Local banks ready to engage in investment banking

Rendi A. Witular, The Jakarta Post, Jakarta

Indonesian banks are ready to engage in investment banking activities in order to help reinvigorate the country's capital markets, as long as the government sets up adequate guidelines to regulate the business, an industry player and analysts have said.

Bank Negara Indonesia (BNI) president Sigit Pramono told The Jakarta Post on Tuesday that several local banks, which have universal banking operations, would have a capability to engage in investment banking activities because of their relatively strong capital.

"Local universal banks, such as Bank Mandiri and BNI, are ready to engage in the business. However, there are no sufficient guidelines yet from the authorities to regulate the sector," said Sigit.

He also said that currently banks were already equipped with adequate expertise and tools for the investment banking business from their securities house operation.

Bank Mandiri and BNI, respectively the country's largest and second-largest banks in terms of assets, each have their own securities units, BNI Securities and Mandiri Securities.

The government has prevented banks from directly engaging in the capital market because of fears that they could not manage the risks, which would threaten their capital.

Banks are currently banned from providing full financial backup for their securities houses. According to central bank regulations, banks may spare only 10 percent to 20 percent of their capital for securities operations.

Several foreign investors suggested earlier that the banking authority allow local banks to act as investment bankers in order for the country to have top securities houses with strong financial backup, and to cater for development of the capital market industry.

The government prohibited banks from engaging directly in the capital market in 1998, after many banks went under during the regional financial crisis.

Before the crisis, many banks engaged in the capital market, such as investing their third-party funds in the stock market or underwriting a bond issue, which required them to set aside a huge provision in case the bond did not sell well.

A lack of prudence has been identified as a key factor leading to the financial crisis in the late 1990s.

Director of Danareksa Research Institute (DRI) Raden Pardede said that the call to allow banks to form investment banking operations was based on the fact that many banks were currently enjoying a huge excess of liquidity.

The excess liquidity is estimated to range from Rp 25 trillion ($2.94 billion) to Rp 30 trillion daily.

DRI is a division managed by state-owned financial group PT Danareksa, which also owns Danareksa Securities.

Banks have been reluctant to channel their money to the corporate sector because that is still considered risky due to slow progress in the restructuring of corporate debt.

Raden said that banks needed to engage in investment banking activities to help them channel their excess liquidity amid difficulties with the corporate sector.

"Our banks are ready, and it is inevitable for them to engage in investment banking activities in the future, as demanded by global investors," said Raden.

Therefore, the central bank and the Capital Market Supervisory Agency (Bapepam) should cooperate to draft a regulation to allow such business to develop here, and to establish a prudential risk management system in order to mitigate the risks, he said.

However, banking analyst Pradjoto feared that allowing banks to engage in investment banking would further discourage them from lending to the corporate sector as making money in the former was easier.