A DECADE AFTER ITS NATIONAL LOW POINT, HOW HAS INDONESIA’S BANKING SECTOR RE-EMERGED AND RECHARGED? DEVI ASMARANI REPORTS

A decade ago, as customers queued at bank counters and ATMs to withdraw their savings, the Indonesian banking sector had a rude awakening.

The Indonesian Rupiah had lost around 80 per cent of its value against the US dollar. A battered economy had diminished purchasing power. With eroding capital and many lenders defaulting, the crisis exposed the banking system’s major shortcomings – a fact that snowballed into a crisis of confidence.

While bank numbers rose from 108 to over 230 within a decade, this was undermined by weak management, lack of transparency and a rash of bad lending decisions. “Up to that point, the banking industry had been poorly managed, encouraged by very liberal policing. This had nourished its growth, but generally made it prone to abuse,” says bank analyst Aviliani of the Institute for Development of Economics and Finance Indonesia.

When the government revoked the licenses of 16 insolvent banks in October 1997, the rush intensified. Most banks, including stronger ones, experienced runs on their deposits. Within a year, 67 banks were closed, 12 merged, and many were taken over by the government – which spent 650 trillion Rupiah (US$69.89 billion) in public funds bailing out the sector.

A NEW ERA

Painful as it was, this chapter of the country’s banking history helped usher in a much-improved system, following an exhaustive restructuring program. Indonesia now has 128 banks, and further consolidation seems imminent.

“After the banking crisis, the Central Bank implemented corrective policies which emphasized prudence. This helped boost the quality of the banking industry,” says Elvyn Masassya, chairman of Financial Intelligence consultancy firm.

These measures included tighter restrictions on lending, requirements for financial transparency, and higher international standards of competence and integrity. All banks must now be members of the new Indonesian Deposit Insurance Corporation (IDIC), to keep depositors insured in the event of another emergency. In the past five years, bank profits have steadily risen as consumer confidence returns. “Even banks with financial problems back then have emerged stronger,” says Elvyn.

BANKING LEADERS

Many banks underwent major changes since the crisis, some with new investors, others due to mergers. Foreign investors from around Asia have injected technologies, management and technical competencies, aiding the turnaround. The strongest banks are now utilizing information technologies, the Internet and mobile banking to strengthen their customer base.

One of these is Bank Central Asia (BCA). Taken over by the Indonesian Banking Restructuring Agency (IBRA) in 1998 then acquired by Mauritius-based Farindo Investment Ltd, BCA grew to become a dominant transactional bank with a strong network of branches and ATMs, and a leader in Internet and mobile banking. BCA’s debit cards are accepted by over 20,000 merchants, while its credit cards are known for their retail discounts.

The country’s largest bank, state-owned Bank Mandiri is an example of a successful restructuring from the merger of four government banks in October 1998. It has a widespread network across Indonesia, with 642 branches and 4,000 ATMs. Bank Mandiri continues to retain dominance with corporate consumers, including major state-owned companies.

State-owned Bank Negara Indonesia (BNI) publicly listed in 1996, was given assistance by the government after the financial crisis. The bank has bounced back, refocusing particularly on small and medium scale enterprises and consumer banking. With over 900 branch offices, including five overseas, some 2,300 ATMs and a syariah unit, BNI’s expansion plans include the purchase of smaller provincial banks.

Indonesia’s oldest bank, the state-owned Bank Rakyat Indonesia (BRI) has kept its focus on serving small-scale consumers. The bank has nearly 4,500 branch offices, 90 per cent of which are located in smaller towns and villages, where it provides micro loans to new entrepreneurs.

Danamon, a merger of nine private banks, has become the second largest player in the country’s micro lending sector. Its Self-Employed Mass Market loan known as Danamon Simpan Pinjam (DSS) was established in 2004 for micro and small-scale enterprises and is now serving some 400,000 customers across the country, from some 51 mobile units deployed to reach out to traders in wet markets.

FURTHER EVOLUTION

Critics say Indonesia still has too many banks. Out of 128 state-owned and private banks, 15 of them control 85 per cent of assets and markets. The government’s Indonesian Banking Architecture, a blueprint to streamline the industry within 10 years, is aimed at halving the number of banks.

“The policies, and the industry as a whole, are still going through an evolutionary process,” says Elvyn. As with the past decade, eventually the strong will survive.

Now freelance, Devi Asmarani was a senior correspondent in Indonesia for The Straits Times for eight years.