Download The Indonesian Banking Industry

The Indonesian Banking Industry
The Indonesian financial system was repressed prior to 1983:




Real interest rate mostly at levels below inflation rate
(negative real interest rates)
High reserve requirements compared with other
countries (15%)
Credit rationing with a subsidized interest rate by
monopolistic state banks, and
The private financial market had not yet been well
established
 Launch a series of the financial deregulations 1983
Objectives of the financial deregulation
1983
• reduce the reliance of the commercial
banks on the liquidity credit from the
central bank
• improve the mobilization of financial
savings and allocation of resources in
society
• expected to stimulate the banking system
to become more efficient and effective in
managing their funds
KEY INDICATORS OF INDONESIAN FINANCIAL
SECTOR BEFORE AND AFTER DEREGULATION POLICY
1983
(Average Annual Percentage Rate)
Indicator
1.
2.
3.
Domestic Credit / GNP
Deposit / GNP *
Investment / GNP
1974 - 1982
1983 - 1991
1996
16,55
3,71
22,87
29,08
14,73
32,72
54,13
50,00
30,82
Source: IFS Yearbook, IMF
Note:- Deposit is time deposit plus saving deposit
- Investment is gross capital formation
- Data for Time Deposit plus Saving Deposit only available from 1980
The Indonesian financial sector has developed greatly since
the PACTO 88 was released, which described by:
•
The number of banks increased from 111 in 1988 to 238 on
July 1997 (before the crisis)
•
The rising of bank asset, the ability of the bank to gather
fund, the ability to channeling credit to the society, increased
more than 500% from 1988 to 1996

Bank as financial institution become more and more
important for Indonesia economy
Conditions of Indonesian Financial Sector:




The rapid development was not supported by good
infrastructure such as banking supervision
The regulatory framework has not already yet to develop a
healthy and efficient banking industry
Human resources have not already yet
Many corruption, collusion and nepotism either in
government or private institutions
 Causes:


Many credits are not lend properly
Many legal lending limit are abused by bankers
Finally decreasing Rupiah, increasing interest rate or decreasing
economic growth places banks in a difficult position where NPL
increasing (from 7,2% in the end 1997 to 57,2% in the end of 1998).
The government disciplined the banking industry by
liquidating 16 banks on November 1, 1997, without any
preparation, socialization and explanation shocked the
society’s belief in banking industry

BANK PANICS
The continuing crisis followed by:
 more than 300% increasing of the interbank
rate of interest,
 bank must still carry negative burden of net
interest margin as the result of vast enough
negative spread, and
 the economic, social and politic environment
that getting worse
The banking in Indonesia finally facing
crisis and needs total restructuring in
banking industry
BANKING RESTRUCTURING DEFINITION
 Banking restructuring can be defined as the package of
macroeconomic, microeconomic, institutional, and regulatory
measures taken in order to correct incentives and to restore
problem banking system to sustainable financial solvency and
profitability. Consequently, bank restructuring must tackle the
causes and the effects of individual bank problems, or of
widespread bank distress
BANKING RESTRUCTURING IN INDONESIA
Established IBRA in January 1998
Full blanket guarantee of the bank obligations since January 1998
The government taken over, merge, liquidate and recapitalize many
banks
Bank Indonesia is given independently by Act Number 23 of 1999
Bank Indonesia gave 142 billion Rupiahs on September 1998 as
liquidity support for the banking industry  BLBI case
Bank Act no.10, 1998, to amend Act no.7, 1992: Commercial Bank
Initially the government has no clear target and concept in banking
restructuring.
The cost increased highly, both the direct costs (such as recapitalization and liquidation costs) and indirect costs (such as
unemployment and social political costs)
What happened after 5 years ?
Number of banks decreasing to 141
Cost of Banking Restructuring: around 60% of GDP
(including recapitalization cost: around Rp 430 trillion)
Almost all banks still government own
 Banking industry is getting better ??
Asset Value & Average of Financial Sector Growth in Indonesia (in
billion Rp)
Financial Activities
Bank
Insurance company
Finance company
Pawnshop
Capital Market *
- Stock
- Obligation
Asset Value
in 1996
Average of
Financial Growth
in 1989 – 1996
(%)
Asset
Value in
2000
328.600
17.269
33.591
14.300
26,16
23,07
43,58
24,65
1.030.500
41.600
34.100
42.000
36.800
8.700
68,02
36,86
225.819
28.787
Source: - Financial Report and RAPBN Indonesia, Bank Indonesia Annual Report
- Indonesian Financial and Economic Statistic BI (monthly edition)
Note : * Emission value
Items
A. Total Assets
Indicators
of Banking
Industry
Position
1.053,4
B. Loanable Fund
1. Credits
- in Rupiah
- in foreign currency
2. Bank Indonesia certificate
3. Securities and others claim
- Government bonds
- Issued securities
4. Others
999,0
346,9
239,6
107,3
88,5
425,4
384,7
40,8
138,2
C. Fund
1. Third Party Fund
- in Rupiah
- in foreign currency
2. Others
893,7
787,0
633,6
148,4
106,7
D. Capital
79,3
E. Ratio (%)
1. LDR
2. NPLs: - Gross
- Net
33,4
12,4
4,3
F. Exchange Rate (1 USD = Rp)
8.785
Financial Industry in Indonesia
Items
Total Assets
(billion Rp)
Share
(%)
Firms
(Unit)
1. Banking industry *
2. Insurance Companies
2.1. Life Insurance Companies
2.2. Property-Casualty Insurance
3. Pawnshop
3.1. Pawnshop
3.1.1. State owners **
3.1.2. Non State owners **
3.2. Financial Pawnshop
4. Finance Companies
5. Securities Firm
1.048.836.389
36.403.744
22.269.114
14.134.630
29.547.653
27.611.983
22.286.366
5.325.617
1.935.518
23.980.597
6.590.382
91,57
3,18
1,94
1,23
2,58
2,41
1,95
0,46
0,17
2,09
0,58
145
153
52
101
306
283
73
210
23
106
183
TOTAL
1.145.358.613
100
893
* Per June 2002
** Per December 2000
Source: Infobank
ASSET SHARE INDONESIAN BANKING INDUSTRY
Items
Total Asset
(million Rp)
Share
(%)
20 banks
860.007.703
82,00
43.000.385
-
188.828.686
18,00
1.510.629
-
1.048.836.389
-
7.233.354
-
Average 20
banks
125 other
banks
Average 125
other banks
145 banks
Average 145
bank
Per June 2002
Source: InfoBank
Credits
(million Rp)
CAR
(%)
240.443.344 -
NPL
(%)
LDR
(%)
-
-
12.022.167 21,16 12,31 42,55
91.292.364 -
-
730.339 23,19 7,76
331.735.708 -
-
2.287.832 20,46 8,39
66,30
62,93