Trial to unveil supervision failure

The government's recent move to liquidate 16 insolvent banks has raised concerns. Economist Kwik Kian Gie looks at the consequences of the move in this article.

JAKARTA (JP): Bank liquidations are always followed by prolonged problems. Depositors have to wait until after the sales of the liquidated bank's assets before repayment. During this time they are overwhelmed with the uncertainties over whether they will eventually get their money back or not. Many of them have to stop their businesses and go bankrupt.

Since the 16 insolvent banks were very unhealthy, most of their customers' savings and deposits have certainly vanished. So, if their money could be repaid through the sales of the liquidated banks' assets, that would be good news.

Liquidation of banks usually comes with a high "domino effect" risk. It also unfairly punishes unoffending depositors.

The government's decision is a correct one, but the implementation and the timing of the liquidation are debatable. The government actually had sufficient time but its decision came too suddenly and unfairly.

The International Monetary Fund, which together with the World Bank and the Asian Development Bank recommended the banks' liquidation under its reform package for Indonesia, unsurprisingly praised the government's decision. But are they aware that many blameless Indonesians have suffered from it? Depositors are seemingly being punished for their failure to deposit their money at foreign banks.

In the future, it would be advisable for the government to take a truly fair solution to correct the banking industry.

When the government said that the liquidation of the 16 banks was final, did it mean that there would be no more bank liquidations in the future?

This is surely not true. Hence, the statement should be construed to mean "for the time being".

So, where should we deposit our money? There are numerous and unprofessional small banks whose owners tend to exploit deposits for their own businesses without heeding regulations on legal lending limits. People know that several banks are still offering high deposit rates, which indicates that they are unhealthy and illiquid.

It has been frequently suggested that the government make a once-and-for-all banking reform under which depositors would be repaid with funds from the state budget or Bank Indonesia, while taking legal action against those who caused the banks to flounder.

True, the government will provide a bridging loan of some Rp 2.3 trillion (US$697 million) for the repayment of deposits of up to Rp 20 million. But will it investigate and punish the parties responsible for the banks' insolvency?

What about the repayment of deposits worth more than Rp 20 million?

Then, how do customers choose banks to deposit their money in? The licensing mechanism should actually guarantee that the monetary authorities would continue monitoring the health of licensed banks. But the fact is that Bank Duta suddenly went bankrupt some years ago, while Bank Summa and 16 other insolvent banks were liquidated.

In developed countries there are laws prescribing banks on how to prepare the details of financial reports. Experts in the press industry, therefore, can help society analyze the operations of banks.

Indonesia has no such rules and banks which have failed to issue any financial reports for long periods of time are still allowed to operate.

This indicates that the government's policies cannot protect the interests of depositors. Depositors, therefore, would do better to set up a consumer protection agency with a special division to defend the interests of bank depositors. The agency could hire experts to investigate the conditions of banks and disseminate the results of the investigation to the public.

Meanwhile, the objection of Bambang Trihatmodjo, one of President Soeharto's sons, to the liquidation of his Bank Andromeda, and his subsequent lawsuit against the government are good news to those who previously thought that Bambang was beyond the reach of the law.

Like other commoners, he has indicated that he would have to abide by any decision taken by the administrative court. The suit will also test the independence of the judge, who will have to try the case involving a son of the President on the one side and cabinet members, who are assistants to the President, on the other.

The trial is expected to disclose the details of all matters related to the liquidation of Bank Andromeda.

In the trial, we will be able to determine to what extent the monetary authorities carried out their supervisory roles, what tricks were employed and why the banks are considered to have violated the law.