The Role of State Owned Banks in Indonesia
P. S. Srinivas1
Djauhari Sitorus
The World Bank
Jakarta, Indonesia
Abstract
State owned banks have historically played a major role in the Indonesian
financial sector. Even today, nearly half the assets of the banking system are
controlled by state owned banks. This paper explores the evolution of their
role in the economy over the years. Looking ahead, there is little economic
justification for Indonesia to continue to have state owned banks. Full
privatization should therefore be the desired policy objective. However, given
the likely political difficulties in achieving this in the short run, steps should be
taken to strengthen both the state owned banks and the Indonesian financial
sector.
1
Paper to be presented at the Brookings/IMF/World Bank conference on “The Role of State-Owned
Financial Institutions: Policy and Practice” being held during April 26-27, 2004, at the World Bank,
Washington DC.
Srinivas is Sector Coordinator, and Sitorus is Financial Analyst, both in the Finance & Private Sector
Development Unit, in the World Bank Office in Jakarta, Indonesia. Comments are welcome. Corresponding
author’s e-mail: psrinivas@worldbank.org. The views and opinions expressed in the paper are the authors’ own
and are not those of the World Bank or its members. All efforts have been made to ensure accuracy of data
used. Any remaining errors are the authors’ own. Thanks to Bert Hofman and James Hanson for valuable
discussions and comments and to Anna Widiana for production assistance.
The Role of State Owned Banks in Indonesia
As in much of the rest of the developing world, state owned banks (SOBs) in Indonesia
originated with the government’s objectives to channel resources to “priority” sectors of the
economy as well as provide financial services to underserved parts of a widely dispersed
country. Each of the state owned banks was also originally established with a clear mandate
to finance specific sectors of the economy. For much of the country’s history, SOBs have
played a major role in the Indonesian economy – at times controlling over three-fourths of
deposits and assets of the banking system – and they continue to control almost half the
assets and deposits of the banking system today. Also in line with many developing
countries, the banking sector dominates the overall Indonesian financial sector – with banks
forming over 80 per cent of the financial sector today. SOBs, therefore, always have – and
continue to – play a large role in the Indonesian economy.
The role of state owned banks has, however, evolved over time. After starting as agents of
channeling subsidized credits – provided principally through rediscounting facilities from the
central bank, Bank Indonesia (BI) - to specific sectors of the economy, these banks have
evolved into full fledged commercial banks. While their privileged access to cheap funding
from BI has declined over time – as Indonesia implemented reforms in the financial sector,
and while their reported performance in terms of profitability and capital adequacy has
improved since the 1997/98 crisis, they continue to face the usual gamut of problems
associated with state ownership. Weak governance and susceptibility to political pressures is
a major issue, while the implicit government guarantee (with or without the current blanket
guarantee on deposits) to depositors in these banks weakens incentives to focus on
performance. Despite efforts by the regulator, SOBs also face problems of weak
implementation of regulation and supervision – given the political considerations involved.
As Indonesia extricates itself from the devastating effects of the 1997 crisis and looks ahead,
a key challenge is to squarely address the role of SOBs in its economy going forward. There
are few arguments for continuing to have a large role for SOBs in Indonesia’s economy
today. Early and full privatization of these institutions would be desirable.
Much has been written about the Indonesian financial sector. Nasution (1983) and Balino
and Sundararajan (1986) provide detailed overviews of the Indonesian financial sector prior
to and in the early 1980s and Indonesia’s first efforts at financial sector reform. Woo and
Nasution (1989) focus on the issue of international debt in Indonesia economy and discuss
the political economy of SOBs in the 1980s. Cole and Slade (1990, 1996) review Indonesian
financial sector development between the 1960s and the late 1980s. Hanna (1994) and
Binhadi (1995) assess various financial sector reform packages in Indonesia from 1983-1991
and study their effects on the real economy. Harris, Schiantarelli, and Siregar (1992) focus on
the impact of financial liberalization in Indonesia on corporate sector financing. During the
mid-late 1990s, much of the literature focusing on the East Asian financial crisis also
discussed the Indonesian case at length (for eg. Claessens et. al.(1999)). More recently,
Santoso (2000) provides an in-depth review of Indonesian financial and corporate sector
reform. Enoch et. al. (2001 and 2003), Kenward (2003), and World Bank (1998, 2000)
provide excellent overviews of the evolution of banking crisis and its management.
