The Indonesian Banking The Indonesian Banking IndustryIndustry

The Indonesian financial system was repressed prior The Indonesian financial system was repressed prior to 1983:to 1983:

Real interest rate mostly at levels below inflation Real interest rate mostly at levels below inflation rate (negative real interest rates)rate (negative real interest rates)

High reserve requirements compared with other High reserve requirements compared with other countries (15%)countries (15%)

Credit rationing with a subsidized interest rate by Credit rationing with a subsidized interest rate by monopolistic state banks, andmonopolistic state banks, and

The private financial market had not yet been The private financial market had not yet been well established well established

Launch a series of the Launch a series of the financial deregulations financial deregulations 19831983

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 1974 - 1982

1983 - 1991 1996

1. Domestic Credit / GNP

2. Deposit / GNP *3. Investment / GNP

16,553,7122,87

29,0814,7332,72

54,1350,0030,82

Source: IFS Yearbook, IMFNote:- 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 The Indonesian financial sector has developed greatly

since the PACTO 88 was released, which described by:since the PACTO 88 was released, which described by:

• The number of banks increased from 111 in 1988 to The number of banks increased from 111 in 1988 to 238 on July 1997 (before the crisis)238 on July 1997 (before the crisis)

• The rising of bank asset, the ability of the bank to The rising of bank asset, the ability of the bank to gather fund, the ability to channeling credit to the gather fund, the ability to channeling credit to the society, increased more than 500% from 1988 to society, increased more than 500% from 1988 to 19961996

Bank as financial institution become more and more Bank as financial institution become more and more important for Indonesia economyimportant for Indonesia economy

Conditions of Indonesian Financial SectorConditions of Indonesian Financial Sector::

The rapid development was not supported by good The rapid development was not supported by good infrastructure such as banking supervisioninfrastructure such as banking supervision

The regulatory framework has not already yet to develop a The regulatory framework has not already yet to develop a healthy and efficient banking industryhealthy and efficient banking industry

Human resources have not already yet Human resources have not already yet Many corruption, collusion and nepotism either in Many corruption, collusion and nepotism either in

government or private institutionsgovernment or private institutions

Causes:Causes: Many credits are not lend properlyMany credits are not lend properly Many legal lending limit are abused by bankersMany legal lending limit are abused by bankers

Finally decreasing Rupiah, increasing interest rate or Finally decreasing Rupiah, increasing interest rate or decreasing economic growth places banks in a decreasing economic growth places banks in a difficult position where NPL increasing (from 7,2% in difficult position where NPL increasing (from 7,2% in the end 1997 to 57,2% in the end of 1998).the end 1997 to 57,2% in the end of 1998).

The government disciplined the banking The government disciplined the banking industry by liquidating 16 banks on November industry by liquidating 16 banks on November 1, 1997, without any preparation, socialization 1, 1997, without any preparation, socialization and explanation shocked the society’s belief in and explanation shocked the society’s belief in banking industrybanking industry

BANK PANICSBANK PANICS

The continuing crisis followed by:The continuing crisis followed by:

more than 300% increasing of the interbank more than 300% increasing of the interbank rate of interest, rate of interest,

bank must still carry negative burden of net bank must still carry negative burden of net interest margin as the result of vast enough interest margin as the result of vast enough negative spread, andnegative spread, and

the economic, social and politic environment the economic, social and politic environment that getting worsethat getting worse

The banking in Indonesia finally facing The banking in Indonesia finally facing crisis and needs total restructuring in crisis and needs total restructuring in banking industrybanking industry

BANKING RESTRUCTURING DEFINITIONBANKING RESTRUCTURING DEFINITION

Banking restructuring can be defined as the package of Banking restructuring can be defined as the package of macroeconomic, microeconomic, institutional, and regulatory macroeconomic, microeconomic, institutional, and regulatory measures taken in order to correct incentives and to restore measures taken in order to correct incentives and to restore problem banking system to sustainable financial solvency and problem banking system to sustainable financial solvency and profitability. Consequently, bank restructuring must tackle the profitability. Consequently, bank restructuring must tackle the causes and the effects of individual bank problems, or of causes and the effects of individual bank problems, or of widespread bank distresswidespread bank distress

