New worries for Indonesian bank
sector By Bill Guerin
JAKARTA
- Six years after a US$60 billion bailout and amid
political uncertainty surrounding elections, Indonesia's
fragile banking industry is beset by new worries that
could negatively affect public and investor confidence.
The 1997 crisis, which forced the government to
bail out and close down troubled banks, was caused in
part by bank owners ignoring prudential requirements.
The restructuring of the sector, started in 1998, was
meant to purge the industry of bad practices prevalent
in the pre-crisis period, including the granting of
large loans to affiliated companies, weak internal and
external controls and poor risk management.
A
recent rash of foreign takeovers is expected to bring
foreign expertise in risk assessment to a sector where,
pre-crisis, it was almost standard operating procedure
for many banks to make loans to affiliated
conglomerates.
Bank Danamon, the country's
fifth-largest bank, was taken over last year by Temasek
Holdings Ltd, the Singaporean government's investment
arm. The Zurich-based ICB Financial Group, owned by
former Malaysian finance minister Daim Zainuddin, is
reportedly chasing a controlling stake in Bank
Bumiputera. Zainuddin, who last year took a minor
shareholding in Bank Internasional Indonesia, has said
he is working with the Sultanate of Brunei on more
acquisitions in Indonesia.
The International
Finance Corp, the World Bank's investment arm, has also
recently acquired small stakes in Bank NISP and PT Bank
Buana. Singapore's Oversea-Chinese Banking Corp Ltd has
a 22.5 percent stake in Bank NISP and has said it
intends to increase this to a majority stake over time.
Australia & New Zealand Banking Group Ltd (ANZ) has
upped its stake in Panin Bank, similar in size to Bank
NISP, to 29 percent from 11 percent.
But now,
hard on the heels of two fraud scandals, Bank Indonesia
(BI), the central bank, last week revoked the operation
permits of two banks because of extreme liquidity
problems allegedly triggered by fraudulent transactions.
The banks, Denpasar-based Bank Dagang Bali (BDB)
and Jakarta-based Bank Asiatic, had capital-adequacy
ratios that were much lower than the minimum
requirement, and non-performing-loan ratios higher than
the official maximum level of 5 percent. The
capital-related problems arose after the banks' owners
allegedly made several fictitious transactions.
Two different families own the two banks, but
they are connected by marriage. The son of I Gusti Made
Oka, who owns the majority stake in BDB, is married to a
daughter of Asiatic's majority stake owner Tong Muk
Keung.
Oka founded BDB in 1970, and it expanded
into one of the largest banks on Bali. A deposit of BDB
funds at Asiatic in the form of interbank loans and
Negotiable Certificates of Deposit (NCD) by a son-in-law
of Bank Asiatic's owner, who was also on the BDB
management team, led to fictitious transactions by Bank
Asiatic.
The amount of the loans, some Rp1.2
trillion (US$139 million), equated to 70 percent of the
bank's assets of Rp1.7 trillion, thus exceeding the
legal lending limit that limits a bank to lending a
maximum of 10 percent of its assets to an affiliated
company.
The scandals have taken the shine off a
basket of several positive macroeconomic factors.
For instance, Bank Indonesia said only last week
that the economy expanded 4.8 percent in the first
quarter from a year ago, the fastest rate in more than
three years.
Interest rates have been falling
sharply in the growing economy. The average rupiah
lending rate fell to 15.55 percent this week, the lowest
since mid-1997. Inflation is down to 5.1 percent from
7.2 percent in the same month a year ago, and the rupiah
has been stable for some time at an average of Rp8,469
to the US dollar. BI's interest rate is at 7.43 percent
and foreign exchange reserves are at $37.42 billion.
Though non-performing loans have risen by 8.3
percent of total loans in the first quarter of this year
against almost 49 percent in 1998, the average capital
adequacy ratio (CAR) is between 8.0 and 12 percent. Many
banks have a CAR of around 20 percent of assets, well
above international norms.
Despite these highly
positive factors, local banking analysts are now calling
for more control from Bank Indonesia in monitoring banks
to prevent a loss of public trust in smaller banks. The
central bank is also being urged to step up pressure on
banks to boost their capital either through mergers, by
raising funds or through capital injections by the
banks' owners.
Though BI has been praised for
the sharp shock therapy, its claims that all efforts had
been made to salvage the two banks do not assuage
concerns over how the fraud could go undetected in the
first place. According to the central bank, alleged
irregularities conducted by the owners centered on a
number of lending frauds and legal-lending-limit
violations.
The decision to close the banks was
seen as a shot across the bows of the remaining banks,
particularly those still being controlled by their
founders. Given the extreme levels of corruption and the
practice of owners intervening in banks' day-to-day
operations, there are fears that without strong control
and supervision, the rapid rates of credit growth could
well herald another banking crisis.
