Standard & Poor's defends appraisal of local banks

JAKARTA (JP): A spokesman for Standard & Poor's, an American rating company which has been criticized for its recent appraisal on the Indonesian banking industry, defended its conclusions, yesterday, saying that the valuation was made under standardized procedures.

"The procedures are correct. We conducted extensive discussions with all the banks concerned, including the central bank (Bank Indonesia), for our studies," Jeffrey R. Paterson, managing director of international finance for the Asian region of Standard & Poor's Ratings Group, told The Jakarta Post in an interview here yesterday.

Standard & Poor's said in its ASEAN Banking Profile report in late April that the Indonesian banking industry is currently undergoing a period of financial stress and adjustment as a result of deregulation in the late 1980s and early 1990s. Consequently, the medium-term outlook for the banking sector is considered to be one of uncertainty and instability.

Governor of Bank Indonesia J. Soedradjad Djiwandono recently questioned the validity of the rating agency's judgment. This was because, according to him, the evaluation had been made by its banking division which had no authority to set a rating.

He felt that the banking division only had the function of collecting banking data for the benefit of investors who make use of Standard & Poor's services, while the rating authority belonged to its sovereign division.

Paterson said yesterday that all the information used for the assessment was based, in fact, on the latest published information in 1992 and another updated information made available by banks.

He argued direct discussion and analysis of banks' financial reports were normal matters, which were also used by the agency for conducting the rating of various business sectors worldwide.

He acknowledged that the rating authority is in the hands of the sovereign division. "But between the banking and sovereign divisions, there is no difference in importance," he said. He added that the banking division had an equal share of collecting information related to the development of the banking industry in the world.

Personnel assigned to the banking and sovereign divisions are more or less the same, which means that the evaluation made by the agency's banking division is also valid for the rating division, he said.

He said the banking division has a specific job because it is also responsible for making recommendations as part of its services of offering opinions to customers.

Paterson was here to participate in a two-day Euromoney conference which ended here yesterday.

Loans

Paterson said his group found the weakest part of Indonesian banking to be the country's state-owned banks. This situation was almost completely due to non-performing loans and high loan concentration.

According to the monetary authorities, non-performing loans at seven state banks swelled by 360 percent within the past three years to more than Rp 14.97 trillion or 21 percent of their total outstanding loans, as of last October.

"As for the private banks, the agency found a relatively high loan concentration towards certain corporate groups which has caused some difficulties," Paterson said.

Standard & Poor's warned that private banks' close affiliation with corporate groups has raised concerns regarding lending and loan concentrations.

The London-based Banking Credit Analysis (IBCA), which is responsible for issuing bank ratings, shared Standard & Poor's assessment. They said that the sorry state of Indonesian banking was partly due to the absence of the profit motivation, combined with the burden of a political mission set by the government.

IBCA's managing director, Robin Monro-Davies, reported that the rates of return on assets and equities at Indonesia's state- owned banks are the lowest in Asian countries.

Both Monro-Davies and Paterson concurred that the absence of transparency, disclosure and independence of management have created an unstable environment at both private and state banks.

Context

Paterson said Standard & Poor's judgment is made not to discourage the country's banking industry. "It is not a criticism of the current regulators or management," he pointed out.

"Because we are a global rating agency and investors are looking for opinions on various banking systems and Indonesia has become one of those in the Asian countries, we offered the services," he added.

He greeted the government's step to establish a new credit rating agency, showing that it is seriously committed to developing the industry.

Meanwhile, Soedradjad told the conference yesterday that the monetary authority had embarked on various efforts to reduce problem loans in the country.

"In an effort to improve rules governing the recovery of bad debts, for example, the central bank has conducted intensive discussions with the Supreme Court, the Ministry of Justice, the Office of the Attorney General, the National Land Agency and the State Receivership Agency," he said.

The central bank has also required commercial banks facing substantial bad loans to form special teams for their recovery or settlement. "The central bank also set up a special task force for settling bad debts which is responsible for supervising the teams set up by commercial banks," he said. (fhp)