Legal reform necessary for bank lending and investment
Legal reform necessary for bank lending and investment
Indonesia's economy recovery relies heavily on the country's
banking sector and the return of foreign investment into the
country. The Jakarta Post's Rendi A. Witular and Riyadi Suparno
interviewed Aman Mehta, chief executive officer of HSBC Asia-
Pacific, to get his view on what needs to be done to reinvigorate
the banking sector and attract investment. The following are the
key points of the interview.
Q: How is business for HSBC in Indonesia currently?
A: Our balance sheet here is actually growing by double digits
(percentage) for loans and deposits. We have opened new branches
in the last 18 months or so. Really in organic terms, there has
been a decent level of growth here. But we have not done anything
major in terms of strategic acquisitions or anything of that
sort, but organically the business is growing. Corporate banking,
commercial banking and credit cards are all growing quite
satisfactorily.
Q: What about your future business plans in Indonesia? Any
acquisitions planned?
A: We're keeping our eyes open, we are an international acquirer.
But we have not made any strategic acquisitions in Indonesia in
recent times. I don't rule out the possibility. The primary thing
for our management is to keep developing the business in organic
terms.
But opportunistically, we are always on the look out for
something suitable like portfolios, for example, such as loan
portfolios, auto loan portfolios, card portfolios... Those are
always interesting for us.
In the longer term I would not rule out even the possibility
of legal entity acquisitions. We have done it in other parts of
Asia.
Q: Are you uninterested in acquiring the number of banks on offer
from the Indonesian Bank Restructuring Agency?
A: We have stood back from the auctions in the last two or three
years on the basis that we've felt that the risk environment was
such that we need to control them very tightly, credit risks as
well as operating risks.
You can do much better with your own branch networks rather
than acquiring something with hundred of branches, thousands of
people, where we have to change the system and retrain the
people, and that takes a long time to get comfortable with the
risk environment.
Given the current state of the legal system, enforcement,
security, contracts, compliance, etc... it's only appropriate for
us to concentrate on our businesses, our branches so that we have
tight control of the risks. But it does not mean that the day
will not come when the legal system is more mature (and less
risky).
Q: Does that mean the Indonesian risk profile is still higher
compared to other countries in the region?
A: If you compare the robustness of the institutional framework
here in legal terms, it's not yet on par with say Singapore, Hong
Kong, Taiwan or Japan. That is the main reason I think that, so
far we prefer to develop our own businesses where you have a very
tight control of the risks.
Q: What is your assessment of the Indonesian banking sector and
how to boost their role in the economy?
A: I think there is much to be pleased about in terms of positive
things happening. You can look at major successes: The fiscal
deficit has been kept in control, the currency has been very
stable, the interest rate is coming down, the inflation is under
control and there is moderate growth, comparable to the rest of
the region.
Clearly there's a long way to go. Look at the balance sheet of
local banks here... They have a liquid balance sheet but not much
new lending.
And there are many important things like the mortgage market
that has yet to evolve here. It's a huge market to drive growth
and drive construction and so on. There is a long way to go.
If you ask me what is the single most important thing, I would
say probably the legal infrastructure, and rights to enforce
property or security or other rights. This will motivate banks to
lend much more, enable small- and medium-sized companies to
receive more loans and stimulate asset-based sectors like leasing
and mortgages.
So, I think reforms in that sector are a long-term thing. It
will have a huge positive effect on the development of the
banking sector, and the entire financing sector in fact, and
eventually on the economy as a whole... I think the stronger the
infrastructure, especially on the legal side, the better the
impact in terms of the ability of the banking sector to
contribute more.
Q: Indonesian banks are said to be reluctant to lend their money
to the real sector. What is HSBC's experience with this?
A: I think banks have a very good idea of who their target
customers are. But the trouble is at this moment, the target list
is quite narrow...
Frankly, our experience tells us that it is very difficult to
realize on loans in terms of security, in terms of
enforceability, in terms of getting a degree.
Unless, we are very, very comfortable with both the balance
sheet standing and the viability of a company, and in fact its
dignity, we won't lend to it... because our experience tells us
if there is a default, we would have to take the loss, we cannot
bind the company, we cannot appoint a receiver. So, one must be
very careful.
The upgrading of the legal infrastructure and the ability to
recover bad loans via legal channels would be a big catalyst for
lending... But in the current conditions, we have to be very
conservative. We have no choice.
Q: What measures do you take here toward defaulted debtors?
A: Well there have been many, many things tried. We have worked
it out in some cases, for example, some agreements have been made
to extend their debts; in some cases, they have been sent to the
secondary market; in some cases, I know they bought their loans
back. A whole range of measures.
Q: Have you tried to use the Commercial Court (for bankruptcy
cases) to recoup your lost assets? What is your experience on
this?
A: In that respect, our experience has been somewhat
disappointing.
I cannot recollect any successful case ... I'm not aware of
any successful case in our portfolio of an actual forced closure
or liquidation of a company.
But I don't want to talk about negative things. There have
been many positive things happening here.
Q: Those weaknesses in the legal infrastructure have not only
affect banking but also foreign investment. What do you think
about the foreign investment situation in Indonesia?
A: Still inadequate. The capital flow is still negative... This
is unlikely to reverse until international investors become
confident of the sanctity of laws, sanctity of contracts,
otherwise, it (new foreign investment) will not happen.
They're all linked together, you know, bank lending,
investment flows, mortgage market, etc... All these positive
developments are linked to the same phenomena: The legal
infrastructure...
However, I think this country is very, very competitive, and
there is great potential to attract investment if you can solve
these legal problems.
Q: Do you have a formula or suggestion on what it would take to
improve our legal infrastructure to stimulate the banking sector
and attract investment?
A: Looking at the Southeast Asia region, countries with the
strongest legal infrastructure like Singapore, Hong Kong and
Japan have very established institutions.
I think frankly how you enforce law is a matter of will,
having an incorruptible judicial system, incorruptible police
force etc....
Those structural weaknesses should be rectified. It will
certainly lead to a much stronger banking sector with much
greater role in the economy, in terms of being the stimulus, the
driver of economic growth.
Q: Despite the legal system HSBC seems able to function in this
environment here in Indonesia, and in fact you are still growing.
What do you think?
A: We do grow, it's a large economy, a large market. Frankly,
most people learn to manage risks in such a way like we do. As I
told you we are still growing at a double digit rate here.
But our balance sheet it is still small for the size of this
country and for the size of the market. So what we do instead is
we grow internally at a very measured pace where we can carefully
control the risks.
We are not inclined to raise the stakes a lot in terms of
either very rapid balance sheet growth or new acquisitions that
may sharply increase our level of investment. One must be very
careful here.