RI's 'sick' banking sector a potential time bomb: Expert

JAKARTA (JP): Indonesia's "sick" banking industry is a potential time bomb that could affect the economy, senior University of Indonesia economist Anwar Nasution warns.

Anwar said at a seminar here yesterday that Indonesia's banking industry had been very slow to cope with its long- standing problems, namely a high level of bad debts -- especially in the property sector.

"There are at least two signs of trouble ahead in our national banking industry. The first is the series of bad debts in our national banks which indicates the magnitude of bad loans in the property sector," Anwar said.

Citing reports from PT Procon Indah, Anwar noted that Jakarta's apartment and office building market had experienced a significant over-supply. This condition will continue until 2000.

According to Bank Indonesia (the central bank), cumulative bad debts in the property sector rose 39.2 percent to Rp 4.66 trillion (US$1.8 billion) at the end of last April from last December.

The country's total bad debts were Rp 10.23 trillion, or 2.93 percent of outstanding loans which stood at Rp 349.77 as of last April. And state banks have the largest portion of bad debts.

The second indication of trouble is the central bank's support for a consortium of 13 state and private banks to be set up to finance the national car project.

"It indicates the power our monetary authorities have to direct credit allocation and banking portfolio quality," Anwar told the seminar.

He commended the central bank's recent move to restrict loans to the property sector to dampen speculation in the real estate market.

But he criticized the government's write off of bad debts at state-banks, especially at Bank Negara Indonesia (BNI) and Bank Rakyat Indonesia (BRI), which he said was to make them look clean so they could go public.

BNI floated 25 percent more new shares last November, while BRI is in the process of going public.

"The financial condition of the two banks (BNI and BRI) looks good because their bad debts were taken over by the state treasury," Anwar said.

"It seems that this kind of cosmetic book-keeping will continue to be done in the restructuring and merging of state banks," he said.

He said the national banking industry was shackled by its own internal weaknesses in selecting good debtors, administering loans and collateral, and supervising credit use and collection.

Problems in state banks often stemmed from the intervention of the bureaucracy, especially in the process of assessing borrowers, he said.

Problems in private banks often arose when the owners used the banks to finance their own projects without considering economic viability and legal factors.

Anwar also noted that local banks were relying too much on short-term funds to finance long-term investments such as infrastructure, factories and property projects.

"This weak financial structure is a time bomb. If not dealt with properly, it could explode anytime like that in Thailand," Anwar said.

He said that any crash in the banking sector would automatically complicate the country's macroeconomic management as foreign investors would automatically pull out their short- term funds here.

But Indonesia's banking and macroeconomic fundamentals were still better than those in Thailand, he said.

He argued that Jakarta's property market was a lot better than Bangkok's, which saw acute over-supply and over-speculation.

Besides, the ratio of Indonesia's current account deficit to gross domestic product, which was below four percent, was much lower than the 8 percent in Thailand, he said.

Indonesia financed deficits with soft-loans from countries and financial institutions grouped in the Consultative Group on Indonesia, while Thailand used mostly commercial loans to fill in the gap. (rid)