How do we choose a bank in more objective approach?

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.