Small banks may be harmed by Bank Indonesia's latest policy
Small banks may be harmed by Bank Indonesia's latest policy
Urip Hudiono, The Jakarta Post, Jakarta
The move by Bank Indonesia (BI) to close two small banks last
week could trigger nervous depositors to shift their funds from
smaller to larger banks, experts said.
"There is a possibility that customers of small banks will
start shifting their funds to larger banks, which they might
consider more reliable," economist Drajat H. Wibowo from the
Institute for Development, Economics and Finance told The Jakarta
Post on Sunday.
Drajat could not give an estimate of the amount of funds that
might be affected, but said that public funds in small banks
currently amounted to about 20 percent of about Rp 800 trillion
(US$95 billion) of third party funds in the entire banking
industry.
To prevent a loss of public trust in smaller banks, Drajat
called for more transparency from the banks when publishing their
financial reports and from Bank Indonesia in monitoring the
banks.
"BI should also educate the public about how to choose banks
according to their financial performance, and not just because
they offer higher interest rates," Drajat said.
He also urged the central bank to step up pressure on banks to
boost their capital either through mergers, by raising funds or
through capital injections by the banks' owners.
BI shut down Bank Asiatic and Bank Dagang Bali (BDB) last
Thursday due to the banks' worsening financial condition,
allegedly the result of violations of prudential banking
regulations and fictitious lending activities involving Rp 1.2
trillion in loans.
The closures will cost the public Rp 2.39 trillion for
covering deposits in the two banks, which fall under the
government's blanket guarantee program.
The controlling owners of the two banks, I Gusti Made Oka of
BDB and Tong Muk Keung of Asiatic, are connected by marriage
(Made Oka's son is married to Tong's daughter). This connection
apparently made it easier for them to abuse the funds in their
banks, leading to unrescuable liquidity problems.
Drajat said the case also provided evidence that bad habits
die hard, as bank owners continue to violate banking regulations
by channeling funds to affiliated businesses, despite the costly
late 1990s financial crisis.
The crisis, which forced the government to bail out and close
down troubled banks at a cost of Rp 600 trillion, was caused in
part by bank owners ignoring prudential requirements.
"The authorities should not hesitate to prosecute them (Made
Oka and Tong)," Drajat said. "BI should also consistently
implement its banker certification and black-listing program,
otherwise cases like these will reoccur."
Economist Revrisond Baswir of Gadjah Mada University also said
that jittery depositors might seek safety in larger banks.
He also criticized the central bank over the case, saying it
demonstrated Bank Indonesia's failure to monitor the country's
banks.
He suggested the government establish an independent financial
authority institution to replace the central bank in the
monitoring of banks.
Urip Hudiono, The Jakarta Post, Jakarta
The move by Bank Indonesia (BI) to close two small banks last
week could trigger nervous depositors to shift their funds from
smaller to larger banks, experts said.
"There is a possibility that customers of small banks will
start shifting their funds to larger banks, which they might
consider more reliable," economist Drajat H. Wibowo from the
Institute for Development, Economics and Finance told The Jakarta
Post on Sunday.
Drajat could not give an estimate of the amount of funds that
might be affected, but said that public funds in small banks
currently amounted to about 20 percent of about Rp 800 trillion
(US$95 billion) of third party funds in the entire banking
industry.
To prevent a loss of public trust in smaller banks, Drajat
called for more transparency from the banks when publishing their
financial reports and from Bank Indonesia in monitoring the
banks.
"BI should also educate the public about how to choose banks
according to their financial performance, and not just because
they offer higher interest rates," Drajat said.
He also urged the central bank to step up pressure on banks to
boost their capital either through mergers, by raising funds or
through capital injections by the banks' owners.
BI shut down Bank Asiatic and Bank Dagang Bali (BDB) last
Thursday due to the banks' worsening financial condition,
allegedly the result of violations of prudential banking
regulations and fictitious lending activities involving Rp 1.2
trillion in loans.
The closures will cost the public Rp 2.39 trillion for
covering deposits in the two banks, which fall under the
government's blanket guarantee program.
The controlling owners of the two banks, I Gusti Made Oka of
BDB and Tong Muk Keung of Asiatic, are connected by marriage
(Made Oka's son is married to Tong's daughter). This connection
apparently made it easier for them to abuse the funds in their
banks, leading to unrescuable liquidity problems.
Drajat said the case also provided evidence that bad habits
die hard, as bank owners continue to violate banking regulations
by channeling funds to affiliated businesses, despite the costly
late 1990s financial crisis.
The crisis, which forced the government to bail out and close
down troubled banks at a cost of Rp 600 trillion, was caused in
part by bank owners ignoring prudential requirements.
"The authorities should not hesitate to prosecute them (Made
Oka and Tong)," Drajat said. "BI should also consistently
implement its banker certification and black-listing program,
otherwise cases like these will reoccur."
Economist Revrisond Baswir of Gadjah Mada University also said
that jittery depositors might seek safety in larger banks.
He also criticized the central bank over the case, saying it
demonstrated Bank Indonesia's failure to monitor the country's
banks.
He suggested the government establish an independent financial
authority institution to replace the central bank in the
monitoring of banks.