Boediono (2002) assesses the political economy of IMF support programs under three
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Indonesian presidents and its impacts on financial sector reform. Redway (2003) assesses the
role of the Indonesian Bank restructuring Agency (IBRA) in reforming Indonesia’s banking
sector. McLeod (2003) reviews the Letters of Intent (LoIs) from the government of
Indonesia to the IMF, evaluates the crisis recovery program, and proposes an alternative
banking crisis recovery scheme that may be followed in future. Hofman and Rodrick-Jones
(2004) provide an analysis of the institutional weaknesses underlying Indonesia’s rapid
growth prior to the crisis and address banking sector issues as part of the overall institutional
framework in the country.
Given the major role of the SOBs in the Indonesian financial sector, many of the papers
cited above necessarily touch upon issues related to SOBs. This paper’s contribution is a
survey of the existing literature with a primary emphasis on the role of SOBs in Indonesia as
well as an analysis of recent developments regarding SOBs. The paper first examines the
rationale for establishing SOBs in Indonesia and their early role. It then traces the impacts of
various financial sector reforms on the SOBs and discusses their evolving roles. It then
focuses on the 1997 financial crisis and its impact on SOBs. It then brings the most recent
developments – including ongoing partial privatization of SOBs – into focus and discuses
the role of SOBs in Indonesia in the mid-2000s. The paper concludes with a discussion of
the future role of SOBs in Indonesia.
This paper focuses on the large, national SOBs in Indonesia – which dominate the banking
system. It does not deal with the regional development banks (BPDs) – which are also state
owned – though by the regional governments. Given its primary emphasis on the role of
SOBs, there are several issues in the Indonesian financial sector that this paper does not
focus on. It does not deal at great length with the details of the 1997/98 financial crisis (see
Enoch et. al. (2001 and 2003), Kenward (2003), World Bank (1998, 2000), and the papers in
Bulletin of Indonesian Economic Studies (April 2004)). The Indonesian Bank Restructuring
Agency (IBRA) and its role in the resolution of the crisis is also touched upon only in the
context of SOBs (the papers referred to above also provide details on this issue). More
recent policy issues such as the financial sector safety net including the proposed deposit
insurance scheme to replace the blanket guarantee, the creation of a unified financial
supervisory authority, and the new banking landscape proposed by Bank Indonesia are only
touched upon briefly in the context of their relevance to the SOBs2.
I.
Rationale for government role in the banking sector in Indonesia
Why do governments own banks? Two broad views – the “development” and the “political”
views – help to explain the role of governments in the financial sector (La Porta et. al. (2002)
and the references therein). The “development” view focuses on the necessity of financial
development for economic growth. Observers have argued that while in some industrial
countries, private banks have been important vehicles of channeling private savings into
industrial development, in others – especially in developing countries – economic
institutions were not sufficiently developed to play this critical role. In such countries the
For more on recent developments in the financial sector, see World Bank (2003) as well as monthly financial
sector updates posted on http://www.worldbank.org.id.
2
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governments could step in, set up financial institutions, and through them help both
financial and economic development. This view is broadly in line with the strand of literature
in development economics that advocated government ownership of firms in “strategic”
economic sectors. Shleifer (1998) provides a review of literature relating to government
ownership of firms. Lewis (1950) advocates government ownership of banks as part of the
“commanding heights” of the economy. Governments could develop strategic industries
through both direct ownership of industries and ownership of banks. Myrdal (1968)
supports government ownership of banks in India, since government as owner has the
incentives to take a longer term view of development than private banks can. These ideas
were obviously influential as governments across the developing world either nationalized
existing commercial banks or started new ones in the 1960s and 1970s.
An alternate view of government ownership of banks is the “political” view that emphasizes
politicians’ desire to control investment in the economy for political objectives.
Governments control banks (and other enterprises) in order to provide employment,
subsidies, and other benefits to their supporters. The beneficiaries in turn support politicians
through votes, political contributions and bribes. Much academic work supports this view
through documenting the inefficiency of state enterprises, the political motivation behind the
public provision of services, and the benefits of privatization (Megginson et. al. (1994) and
La Porta and Silanes (1999) among others).
