Jumat, 10 Mei 2013

Bank reforms ahead of ASEAN economic community ( Part 1 of 2 )


Bank reforms ahead of ASEAN economic community ( Part 1 of 2 )
Anwar Nasution   Professor of Economics at University of Indonesia,
Former Senior Deputy Governor of BI
JAKARTA POST, 07 Mei 2013


The Indonesian banking system needs to be reformed to survive in the coming ASEAN community in 2015 and globalized world in general. Reforms must improve market competition to lower interest rate, improve banking services and increase competitiveness of domestic banks both domestically and internationally. In terms of asset and branch networks, banking is the core of financial system in Indonesia. 

The banking system is centered on 31 inefficient public sector banks that control over 40 percent of assets. The central government has four state banks and each of the 27 provinces that existed before the 1997 financial crisis have a regional development bank (RBD). With the growing number of new provinces since 2000, some of the RDBs are shared by more than one province.

A government instruction issued in 1997 by the New Order government in 1997 requires all public sector entities (including about 150 state-owned enterprises) to deposit their financial assets at state-owned banks. 

The financial assets of local governments (including their enterprises) may only be placed at the local RDB. In 2012, more that 63 percent of the asset of the banking industry was controlled by 11 large banks and rest by the other 109 banks. 

The four state-owned banks control 36.3 percent of the assets: Bank Mandiri with 13.2 percent, BRI 12.8 percent, BNI 7.6 percent and BTN 2.7 percent. There are too many banks and particularly too many public sector banks making dubious contributions and competing in a relatively small market. 

The first problem of the domestic banking industry is how generate Tier I capital to meet Basle III capital requirement. In 2010 the Basel Committee on Banking Supervision published global regulatory standards for bank capital adequacy ratios (CAR) and liquidity. 

The standards include an amplification of the definition of regulatory capital, an increase in minimum requirements and the introduction of new buffers to help banks to survive economic and financial pressure. Tier 1 capital is permanently and freely available to absorb losses without the bank being obliged to cease trading.

An important part of this issue is reducing dependency on the volatile sovereign bond injected in 1998 to restore their capital base. Over one third of the rupiah sovereign bonds in the domestic market are controlled by foreign investors providing liquidity through capital inflow. A rise in the price of sovereign bonds improves the capital adequacy of recapitalized banks and reduces ratio of their non-performing loans (NPL). 

The mutual funds industry collapsed in 2003, 2008 and 2010 due to drops in the prices of sovereign bonds following capital outflow. Lower interest rates allow them to expand credit. On the other hand, capital outflow depresses the price of sovereign bonds and raises interest rates that reduce CAR of the banks and their NPL. 

The second problem, particularly for public sector banks, is improving productivity and competitiveness. This will require a substantial upgrade of their skills and technology and the introduction of new products.

None of our state banks or RDB can compete with state-owned banks from neighboring countries, such as Maybank or CIMB or the Development Bank of Singapore. 

The third problem of the banking industry is to reduce net interest rate margin (NIM) — the gap between lending and deposit rates — now the highest in any ASEAN country. The average NIM of all banks in December 2010 was 5.73 percent. 

The highest (9.10 percent) was at non-foreign exchange banks, followed by RDBs at 8.74 percent and state-owned banks at 6.11 percent. The average NIM at foreign banks stood at 3.54 percent, about a half of the state-owned bank rate. 

The high NIM is symptomatic of inefficiency, partly due to the high overheads inherited from the long financial repression of the past. 

At that time, the government adopted a policy where the central bank set tone and lending rates of credit by economic sector and class of customer. 

The central bank also provided refinancing and assumed most of the credit risk. As credit was administratively allocated, there was no need for bank officers to mobilize funds and pay attention to credit risks. Bank supervision was almost irrelevant under such a system. 

To deliver the credit program, state banks opened branch offices everywhere, including very remote places, and bank employees were mainly administrators, hence high overheads.

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