Selecting the right bank amid clamor from rumor mill
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.