Uncertainty to further hurt banking industry: Analysts

JAKARTA (JP): The uncertainty surrounding the government's economic policy will further drag down the ailing banking industry, economists have warned.

Eugene Keith Galbraith, an independent commissioner at Bank NISP, said here on Wednesday that the government's economic policy had failed to provide a necessary direction for local banks to cope with their financial hardships.

He said that a series of reshuffles in the government's economic team had often put business players in the dark as each minister tended to have different priorities in managing the country's economy.

"Such uncertainties should be removed if the government wants to see the banking industry fare better in the future," Galbraith said after Bank NISP's annual shareholders general meeting.

In the meeting, the bank's shareholders approved the appointment of Michael J. Higgins as new commissioner representing International Financial Corporation, and Surjawaty Tatang as a new director.

Galbraith said the reshuffles, especially in the economic team, were too frequent and had made the government lose its momentum in coping with economic problems, as can be seen in the continued fall in the rupiah to the U.S. dollar.

He acknowledged that although the rupiah was greatly affected by nonfinancial factors, such as the country's political conflicts, the central bank should also be responsible for the weak rupiah.

He said that the rupiah's continued decline had forced the central bank to push up interest rates in a bid to prevent the currency from further falling.

Banks have had no choice but to follow the high interest rate policy although such moves caused a severe blow to their operations, he said.

"With high interest rates, banks cannot execute their intermediation function properly to provide loans for businesses," he added.

In such a situation, it would be difficult for the banks to stand on their own feet, although many had received a capital injection, albeit only in the form of bonds, from the government.

He said the current gloomy situation had also discouraged foreign investors from joining the country's banking activities.

"The policies confuse foreign investors about where the government really wants to go," Galbraith said.

Amitava Banerjee, an IFC representative for Indonesia, said that the country's weak legal system also discouraged investors from entering the local banking industry.

"This is a very important issue for investors," he said after the meeting.

IFC is one of Bank NISP's institutional shareholders, with a 9.61 percent holding.

Citing an example, Banerjee said the cancellation of Standard Chartered's purchase in Bank Bali in 1999 indicated the weakness in the country's legal system.

Therefore, the government should speed up the legal and judicial reform to encourage both local investors and foreign investors to the banking industry, he added.

Bank NISP president Pramukti Surjaudaja said that the bank projected an unconsolidated net profit increase of between 10 percent and 20 percent this year from Rp 36 billion in 2000.

He said the bank planned to extend Rp 1.5 trillion in new loans this year, 80 percent of which would be channeled to small and medium-sized businesses, and the remaining 20 percent would go to consumer financing.

The fresh loans would raise its total credit outstanding by 50 percent to Rp 4.5 trillion at the end of this year, from about Rp 3 trillion at the end of 2000, Pramukti said.

The bank also plans to open between 10 and 20 new branches in Jakarta, Bogor, Tangerang, Bekasi, Bandung and major cities in Sumatra this year.

Parwati Surjaudaja, the vice president of Bank NISP, said that the bank had budgeted between Rp 500 million and Rp 2 billion to establish a new branch. (05)