The race in Indonesia's online banking

The following is the first of two articles on on-line banking by C.G. Moghe, a Jakarta-based adviser on financial issues for a multi-industry group in Indonesia and an expert on risk management.

JAKARTA (JP): "Indonesian banks will need to move quickly (into on-line banking) lest their customers flee to cyberspace competitors," an opinion piece in this newspaper read recently.

Sounds familiar? Perhaps as familiar as "let them eat cake if they cannot afford bread"?

While very few countries have had the opportunity or misfortune to face all that Indonesia has had to go through since mid-1997, the problems faced by the banking industry are not exclusive to Indonesia.

The potently explosive combination of adverse factors, however, was exclusive to Indonesia: unstable currency, declining economy, socio-political uncertainties leading to a general lack of confidence in the system, and all these issues in turn making it difficult for corporations to meet their creditor obligations.

Since none of the countries where the experts and consultants presently are advising Indonesian banks on things like crisis management and evaluating business plans have experienced similarly adverse conditions, these experts can hardly appreciate the predicaments and priorities of Indonesia's banks.

The prescribed "medicine" for the Indonesian banking industry generally tends to be repetitions of what was done in more advanced countries, and therefore carries a built in bias for nonrelevance. These "solutions", however, look good, especially if they can be viewed with the conviction that what worked for any of the advanced countries must work for Indonesia, relevant or not!

Indonesian banks, since mid-1997, have had to think first of their survival; long-term issues like cyber-banking have been on the back burner for the last two or three years, especially where large investments for training and equipment is called for.

There are, however, a few exceptions to this generality, both in terms of banks and the issues dealt with.

Thanks to the guarantee by the Indonesian government, the general public does not have to worry about the safety of money deposited in Indonesian banks, nor do any of the banks need to worry much about their liquidity, as was the case in late-1997.

In fact, since the first round of bank liquidations in late- 1997, severe liquidity problems coupled with the high cost of funds lead the government to assist banks by issuing a guarantee covering public deposits, easing the pressure on the banks.

While the problems seem to be diminishing in their variety and magnitude, Indonesian banks do not yet seem to be out of the woods, and seem to be always looking for props.

According to statistics from Bank Indonesia (BI), as of March 2000 the capital adequacy ratio (CAR) of 39 banks was below the stipulated minimum of 4 percent, while the CAR of 10 banks was between 4 percent and 8 percent, the target level stipulated for 2001.

Presently as many as seven banks are reportedly being monitored by BI. In other words, there are quite a few Indonesian banks which still need to worry for the present about getting adequate capital to deal with their immediate future, rather than some distant goal of being able to offer on-line banking.

BI recently announced it was extending the deadline for compliance with the requirements of legal lending limits, with the additional time afforded banks to continue restructuring debts swapped in to equity and a more liberal calculation of CAR.

It is important to note that this extension has been made available to all banks, and not only to those banks which are in a weak but repairable position. These dispensations indicate that all is not well with the banks, and some concessions are still needed to help many of them carry on with their business.

In the overall population of Indonesian banks, the small and medium-sized (in terms of balance sheets and customer base) banks from the private sector form the majority.

To develop the ability to offer on-line banking, each of these banks is required to commit large amount of resources to entertain a small customer base, consisting mainly of unsophisticated customers whose needs are limited.

These capital commitments, considerably large compared to the banks' already thinly stretched capital, also are unlikely to produce any assured returns within any immediate/assured short term.

On the other hand most of the larger Indonesian banks, who by virtue of their size have some interest in maintaining their competitive edge (if it still exists), also went through recapitalization during 1999 or later.

The Indonesian Bank Restructuring Agency and the government, which provided the recapitalization capital, is under pressure to recover this "investment" as soon as possible by virtue of an initial public offering (IPO) or by inviting in investors.

The next phase these banks need to be concerned with is establishing their profitability. Only if their profitability is attractive can they hope for a successful IPO and/or an eventual sale to an investor.

The tendency therefore may be to sacrifice some intangible gains in competitiveness offered by on-line banking to manage the costs/capital in the short term.

Going by the debate generated by the financial details of Bank Central Asia (BCA) disclosed at the time of its IPO, successfully launching an IPO or attracting investors will be a daunting target for most large banks assisted by the government through recapitalization.

In addition, most banks are yet to find any attractive lending opportunities for the liquidity they have generated. For example, of the Rp 28 trillion liquidity enjoyed by BCA, only some Rp 5 trillion is expected to be used for customer lending.