1 / 17

The Role of State Owned Banks in Indonesia

The Role of State Owned Banks in Indonesia. Global Conference on The Role of State-Owned Financial Institutions: Policy and Practice April 26-27, 2004, The World Bank P.S Srinivas Sector Coordinator Finance & Private Sector Development The World Bank, Jakarta, Indonesia.

xue
Download Presentation

The Role of State Owned Banks in Indonesia

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. The Role of State Owned Banks in Indonesia Global Conference on The Role of State-Owned Financial Institutions: Policy and Practice April 26-27, 2004, The World Bank P.S Srinivas Sector Coordinator Finance & Private Sector Development The World Bank, Jakarta, Indonesia

  2. Indonesia’s Financial Landscape – Dec. 2003 US$1 = Rp. 8500

  3. Role of Bank Indonesia • Evolution of SOBs strongly influenced by role of BI • BI’s dual roles (until 1999) • Agent of government for development • Direct financing to public enterprises • Refinancing/special credit programs – mainly to SOBs • Banking sector regulator/supervisor • Historic problems of weak supervision and enforcement – especially of SOBs • Since 1999, BI independent, significantly improved regulation and supervision and more assertive in enforcement • However, for SOBs – enforcement is still an issue

  4. Overview of role of SOBs

  5. Evolution of SOBs in Indonesia • Origins in the developmental view of state ownership • Instruments of state in promoting development • Each SOB assigned a specific sector of economy • BRI – rural, BDN – minerals, Exim – export/import, BNI – manufacturing • Transformed into political instruments • Directed credit to SOEs, politically connected groups • 1992 law removed all distinctions between SOBs and private banks, except for owner • Situation continues at present

  6. Milestones in SOBs evolution - Prior to 1983 • SOBs main channel of BI’s liquidity credit programs • Lending at subsidized rates to “qualified” borrowers • In 1982, liquidity credits over 40% of total loans • Important part of overall development strategy • Recycling oil revenues • BI refinancing/state directed lending reduced need to • Mobilize deposits • Develop strong credit risk assessment skills

  7. Milestones in SOBs evolution - 1983 reforms • First major financial sector reforms in Indonesia • Driven by BOP problems and weak fiscal situation after decline of oil prices • Main features • Reduction of subsidized directed credit programs • Deregulation of SOB deposit rates • Elimination of credit ceilings • Impact on SOBs • Increased attention to deposit-taking • Increased competition from private banks in lending • Shortcomings of reform • Continued presence of directed credit programs • Weak incentives for SOBs to improve credit risk assessment

  8. Milestones in SOBs evolution- 1988-92 reforms • Key aspects • Entry of new private banks allowed • SOEs allowed to move deposits to private banks • Foreign exchange transactions rules changed • Directed credit programs further reduced • Mandatory subsidized credit insurance abolished • Risk based capital adequacy standards introduced • Impacts • Dramatic increase in competition for SOBs • No. of private banks from 77 (1988) to 206 (1994) • SOBs’ share of banking system assets from 2/3rds (1988) to 40% (1995)

  9. Milestones…1988-92 reforms (cont’d) • Liquidity credits from 41% (1982) to 28% (1989) to 13% (1991) • Liquidity credits (), competition (), and capital requirements ()  weak state of SOB balance sheets exposed • Government committed to recapitalize SOBs to full 8% CAR by 1992 • SOBs’ role as political instruments of state • Revelations of large scale SOB funding of politically connected projects and persons • Weak governance of SOBs exposed • Bank Indonesia’s weak supervision of SOBs highlighted

  10. Milestones in SOBs evolution – 1997/98 crisis • SOB loan portfolios deteriorating for some time prior to crisis • Serious SOB weaknesses known - Bapindo collapse (1993), BBD insolvency (mid 1997) • Other SOBs with impaired capital • Main cause – lack of credit analysis • Politically motivated lending that went bad • Most SOBs found insolvent soon after crisis broke

  11. Milestones…1997/98 crisis (cont’d) • SOBs considered too big to fail • Four were merged into Bank Mandiri and recapitalized • Corporate loans of BRI also to Mandiri • Other three recapitalized • NPLs transferred to IBRA • High cost of recapitalizing SOBs • Total cost of banking crisis about 50% of GDP • About US$50 billion of recap bonds provided to banking sector • SOBs accounted for about 40% of assets prior to crisis • Accounted for about 2/3rds of recap bonds • Bank Mandiri alone nearly 40% of total cost • Poor incentives due to too-big-to-fail consideration potentially increased recap cost

  12. Current role of SOBs (Dec. 2003) • SOBs still major players in the banking sector • 28% of branches, 42% of deposits, 46% of assets, 40% of loans of banking sector • Two largest SOBs – nearly 1/3rd of banking system • Bank Mandiri 20%, BNI 11% of assets • Partial privatization in last year • 30% of Bank Mandiri, 40.5% of BRI sold, Government has golden share • Government bonds’ major role in the system influences SOB performance • 30% of banking system assets • SOBs hold 60% of all government bonds • 40% of SOB assets • Improving reported indicators • Declining NPLs, improving CARs, increasing profitability • Large presence of government bonds and regulatory treatment of restructured loans potentially exaggerates soundness

  13. Recent performance of SOBs – Dec. 2003

  14. How real are the reported numbers? The largest SOBs continue to be potentially risky

  15. Governance of SOBs • Continues to be key issue • Has been improving • Performance contracts and management changes in return for recapitalization • New and more professional Boards appointed • Closer monitoring by shareholder • Better supervision by BI • But much more is needed • Continuing weaknesses being exposed through scandals • BNI • BRI • Questionable credit decisions continue

  16. What can be done going forward? • Should Indonesia continue having SOBs? • Partial privatization step forward, but inadequate • Especially with government’s golden share • Full privatization would be ideal…but • Unlikely to be politically feasible in short-run • Potential investors? • Options for the short run • Greater oversight by shareholder of SOBs • Increase accountability of SOBs to government • Closer attention to new loan origination – especially corporate • Ensure compliance with corporate plans • More operational restructuring • Enhanced supervision and enforcement by BI • Make regulatory oversight of SOBs the same as private banks in practice

  17. Main messages • SOBs always have and continue to play a major role in Indonesia • After an extremely expensive recapitalization, government/regulator has begun taking steps to improve operations/management/supervision of SOBs • Despite these measures, SOBs remain vulnerable to non-commercial pressures and continue to exhibit weaknesses in core banking areas • Full privatization should be the goal – but further restructuring, improved governance also necessary • Key question: Is government willing to give up political benefits of owning banks?

More Related