businesses," Laksamana said. (rid)