Reforms to restore confidence in banking

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)