Liquidation of insolvent banks needed: Kwik

The recent liquidation of 16 banks has sacrificed the interests of depositors. Economist Kwik Kian Gie discusses the necessity of punishing those responsible for the bankruptcy of the banks.

Question: Do you agree with the liquidation of the banks?

Kwik: I have been suggesting the reform of our banking sector because it has been decaying.

So, we have to adopt a routine program for a certain period of time to liquidate insolvent banks until all the existing banks are solid. That means the government should not say that after these 16 banks, there will be no other banks liquidated.

The liquidation has made society extraordinarily anxious. What will happen if bank liquidation is conducted regularly?

Bank liquidation will never create anxiety as long as depositors can immediately recover all their money.

Where should the refund money come from?

It should be the people's money collected from taxes. So the repayment of deposits in liquidated banks should come from the state budget. Banking reforms can be planned for years in the future, with a target that the sector, for example, should become solid after three years.

Is it fair to use taxpayers' money for such a bailout?

Experience in the United States, where taxpayers are aware of their rights, show that such a payment is acceptable because taxpayers understand that the economy will be ruined if the banking sector, the main source of liquidity, is damaged.

But there is a big "but". Those who have caused loans to go bad or corrupted funds from banks must be really punished. As far as I know, bad loans in the United States reached US$380 billion a few years ago in the savings and loans scandal.

But taxpayers accepted the use of their fund for a bailout because they knew that those who were guilty were chased, investigated and punished. Even a son of then U.S. president George Bush, Neil Bush, was punished.

I am sure Indonesian taxpayers would not object to the use of tax money to improve the health of the banking sector, if the government enforced the law strictly and transparently.

Isn't the government using Rp 2.3 trillion of the people's fund for the repayment of depositors' savings of up to Rp 20 million each in the liquidated banks?

Yes. But the government does not investigate and punish those responsible for the bankruptcy of the banks.

What is strange and unfair is that depositors are most unlikely to recover their savings beyond Rp 20 million. Minister of Finance Mar'ie Muhammad once told the House of Representatives that one of the reasons for the liquidation was that their assets are far less than their liabilities.

That means the sales of the liquidated assets will not be adequate to repay all the deposits. Many depositors will lose their savings forever and many small-scale entrepreneurs suddenly will not be able to continue their businesses due the loss of their working capital. Many of them are suffering from stress and some have committed suicide or gone mad. The government is cruel for having sacrificed them, while there is no sign that the authorities will investigate those responsible.

Why has the government done this?

I have the impression that the government has been pressed by the International Monetary Fund to take real action in reforming the banking sector as soon as possible. The government had for quite a long time known, recognized and admitted the increase of bad loans and the rotting of the banking industry. I had written for Kompas 13 times since May 1993 about bad loans and the rotting of the banking industry, as well as the way to solve the problems. The IMF was cruel if it praised the government's move, sacrificing many people who have committed no wrong.

You keep saying that depositors are not in the wrong. Shouldn't they be responsible for selecting their banks?

Not at all. Until the date of liquidation, the banks were still holding operational licenses from the government. The existence of various regulations and supervision by Bank Indonesia made the depositors sure that their banks were safe.

Furthermore, how could depositors evaluate the healthiness of their banks if the format of the financial reports made it impossible for them to analyze them and the banks violated the requirement on the frequency of report publication? Financial reports, even though they were audited by public accountants, could be manipulated if the leaders of the banks provided false records to the accountants and signed representation letters.

Is IMF aware about what you have described?

As the IMF has praised the way the Indonesian monetary authorities liquidated the banks, I think the IMF does not care much about the fate of the depositors, who are not their national fellows and not of their concern.