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.