Lessons of Lippo
Lessons of Lippo
A clearing loss of a mere Rp 10 billion (US$4.4 million) for a bank with assets of more than Rp 7.6 trillion ($3.3 billion) and a pre-tax profit of Rp 65.3 billion in the first half of this year should not have caused such a big fuss. Neither should such a one-off mismatch of cash in the clearing of checks have commanded the front-page of several newspapers for several days. But that was the irrational reaction to Lippo Bank's clearing loss of about Rp 10 billion early this month.
Lippo Bank, one of the country's five largest private banks, is traded on the domestic stock exchanges and is therefore subject to stringent disclosure requirements. Its latest report, covering the first semester of this year, shows that the fundamentals of the bank are solid. Its financial ratios are quite sound. Private savings and demand deposits, for example, account for 63 percent of the bank's total assets. That reflects its broad customer base.
The puzzling question then is why such a one-time mismatch of funds could have caused such a big stir. We are inclined to think that the problem was blown out of proportion by negative rumors. Since the basic asset of banks is the public's trust, rumors can hurt their operations.
Why has Lippo Bank been the target of such negative rumors? We agree with Laksamana Sukardi, a former executive director of Lippo Bank, who blamed the irrational reaction to the clearing loss on the Lippo group's high profile in the property development sector. All bankers and analysts should know that the cycle of the property business from boom to bust is very short. The biggest cause of bad debts of banks in Indonesia, as in most other countries, has been lending to property developers.
Lippo has been very aggressive in property development in Greater Jakarta. The group is simultaneously developing three satellite towns for middle- and high-income people in Tangerang and Bekasi. The nature of the property business forces the group to have a high profile in order to market its luxury houses and other modern amenities through advertisements in the mass media.
Lippo's huge investment in property development has unavoidably raised eyebrows among analysts. So when word got out that Lippo Bank had suffered a clearing loss of Rp 10 billion on Nov. 2, the rumor mill began running at a full speed.
Fortunately, the rumors were short-lived, thanks to the speed with which the management of Lippo Bank acted to counter the irrational claims being made. We also greatly welcome the support provided by four other major private banks: Bank Danamon, Bank Central Asia, Bank Bali and Bank Internasional Indonesia. That support accelerated, we think, the restoration of the public's confidence in Lippo Bank. Had the rumors and jitters lingered, a run on the bank could not have been avoided and such a development could have affected the whole banking system.
Hardly any bank, however big it may be, is capable of handling a massive run. And a bank failure, unlike a company bankruptcy, always has far-reaching repercussions because banks are engaged in a multiplicity of transactions with one another (inter-bank deals) and with each others' customers.
We think the Lippo Bank episode contains a reminder to the central bank (Bank Indonesia) and the monetary board that they must always monitor closely the activities, not only of banks, but also of their subsidiaries and affiliates. The incident also serves as a reminder to Lippo Bank and other banks that they should refrain from activities which can lead to misunderstandings and negative rumors.