There are various ways in which governments can participate in the financing of activities
that they consider desirable. They can provide subsidies directly from the budget, they can
encourage private banks to lend to desired sectors through regulation, or they can own
financial institutions. There are distinct advantages of governments owning banks – as
opposed to regulating banks or to owning projects or firms. Bank ownership allows the
government control over the choice of projects being financed while leaving the execution
of the projects to the private sector. In this manner, governments can meet both their
developmental and political objectives. Ownership of banks allows governments to both
collect savings and direct them towards “strategic” projects. Through such financing the
governments overcome institutional failures that undermine private capital markets and
foster economic growth. In the “developmental” view, these projects would be socially
desirable – but would not get privately financed. The political view states that state
financing would fund politically – though not necessarily socially - desirable projects.
La Porta et. al. (2002) test these theories using global data and conclude that government
ownership of banks is large and pervasive across the world. It is higher in countries with low
levels of per capita income, poorly developed financial systems, interventionist governments,
and poor protection of property rights. They find more support for the “political” view of
government ownership – higher government ownership of banks is associated with slower
subsequent development of the financial system and lower economic growth. Hanson (2003)
also highlights the large role that state owned banks play around the world and argues that
these banks’ performance has been poor and that it has impeded financial and economic
development.
Indonesia’s experience with SOBs exhibits elements of both political and developmental
views of state ownership. The historical roots of SOBs lie in the developmental view –
wherein the SOBs were established with mandates to provide finance to segments of the
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economy that were considered socially desirable but which the government felt could not be
financed in private markets. Over time, however, the political view took over – with the
SOBs being used to finance politically important projects as opposed to developmental
objectives. The true extent of the losses incurred by the state as a result of such politically
connected financing was exposed by the 1997/98 crisis.
II. Overview of state owned banks in Indonesia
The modern banking system in Indonesia has its origins in Law 14/1967 on the Principles of
Banking. The law characterized the banking system as an instrument of national
development to improve economic growth, equitable distribution of wealth, and national
stability – clearly along the lines of the “development” view. Depending on their core
business, banks were classified under the law as General Banks (or commercial banks),
Savings Banks, and Development Banks. SOBs spanned all three categories. General banks
could finance themselves with current and time deposits and engage in short term lending.
Savings banks were permitted to finance themselves though savings deposits and had to
invest in marketable securities. Development banks could fund themselves through time
deposits and issue medium/long term paper and engage in medium-long term credit
provision.
Prior to the 1997 financial crisis, Indonesia had seven SOBs. Bank Rakyat Indonesia (BRI)
was the oldest – established in 1895. Bank Negara Indonesia (BNI) – was established in
1946. Four others - Bank Bumi Daya (BBD), Bank Dagang Negara (BDN), Bank Ekspor
Impor Indonesia (Bank Exim), and Bank Pembangunan Indonesia (Bapindo) were created in
1967/687 under the Banking Act and associated legislation. Bank Tabungan Negara (BTN)
was established in 1950. After the crisis, four of these banks – BBD, BDN, Bank Exim, and
Bapindo were merged into the newly created Bank Mandiri in 1998. (See Appendix 1 for
further details on the origin of each bank). A new SOB – Bank Ekspor Indonesia (BEI) was
started in 1999 to channel bilateral aid funds to specified projects3.
As was common in several countries at the time, these banks were established largely under
the developmental view of state ownership of banks. These banks were to be instruments of
promoting overall national economic development and each bank was assigned a specific
sector of the economy in which it would operate or to which it would give priority. BRI was
to provide agricultural and rural credit – which later evolved into micro-credit. BBD’s
original mandate was to focus on the provision of credit to entities involved in the
development of Indonesia’s food and non-food crop resources – such as agricultural,
forestry, plantation and fishery companies4. BDN was originally mandated to focus on the
provision of credit to entities involved in the development of Indonesia’s mineral resources5.
Bank Exim focused on the providing credit for to Indonesian entities involved in importing
BEI remains a small bank in the overall financial system and is not discussed further in this paper. It is also
not allowed to take deposits.
4 BBD was Indonesia’s 6th largest bank at the time of acquisition by Bank Mandiri.
5 BDN was the 4th largest bank in late 1998, at the time of acquisition by Bank Mandiri.
3
4
and exporting activities6. Bapindo’s focus was on the provision of medium and long-term
credit facilities to entities involved in large-scale development projects in the areas of
manufacturing, transport and tourism7. BNI initially functioned as the country’s central bank
before it was converted into a commercial bank. BTN was initially established as a housing
bank and continues to provide housing loans to low-income families.
