Indonesian Political, Business & Finance News

Govt told to get out of banking

| | Source: JP
Indonesia's banking sector must improve its risk management capabilities to avoid a repeat of the 1997 economic crisis, a former Australian prime minister and treasurer says.

Paul Keating said giving up government ownership in commercial banks, developing more sustainable lending markets fitted to the local retail and consumer economy and opening itself to international best practices were among the efforts the Indonesian banking industry could take up.

Addressing the Asian Bankers Summit as a distinguished keynote speaker in Jakarta on Monday, Keating said the government should refrain from owning stakes in commercial banks, which only creates unhealthy risk management within the industry, and could eventually jeopardize the state budget.

He said the government should instead allow banks to operate freely in taking up public funds from deposits and lending the money out on any opportunities and margin rates, as long as they stay within a strictly enforced regulatory framework set down by the central bank.

"What does a country need a banking system to do? It needs banks to help grow the economy, to lend for consumption, for housing and for small businesses. That's their primary service.

"What matters is not whether governments own banks or not, but that the central bank is able to run an effective monetary policy, regulate lending rates and banks' credential requirements such as capital reserve ratios, etc. The central bank does enjoy these powers now, therefore there seems to me no point in government owning banks," he said.

Keating, who during his term as prime minister, laid out reforms to further deregulate Australia's financial sector, said the danger of state-owned banks was that their managements always assumed the government would step in if they found themselves in trouble.

"This in the end creates bad habits in the banking system, like bank lendings just to grow business but reduced in quality. And when tougher times arrive, those lending decisions start to bite back against the bank and the budget.

"So if you've got private capital in banks, the better off you'll be as banks will be more careful about risks. When bank managers are responsible for their own capital, they're generally more careful about the quality of their loans," he said.

The Indonesian government currently has controlling stakes in Bank Mandiri, Bank Negara Indonesia (BNI), Bank Rakyat Indonesia (BRI) and Bank Tabungan Negara (BTN) -- the first three being among the country's top four lenders by assets.

Bank Indonesia wants to consolidate the industry into fewer banks from the 130 at present, but President Susilo Bambang Yudhoyono has mentioned the need to maintain certain state banks for strategic sectors.

Vice President Jusuf Kalla has criticized state banks for not providing more loans to the real sector.

Keating said if the government wanted investments in particular sectors, it should go through specialized institutions such as development banks.

"A development bank is different from a private bank. It knows it's doing things in unchartered territory that it would not do commercially, and knows capital committed might be lost," he said.
Tags: business
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