A recent
Economist Intelligence Unit report warned that the same
dodgy lending practices that precipitated the 1997
crisis were likely to continue.
The Association
of Indonesian Bankers (Perbanas) said it supported the
decision and the closures had sent the right message to
other banks, especially those still being controlled by
their founding owners, that they must put in place
prudent practices.
Perbanas chairman Agus
Nartowardoyo was quoted as saying that the closure of
the two small banks would not affect the operation of
other banks and may even improve public confidence in
the country's banking system.
Nonetheless, with
136 banks still operating in Indonesia, BI was quick to
quell incipient rumors of other shutdowns. "At present
we don't see any other banks that are in the same
financial condition as the two closed banks," BI senior
deputy governor Anwar Nasution told the press on
Tuesday.
BI emphasized that the closures were
because of fraudulent practices from the bank's
insiders, rather than from weak supervisory mechanisms
on its own account. Management and shareholders of the
two banks had admitted they were unable to comply with
minimum banking standards.
Before the decision
to close the banks had been made, Bank Indonesia had
closely supervised the two banks to try and fix their
severe liquidity problems, he said. Key bank boards of
directors were replaced, while capital injections from
the owners were also sought.
Police have set up
a team to investigate the fraud claims and have slapped
travel bans on 11 officials of the two closed banks, six
from Asiatic and the others from BDB. This followed a
report filed by Bank Indonesia last week.
The
government has also pledged to stump up and refund the
depositors of the closed-down banks within two weeks,
and a process of verifying the depositors is well under
way.
The closures will cost the taxpayer Rp2.39
trillion to cover deposits that are protected by the
government's blanket guarantee program.
The
program guarantees bank deposits up to a certain limit
and was created to boost confidence after massive bank
runs at the height of the financial crisis in the late
1990s.
Bank Negara Indonesia (BNI) has been
appointed to repay the depositors after tendering the
best price and having enough branch offices to implement
the compensation scheme, the Ministry of Finance's
director general of financial institutions, Darmin
Nasution, said on Thursday.
Public deposits in
what are classed as small banks currently amounts to
some 20 percent of the massive Rp800 trillion ($95
billion) of third-party funds spread across the entire
banking sector.
BDB had 408,000 depositors
serviced by 31 branches and 632 employees, while Asiatic
boasted 2,200 depositors, had two branches and employed
about 150 staff.
With combined liabilities of
only Rp3.4 trillion ($400 million) and third-party
deposits of Rp2.39 trillion, the closure of the
family-owned banks may not pose a major risk to the
stability of the banking industry, which was reported to
have a total asset base of Rp1.1156 quadrillion ($131.5
billion) as of January.
However, BI's message to
bank owners may be too little and too late to prevent
jittery depositors seeking safety by shifting their
funds from smaller to larger banks. Investors as well as
depositors remain nervous amid the current political
uncertainty.
After a week-long rally triggered
by almost trouble-free legislative elections, the
Jakarta stock market plunged 1.5 percent on Monday on
fears of political instability following strident
demands by 19 of the 24 contesting political parties for
a recount.
The recent lending scandals involving
the much larger publicly listed BNI and Bank Rakyat
Indonesia (BRI) showed that fraud and corruption
remained well embedded in the sector. Irregular
transactions conducted by bank owners spawned a number
of lending frauds and legal lending limit violations,
involving affiliated companies, which turned out later
to be fictitious.
The Rp1.7 trillion ($200
million) export credit scams at BNI, the country's
second-largest bank, for example, remained undetected
for almost a year because of a lax risk-management
system at the bank and alleged inadequate supervision
and monitoring by the central bank.
The
high-profile trial of two of 16 suspects in the BNI case
began on Monday at the South Jakarta District Court,
with the head of the Kebayoran Baru branch, Koesadiyono,
and Foreign Customers Division head Edy Santosotwo
facing charges of violating Law No 31/1999 and Law No
3/1977 on corruption.
The pair are alleged to
have disbursed export credits to companies without
proper assessments or checks and could, in theory, be
sentenced to life imprisonment if convicted. The prime
suspect, Maria Pauliene Lumowa, remains at large in
Singapore, which does not have an extradition treaty
with Indonesia.
These large state-owned banks
are said to be prone to widespread politically directed
lending. There have also been rumors that some Golkar
presidential hopefuls, including former military
commander Wiranto, received a share of the BNI funds.
Indonesia, which just held parliamentary elections,
faces its first direct presidential election in July.
The central bank may need to come down heavier
to get its message across before a new Golkar-led
administration takes over parliament in October.
A Bank Indonesia directive, imposed almost a
year ago, requires all commercial banks to submit their
action plans on risk management and implement them by
next January at the latest. So far only 28 banks have
submitted plans.
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