Over time, many of these banks had begun lending into sectors that were not their focus
areas – initially due to pressure from clients who had diversified into other activities, but
preferred not to change banks and later due to the banks’ own strategic decisions to get
involved in what they thought were attractive opportunities in corporate lending. The
government also played a role in directing credit of these banks to state owned enterprises
and politically connected private groups. The banking reform package of 1992 eliminated all
distinctions between private banks and SOBs – except for the status of the owner – and
formalized the role of SOBs as full fledged commercial banks. This situation continues at
present. Beginning with BNI’s partial privatization in 19968, the government has since sold
minority stakes in Bank Mandiri (30 per cent) and BRI (40.5 per cent) to the public. BTN
remains fully government owned.
Tables 1a –1d provide an overview of the structure of the Indonesian banking system since
1981. Until the early 1980s, Indonesia’s financial sector was relatively small with total assets
of the financial system being around 50 per cent of GDP. In 1981, the system was
dominated by seven SOBs that controlled almost 80 per cent of banking system assets and
deposits and about 85 per cent of the system’s loans. The SOBs in turn obtained the
majority of their funding from BI (Cole and Slade (1996) and further discussion below).
SOBs had a wide network of branches throughout the country – with almost two-thirds of
all bank branches being those of SOBs.
A series of reforms in the 1980s and early 1990s significantly expanded the role of private
banks in Indonesia – and consequently the share of assets controlled by SOBs declined to
about 41 per cent just prior to the crisis. As a result of several actions taken during the
crisis, the role SOBs in the banking sector expanded again to over half of the banking system
assets in 2000. As the economy has begun to grow again and the role of private banks
expands, the share of SOBs in assets of the banking system has begun to go down again
since 2000. In terms of the overall financial sector, banks continue to dominate Indonesia’s
financial sector. As of December 2003, – 80 per cent of financial sector assets were
controlled by banks (Table 2). SOBs’ controlled about 46 per cent of these assets.
6 Bank Exim was one of the country’s leading trade financiers in 1998, although by this time it was also funding
Indonesia’s large private sector corporates.
7 In 1993, it was defrauded of Rp. 1.3 trillion via a credit scam involving one of Indonesia’s then large privatesector corporates connected to the Soeharto regime. Its capital base diminished in the subsequent years leading
up to the Asian crisis and the bank was almost non-existent in the market at the time of its merger with Bank
Mandiri.
8 BNI sold 25 per cent of its equity to the public in November 1996. During its recapitalization after the crisis,
this was diluted to 0.1 per cent.
5
III.
The role of Bank Indonesia
The evolution of the SOBs in Indonesia has been strongly influenced by the role and
policies of Bank Indonesia. Law no. 13/1968 created BI as the national central bank. At the
apex of the banking structure lay the Monetary Board that was chaired by the Minister of
Finance, with government representatives constituting a majority of the board; the Governor
of BI was a member of the Board. BI was originally conceived of as very much a part of the
government – central bank independence in Indonesia would come much later9. The law
stipulated that if the Governor of BI disagreed with the position of the Board and was not
supported by the cabinet, he could publish his views. However the cabinet had the right to
veto the publication in order to protect national interests. Second, the law required BI to
lend money to the Treasury on demand. The act stated, “the Bank shall, whenever the
Minister of Finance deems it necessary to temporarily strengthen the Treasury funds, be
bound to advance the Republic of Indonesia monies in current account against sufficient
treasury bonds.” Lending limits originally were set at 30% of Treasury revenue (in the
previous budgetary year), then raised to 50%, and subsequently ignored in practice. The early
financial sector policies in Indonesia were generally subordinated to the needs of funding
large government budget deficits (Hofman and Rodrick-Jones(2004)).
While the Banking Act delegated to BI responsibility for the guidance, control and
supervision of all financial institutions, the role of BI in the Indonesian economy historically
has been much broader than that of a traditional central bank. BI has taken the lead in
furthering national development by directly financing public enterprises and by promoting
special credit programs (providing refinancing facilities) to banks, thus enabling them to
finance investments in priority sectors. In this way, BI became a very important source of
funds to the banking sector, and therefore to the SOBs – since the latter formed the vast
majority of the banking sector. Until the June 1983 financial sector reforms, the SOBs had
essentially unrestricted access to all BI facilities. BI also functioned for much of its history as
an arm of the government - its lack of independence significantly limited its supervisory and
regulatory oversight of SOBs – which in turn contributed to the weak performance of SOBs
in Indonesia over the years. This structure of the supervisory system created in the banking
law in 1968 contained the seeds for weak governance of the SOBs – a problem that has
plagued the SOBs in Indonesia ever since.
