How do we choose a bank in more objective approach?

Elvyn G. Masassya, Banking analyst, Jakarta

Most of us, in one way or another, frequently make use of the various services provided by a bank: time deposits, savings and current accounts and money transfers, just to name a few. In short, forming a relationship with a bank has very much become an integral part of our lives.

However, some people go through some unpleasant experiences with their banks. Part of the nightmare or disappointment could be due to the liquidation of dozens of banks several years ago and the unsatisfactory service provided by certain banks. Hence, choosing the right bank that matches your needs can be a problem in itself.

Currently, almost all of the 144 banks operating in Indonesia lure customers with various offers, such as weekly prizes, a high interest rate and an array of personalized services. Are all these offered in the spirit of giving the best to their customers? Is the high interest rate part of the bank's benevolence? Well, not entirely, as all these components are a part of the bank's marketing strategy rather than to perform as some sort of a Santa Claus. The more a bank offers, probably the more watchful one should be.

Why so? The answer is simple. Basically, a bank is an institution of trust and operates on this principle. So, your choice of any bank as your financial partner must first be based on its trustworthiness and much less on its offers of a brand-new Mercedes Benz or BMW.

Any bank you choose these days will not pose any financial risk, as all banks are guaranteed by the government, as long as they are paying the security-guarantee fees. This means that even if a bank is liquidated, your money is safe as it will be paid by the government. However, this scheme will not last forever, as it will be reduced in stages by the latest in 2005, at which time it will be provided by an institution, Depositors' Guarantor Institution (LPS) or by some kind of deposit insurance. Even these institutions will have a limited guarantee, such as for deposits below Rp 100 million. In other words, major customers with huge deposits will have to face the risks on their own. To avoid any of the worst scenarios, prudence is, therefore, most important.

Choosing a bank is admittedly not that easy. Among the various considerations, some base their choices on rational thinking, but quite a number of people are emotionally driven. How should one select a bank in a more objective way?

Basically, there are two ways in choosing a bank. First is the psychological approach, which is similar to deciding on your marriage partner. What must be applied is the bibit, bebet and bobot (Javanese words for lineage, rank, wealth and origins -- a criteria for evaluating a prospective son or daughter-in-law) of the bank.

What is meant by bibit is the background of the bankers. If they used to be traders, most often they have trader's instincts and apply these in running the bank. One must be careful about this, because a bank must be managed with utmost prudence, while a trader usually disregards risk factors just for the sake of making quick profits. This kind of paradigm, if applied in banks, would be hazardous.

Bebet is analogous to the quality of a bank's assets. A bank's healthy assets are reflected positively in its earnings. To assess its assets, one has to analyze the percentage of the bank's problematic or non-performing loans, which, to be healthy, should not be more than 5 percent of the total loans.

Bobot refers more to the management skills or professionalism in running the bank. Theoretically at least, bankers with years of relevant experience perform better than the newcomers or, from another perspective, a bank that has been established for decades should be more solid than a newly born bank.

Next there is a more scientific approach based on an empirical study of a bank's performance.

First, take a look at the bank's interest rate. The higher it is, in comparison to another bank with a similar level of assets, the riskier the bank. The argument behind it is this bank is in need of more liquidity and that's why it dares to offer a higher interest rate. Either that, or the bank is afraid of losing its current customers. Another possible reason is the bank has given long-term loans, while its current sources of funds is short- term. To face their own problems in repaying short-term funds and to retain them, the bank, obviously, has to collect fresh funds by offering higher rates of interest. Therefore, one has to be extra cautious about banks that offer interest rates much higher than their competitors.

Second is the structure of ownership and management. Quite a number of the problematic banks are those with a close relationship between its owners and the management. Take a bank that is run by a management team and which has close family members of its owner. Here, there is a great probability that the bank will be doing business mostly in the interests of its owner, which is in contradiction to the principle of prudence. While not all banks are managed in this manner, quite a number in this category tend to face difficulties in the area of professional bank management.

Another category is banks with owners who are the sole or majority shareholders. With this kind of setting, it is imaginable how easy it is for the owner to intervene for his own agenda and "milk the cow" for his other companies. So, be on the lookout.

Third is asset growth. One should think twice about a bank with a super rapid growth of its assets. Assets should grow at a natural pace, so, more often than not, the bank's growth of assets, say in tenfold, just within a year should set off some questions in your mind. Growth could be due to major steps of expansion, which are not a sure-fire sign of success. It could also mean that the bank has a large number of non-performing loans and the debtors' unpaid interest has been turned into its "capital" in the form of new loans for the existing non- performing clients, which make the asset look larger. This larger asset is none other than a bubble asset. So beware of owners of bubble assets.

The gifts, prizes and other grand promotional activities are, needless to say, an implication of cost. To cope with these costs, the bank usually reduces its interest rates for your time deposits, savings and the like. The conclusion is try not to make the promotional activities the only parameter for choosing a bank. Prudence is the key word.