State bank mergers very good for the country

The government has announced a plan to merge four state banks while inviting foreign capital participation. Economist Kwik Kian Gie discusses its impact on the country's banking industry.

Question: What do you think about the government's merger of four state banks?

Kwik: It is good and very realistic. There is actually nothing new in the policy. On April 6, 1995, the IBII school of economics, in cooperation with an American consulting firm, Barents LLC, organized a seminar in Jakarta to discuss such a proposal. Bank Indonesia governor Soedradjad Djiwandono opened the discussion and Robert Clarke of Trust Corporation of the United States was the main speaker. Clarke, a former U.S. currency comptroller, discussed Trust Corporation's success story in helping solve bad loans of up to US$350 billion in the U.S.

So Indonesia has had a reference of experience. If necessary, the government can ask for Clarke's assistance.

Unfortunately, the government is trying to solve only the state bank problems. It is not clear how it will handle private banks. The government only said that it was hoping private banks would consolidate their businesses through mergers and inviting foreign banks for partnership cooperation.

Q: Do you think the merger will succeed?

K: It will depend on the solvency conditions of the four banks, Bank Pembangunan Indonesia (Bapindo), Bank Bumi Daya, Bank Dagang Negara and Bank Ekspor Impor Indonesia. According to the government, all the bad and doubtful loans of the four banks will be excluded from their balance sheets (and settlements will be carried out by a company that will soon be established). But it is unclear how far such an exclusion will cut their total equity capital. I think their total equity capital will become negative.

It is also not clear whether the adequacy of their capital will be met with a new capital injection from the government or with capital participation from a foreign partner. Anyway, the state banks should become healthier.

Q: Do you think that the bad loans will be written off?

K: The government has not say so. It said that the planned company would settle all the bad loans. Borrowers, therefore, will be demanded to repay their debts and laws will be enforced.

According to my understanding, each of the borrowers will be scrutinized and investigated to check whether their debts have gone bad due to manipulation, malpractice or anything else. If a borrower is found guilty, he or she would be prosecuted.

Q: Why didn't the government do this before?

K: I suspect that many of the borrowers whose debts have gone bad have close relations with power holders. They are untouchables and beyond the reach of laws.

Q: So, will the planned law enforcement be effective?

K: If the bad loans are managed by competent managers with special expertise, at least, all data and information on such loans can be collected systematically, accurately and completely. The information will be very important, particularly when changes have happened, so that these untouchables will become common people who have to comply with laws.

Q: What should the government do with private banks?

K: We have seen that the recent liquidation of 16 insolvent banks has victimized depositors whose savings exceeded Rp 20 million.

The government said solvent banks that lack liquidity will receive liquidity assistance from Bank Indonesia, while insolvent banks are expected to merge with other banks. If a bank is in very bad shape, so much that no other bank is willing to cooperate with it in a merger, it must be liquidated.

People, therefore, currently have a perception that they face a high risk if they deposit their money in a private bank.

As long as there is no transparent policy, many people will move their deposits from domestic private banks to state and foreign banks. Such a move is similar to a gradual run on domestic private banks.

Q: Aren't depositors free to choose strong and healthy private banks when saving their money?

K: Yes. But the public is not given an opportunity to know the real conditions of these banks. Bank Indonesia has never announced any bank whose condition has worsened on fears that depositors will make a run on it.

Depositors, therefore, will continue moving their money from domestic private banks to state-owned and foreign banks until the government introduces a transparent policy.

Q: What should domestic private banks do then?

K: The government must guarantee that whenever a private bank is liquidated or goes bankrupt, depositors will be able to recover their own savings. The government can use public funds which are under its control for such a guarantee.

To make the public consent to use its funds for such a measure, anyone who is found guilty of having made a bank go bankrupt or liquidated must be investigated and punished.

Editorial -- Page 4