A.
Role of Bank Indonesia in credit provision
Bank Indonesia was originally created through the nationalization of De Javasche Bank in
1951 and enactment of Law No. 11 in 1953. Under this law BI acted as both a central bank
9 The lack of independence of the Bank Indonesia from the government would raise alarms repeatedly as
banking and financial developments became more complex over the next three decades. In fact
recommendations to create an independent Central Bank feature regularly in World Bank reports issued
between 1968 and May 1997. In the end, an independent Central Bank was not created until May 17, 1999
(Law No. 23/1999 on Bank Indonesia) after the damage to the financial sector by the 1997 crisis was done.
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and a commercial bank - essentially continuing the practice that had prevailed prior to July
1953 when De Javasche Bank performed both these functions. The dual functions were
deemed necessary as the government at the time had only one other national commercial
bank (BNI 1946) to carry out its policies. Understandably, over time, this role of BI led to
direct competition between BI and other commercial banks10.
After several changes to the structure of BI and BNI in the 1960s (see Appendix 1 for
details), BI’s role was formally limited to that of a central bank in 1968 – albeit under a broad
definition of “central bank”. BI’s credit provision role continued as it remained part of the
government and was its agent in implementing government economic policy. This role was
carried out through the provision of direct credits to borrowers and through provision of
liquidity credit to commercial banks – well beyond a “ lender of the last resort” function.
BI’s direct credit was used to finance large projects that could not be financed by
commercial banks or government economic programs11. Liquidity credit (better known as
KLBI) was given through commercial banks (mostly SOBs) to finance special programs in
prioritized sectors as outlined in the government’s five-year economic plans. Table 3
provides an illustrative list of programs supported by BI through liquidity credits12. During
the oil boom years from 1974 to 1982, abundant government revenues were channeled into
the domestic economy through more BI credits and policies on credit ceilings and credit
allocation. Liquidity credits were allocated among the SOBs in accordance with their
respective mandates as agents of development in their respective sectors.
Table 4 shows the evolution of the role of BI in credit activities both directly and through
financing banking sector credit. In 1963, BI’s direct lending accounted for over 46% of total
loans of commercial banks. The share decreased since then primarily because BI transferred
ownership of many of these loans to SOBs13. From 1974 until the early 1980’s liquidity
credits become the major source of loans for the banking sector. The share of liquidity
credit to total loans of commercial banks reached 19% in 1974 and rose to 41% in 1982. As
most of these loans were provided by SOBs, their share in total loans of commercial banks
also increased during that period. Liquidity credits accounted for 26% and 65% of loans of
SOBs in 1974 and 1982 respectively (Rahardjo, 1995). BI also supported the operations of
SOBs in other ways in order to increase their term-lending and improve their credit
evaluation capacities. BI set up a project appraisal department to monitor the appraisal
quality of the individual banks and helped provide training programs on project evaluation.
Bank Indonesia’s commercial banking operation was once even considered as the strongest and the most
prestigious commercial bank at the time (Rindjin 2003 and references therein)
11 Examples of these were loans to Krakatau Steel (state steel factory), import of sugar, wheat, and BIMAS –
the government sponsored rice program.
12 These schemes were available until 1999.
13 For instance, in 1984 BI’s direct loans to BULOG was transferred to BRI and its loan to the state oil
company - PERTAMINA - was transferred to BDN.
10
7
The decline in oil price and world recession that came in the early 1980’s led to introduction
of a series of financial sector reforms (see below). As part of these reforms, BI reduced its
liquidity credit both in volume and in terms of sectors targeted. BI introduced Sertifikat
Bank Indonesia (SBI, or BI’s certificate) in 1984 and permitted commercial banks to issue
Surat Berharga Pasar Uang (SBPU or money market securities) in 1985. These short-term
securities were the new tools for BI to conduct open market operations. This policy coupled
with policies to remove credit ceilings and permitting banks to freely set loan and deposit
rates had increased competition for the SOBs. The series of bank deregulation measures in
the late 1980’s until early 1990’s further limited both types and amount of BI credit
programs. However, the preferred position of the SOBs, particularly their access to BI
funding and BI's regulation of most of the interest rates they could charge (until 1983),
effectively insulated them from competition and diminished the stimulus for these banks to
emphasize operational efficiencies. The new central bank Law No. 23/1999 enshrines the
independence of BI and prohibits BI from providing such credits.
