Reforms to restore confidence in banking

The government announced comprehensive programs to restore public confidence in the banking system on Tuesday. Banking consultant Laksamana Sukardi discusses their significance.

Question: What do you think of the banking rehabilitation programs which offer a guarantee to all the claims of depositors and creditors of locally incorporated banks?

Laksamana: They are good and, in this severe monetary crisis, are needed to restore confidence in the banking system. With such a guarantee, depositors, who have preferred to save their money in foreign and state banks since the November liquidation of 16 insolvent banks, will have no more doubts about private domestic commercial banks. Foreign agencies are also expected to have more faith in Indonesian banks.

The government is now on the right track and heading in the right direction in developing the banking sector.

However, the successful implementation of these programs will very much depend on the transparency and independence of the Indonesian Bank Restructuring Agency (IBRA).

The rules of the game and the operation of the agency must be transparent from the very beginning, so that it has no double standards and can handle the bank shareholders who have been "untouchable" until now. Its function is very important because it will have to scrutinize all commercial banks and their management.

But a question about the agency's independence arose as soon as the government appointed Director General of Financial Institutions Bambang Subianto as its chief because he is a bureaucrat subordinate to the minister of finance.

Q: Are there many banks needing IBRA assistance?

L: Even healthy banks are facing liquidity problems depositors have been withdrawing their money. These programs are expected to help restore public confidence and calm depositors so that the monetary crisis does not cause many banks to go bankrupt.

Q: Bank Indonesia will provide a guarantee in foreign currency for imports of essential commodities. How will this measure help restore confidence?

L: The government will endorse letters of credit for imports of essential commodities. This will help improve Indonesia's rating based on country risks.

Q: All locally incorporated banks will be subject to greater supervision. Do you think the government has enough personnel and facilities for this?

L: The supervisory jobs will be conducted by IBRA. IBRA's takeover of banking supervision from Bank Indonesia is something like the takeover of the import inspection from the Directorate General of Customs and Excise by the Geneva-based Societe General de Surveillance in 1984. I hope IBRA personnel, some of whom will come from Bank Indonesia, will work professionally.

Q: The government plans to replace the guarantee with a deposit insurance system, whose modalities will be studied later on. Do you think any investors will be interested in setting up a deposit insurance company in the country?

L: I don't think anyone would be interested given such a critical situation. But private investors will become interested in this type of business when the banking industry is normal.

IBRA, therefore, is now also acting as an insurance agency and all locally incorporated banks will have to sign insurance agreements with it, paying premiums of 0.5 percent of their guaranteed funds.

Having such an insurance scheme is good during this time of crisis but IBRA must be alert to abuse possibilities. A company belonging to a conglomerate finding it difficult to repay its foreign debts, for example, could abuse the system by transferring its debts to a bank owned by the same group. By so doing, the borrower would only have to pay a 0.5 percent premium and its debt would be covered by IBRA.

Q: The government is eliminating all restrictions on foreign ownership of Indonesian banks. What will be the positive and negative impacts of this measure?

L: Nationalist citizens will say the government is selling the country to foreigners, but this is no longer relevant in this severe economic situation. The economy cannot be salvaged without inviting foreign investors. But we must negotiate so that the inflow of foreign investment does not limit domestic employment.

Q: Do you think domestic banks are ready to compete with foreign banks?

L: They will be competitive if they are professionally and efficiently managed and the government supports their operations with transparent regulations. The investing public now trusts foreign banks more because they are professionally and transparently managed. Even if domestic banks expand through mergers, they will never win public confidence if they are not supported by transparent regulations from the government. (riz)