Selecting the right bank amid clamor from rumor mill

By Laksamana Sukardi

JAKARTA (JP): Selecting the right bank is even tougher these days. Uncertain economic times have affected people's ability to think logically and left them easily swayed by groundless rumors.

The public, confused and dismayed after the recent closure of 16 insolvent banks, needs responsible explanations from the monetary and banking authorities on the healthiness of banks still operating.

In a recent survey, The Economist magazine attributed failure of banks in emerging market countries, including Indonesia, to four main reasons -- a severe economic downturn, excessive lending to sister companies in the same business group, excessive intervention by governments and banking liberalization which is not followed up by prudential regulations.

As the nation is currently experiencing an economic downturn, it is understandable that people are easily panicked and vulnerable to rumors. Those who cannot afford to travel abroad regularly do not have the option to transfer their money to banks in other countries.

That leaves no choice but to be more cautious in selecting domestic banks. Here are several tips for depositors to be circumspect in selecting the bank for their money.

Put in a nutshell, depositors need to evaluate the quantitative and qualitative aspects of a bank.

The quantitative aspect can be evaluated from the financial reports routinely released by the bank in print media. From the reports, depositors can ascertain the bank's financial ratios -- its capital adequacy ratio (CAR), loan to deposit ratio (LDR) and profitability.

If the ratios meet requirements set by Bank Indonesia, the central bank, the bank can be considered more or less healthy.

This quantitative aspect does have weaknesses. Financial reports, for example, are complicated and not practical for the layman's understanding.

Furthermore, publication of financial reports is always late, generally several months after the date of the data recorded, whereas the asset and liability conditions of a bank change dynamically. Drastic changes can occur in a minute.

People will be more comfortable in using the qualitative aspect. This is an important determinant, but its evaluation is not easy.

Most important factors of the qualitative aspect are the management of the bank and the conditions of its shareholders.

The management of the bank has a great role in the changes of its healthiness. If the directors manage the bank conservatively, it is generally healthier than a bank managed speculatively.

But in some cases, the management of a bank is heavily influenced by shareholders, because they are the ones recruiting the directors and determining their bonuses. Overly dominant shareholders will determine the style of management and, in turn, influence the healthiness of the bank.

During a period of financial uncertainty, people feel more comfortable in depositing in banks whose shareholders are well- known, wealthy and have solid reputations.

Evaluating a bank based on the quality of the shareholders is also risky because even though they have fine reputations, they, as human beings, can change. When someone is fully entrusted to manage funds without any supervision, it will be easier for him to abuse that trust.

The best banks are those owned by affluent shareholders who have good reputations and integrity, but who cannot make arbitrary decisions on its operation because a good supervision system is in place.

How is the supervision implemented? If the bank has only one shareholder, it would inevitably be difficult to implement a good supervision system. The more shareholders the bank has, the better the supervision will be.

But if a bank is owned by too many shareholders, it might find it difficult to grow because it will be less sensitive to changes and slow in making decisions.

Good shareholding is a combination of institutional and public shareholders. The combination will force the directors to operate the bank carefully and prepare transparent reports.

There is still reason for caution. The continuing likelihood of subjectivity makes it difficult for depositors to fully evaluate the reputation and credibility of individual shareholders.