BANKING RESTRUCTURING IN INDONESIA

Established IBRA in January 1998Full blanket guarantee of the bank obligations since January 1998The government taken over, merge, liquidate and recapitalize many banksBank Indonesia is given independently by Act Number 23 of 1999Bank Indonesia gave 142 billion Rupiahs on September 1998 as liquidity support for the banking industry BLBI caseBank 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 re-capitalization 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 Asset Value in

1996

Average of Financial

Growth in 1989 – 1996 (%)

Asset Value in

2000

BankInsurance companyFinance companyPawnshopCapital Market *- Stock- Obligation

328.60017.26933.59114.300

36.8008.700

26,1623,0743,5824,65

68,0236,86

1.030.50041.60034.10042.000

225.81928.787

Source: - Financial Report and RAPBN Indonesia, Bank Indonesia Annual Report - Indonesian Financial and Economic Statistic BI (monthly edition)Note : * Emission value

Indicators of Banking Industry

Items Position

A. Total Assets 1.053,4

B. Loanable Fund1. Credits - in Rupiah- in foreign currency2. Bank Indonesia certificate3. Securities and others claim- Government bonds- Issued securities4. Others

999,0346,9239,6107,3

88,5425,4384,7

40,8138,2

C. Fund1. Third Party Fund- in Rupiah- in foreign currency2. Others

893,7787,0633,6148,4106,7

D. Capital 79,3

E. Ratio (%)1. LDR2. NPLs: - Gross - Net

33,412,44,3

F. Exchange Rate (1 USD = Rp) 8.785

Financial Industry in IndonesiaFinancial Industry in Indonesia ItemsItems Total AssetsTotal Assets

(billion Rp)(billion Rp)ShareShare

(%)(%)FirmsFirms

(Unit)(Unit)

1. Banking industry *1. Banking industry *

2. Insurance Companies2. Insurance Companies

2.1. Life Insurance Companies2.1. Life Insurance Companies

2.2. Property-Casualty Insurance2.2. Property-Casualty Insurance

3. Pawnshop3. Pawnshop

3.1. Pawnshop3.1. Pawnshop

3.1.1. State owners **3.1.1. State owners **

3.1.2. Non State owners **3.1.2. Non State owners **

3.2. Financial Pawnshop3.2. Financial Pawnshop

4. Finance Companies4. Finance Companies

5. Securities Firm5. Securities Firm

1.048.836.3891.048.836.389

36.403.74436.403.744

22.269.11422.269.114

14.134.63014.134.630

29.547.65329.547.653

27.611.98327.611.983

22.286.36622.286.366

5.325.6175.325.617

1.935.5181.935.518

23.980.59723.980.597

6.590.3826.590.382

91,5791,57

3,183,18

1,941,94

1,231,23

2,582,58

2,412,41

1,951,95

0,460,46

0,170,17

2,092,09

0,580,58

145145

153153

5252

101101

306306

283283

7373

210210

2323

106106

183183

TOTALTOTAL 1.145.358.6131.145.358.613 100100 893893

* Per June 2002* Per June 2002

** Per December 2000** Per December 2000

Source: InfobankSource: Infobank

ASSET SHARE INDONESIAN BANKING INDUSTRYASSET SHARE INDONESIAN BANKING INDUSTRY

Items Total Asset(million

Rp)

Share

(%)

Credits(million

Rp)

CAR (%)

NPL (%)

LDR (%)

20 banks 860.007.703 82,00 240.443.344

- - -

Average 20 banks

43.000.385 - 12.022.167 21,16

12,31

42,55

125 other banks

188.828.686 18,00 91.292.364 - - -

Average 125 other banks

1.510.629 - 730.339 23,19

7,76 66,30

145 banks 1.048.836.389

- 331.735.708

- - -

Average 145 bank

7.233.354 - 2.287.832 20,46

8,39 62,93

Per June 2002Source: InfoBank