News Focus: TENS OF BANKS IN RISKY CONDITION

By Andi Abdussalam
Jakarta, April 22 (ANTARA) - Following last week's liquidation of IFI bank by Bank Indonesia (BI), economists warned on Tuesday of risky conditions of about 40 to 50 small banks in the country, advising the central bank that it should ask them to merge.

Of the 130 banks in Indonesia, only about 15 large banks have good levels of capital adequacy ratio (CAR), non-performing loan (NPL) and deposit ratios. The 15 large banks control about 70 percent of overall bank assets.
"Only 15 large banks have good ratio levels because they control 70 percent of the assets while about 40 to 50 small banks are, I think, in risky conditions," Economist of the Institute for Development of Economics and Finance (Indef) Aviliani said on Tuesday.
After all, banks are now called on to cut their lending rates following BI (the central bank)'s aggressive step to lower its benchmark rate. The lowering of the lending interest rates would force them to also cut the interest rates of their deposit. Thus, small banks could run short of liquidity as depositors would withdraw their funds.
According to Bank Mandiri director for micro and retail banking affairs Budi Gunadi Sadikin the interest rates tend to go down now despite the fact that banks' NPL had the potential to increase. This is because banks are expected to cut the interests of their third party funds (saving, deposit and demand deposit).
Aviliani said that small banks were now facing problem with the public confidence where customers were reluctant to place their funds at small banks. About six percent of small bank customers left their banks to more reliable banks.
With the liquidation case of Bank IFI, BI must forces small banks to merge. Because if small banks go bankrupt one by one it would pose a difficulty on the Deposit Insurance Corporation (LPS).
Bank Indonesia on Friday last week announced the liquidation of Bank IFI due to the problems the bank faced with its capital adequacy ratio which was below eight percent and NPL which reached 24 percent. Bank IFI actually has been put under special supervision since last September.
"Based on the decision of Bank Indonesia governor, Bank Indonesia revoked Bank IFI's license," Bank Indonesia's head of financial system stability, Wimboh Santoso, said.
He said the liquidation of the bank would not disturb bank conditions in general because it would not have a systemic effect. He said the bank's total assets were recorded at only Rp440 billion or 0.01 percent of the total assets of banking industry.
In general, based on indicators at Bank Indonesia, the conditions of national banks, are actually still good. "The average rate of banks' CAR, NPL and deposit ratios is still above BI's indicators," Aviliani said.
But the good ratio performance does not happen evenly on every banks but only on about 15 large banks of the 130 banks in the country, Aviliani said. Further more, small banks are facing a lack of public confidence.
This condition would force small banks to even raise their interest rates to increase their liquidity. Economic observer Tony A Prasetyantono said that Bank Indonesia must continue to be alert with regard to current tight liquidity situation especially on small banks because it would be the small banks that would fall victims to the situation.
He said small banks would have difficulties seeking funds particularly from the third party to meet their liquidity.
"They will be the ones to suffer in the current situation. Big banks would survive because they are more trusted and have capacity to pay a high deposit interest. Small banks cannot do it," he said.
For this purpose, Aviliani suggested that BI should urge small banks to merge soon or offered acquisition so that they would not cause concern for banks' customers.
BI should also set a deadline for small banks to carry out the merger or acquisition after which it could be liquidated. Bank IFI is a case in point. "As far as I know Bank IFI has been bought by other company but because no agreement is reached yet on its price it is eventually liquidated," Aviliani said.
In the meantime, Bank Mandiri's chief Economist Mirza Adityaswara has other opinion, saying that the banking condition in the country is now improving.
He said that banks in Indonesia had passed the critical stage in the September - October 2008 period, or in the fourth quarter of that year. The improving bank condition could be observed from the fact that banks have begun to lower their interest rates.
On the hand, the banking funds invested in Bank Indonesia's certificates (SBI) have up to April 1, 2009 reached Rp233 trillion, Adityaswara said.
"This indicates that banks are carrying out the banking prudence principles while on the other hand shows that banks liquidity is improving," he said.
He said that the improving of bank conditions was also reflected in the absence of negative impact created following the liquidation of Bank IFI. "If the bank was liquidated in the fourth quarter last year, it could have caused panic. But the liquidation last week did not cause a rush, meaning that banks are now in stable condition and public confidence is high enough," Adityaswara said.