B.
The role of Bank Indonesia as regulator and supervisor of SOBs
Bank Indonesia has been the supervisor of the banking sector since 1953 and its role was
further clarified in law No. 13 of 1968. However, until the early 1980’s, there were a
relatively small number of commercial banks with SOBs dominating the sector (Table 1a).
BI therefore rarely gave its supervisory function much importance and its powers over the
SOBs were rarely exercised. Following the October 1988 deregulation package, the number
of banks and their branches increased significantly (Table 1a). The amounts of loans and
deposits soared as well (Table 1b-1d). This prompted the government to introduce a number
of prudential measures aimed at enhancing bank soundness - such as enhanced capital
requirements (based on the CAMEL rating system), limits on net open positions (NOP), and
stricter loan provisioning requirements. Together with these measures also came sanctions
for violations by banks. However, enforcements of sanctions by BI were weak - especially in
dealing with the SOBs.
BI was clearly conflicted in its dual roles as an agent of the government for development and
as the regulator and supervisor of banks. This led to the situation of weak supervision –
especially of the SOBs. Quite often violations of banking regulations by SOBs were ignored
and left unsanctioned because they were deemed in line with high-level government
economic policies. Such forbearance together with many other types of interventions from
various government authorities and officials had effectively reduced Bank Indonesia’s
credibility as the supervisor of commercial banks. In addition, BI did not have the necessary
supervisory capacity to cope with the implications of the series of deregulation packages in
late 1980’s and early 1990’s. While on the one hand, the economic slowdown of the 1980s
provided the opportunity for reforms of the banking sector, it was also the case that the
deregulation of banking was too fast, poorly planned and had been done in a reverse
sequencing pattern where prudential regulation and supervision came after the sector had
been liberalized for a number of years.
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C.
The 1999 central bank law and related improvements in regulation and
supervision
The enactment of the Central Bank Law No. 23/1999 in May 1999 has repositioned BI as an
independent central bank that is free from interventions of the government or any other
parties (Article 4). The independence is also reflected in the provision of a single objective of
Bank Indonesia that is to achieve and maintain stability of the value of the Rupiah (Article
7). With this framework, BI has been freed from its earlier objectives of assisting the
government to “promote smoothness of production and development as well as to expand
employment opportunity in order to improve that standard living of the people” (Article 7
Law No. 13/1968). The 1999 Law ensures that no party can intervene with BI in performing
its duties and it requires BI to reject and/or ignore such interventions (Article 9). BI is no
longer an implementing agent of government policies and is now positioned as a partner of
the government that is to be consulted on various economic, banking and budget policies
and decisions (Article 52,53,54,55). Thus the 1999 law has effectively removed the role of
the Monetary Board which in the past served as the bridging institution between BI and the
government. The new law also prohibits BI from providing loans to the government
(Article 56). Outstanding or committed Bank Indonesia Liquidity credit (KLBI) is to be
transferred to an appointed state owned enterprise and all costs due to interest rate subsidies
are to be borne by the government (Article 74)14.
The 1997 crisis prompted the need for BI to improve banking regulation and supervision.
The Letter of Intent that the government signed with the IMF in 1998 stipulated policy
commitment to strengthen BI’s bank supervision and to strengthen enforcement of
regulations. Since 1998, BI has issued numerous new banking regulations which broadly
cover areas of bank licensing and operations, prudential banking, performance rating, selfregulatory provisions, regular reporting, short term financing, shariah banking principles,
money laundering and risk management15.
BI developed a master plan for enhancement of effective banking supervision which was
designed to comply with the Basel Core Principles (BCPs). The plan contains a core program
to tighten on-site and off-site supervision. This core program, most of which was put into
place during 2000, included special surveillance and on-site supervisory presence in a
number of banks that play a significant role in the national economy – including SOBs. In
practical terms, Bank Indonesia divides the supervision into normal supervision, intensive
supervision and special supervision based on the health of the particular bank. Based on an
independent assessment of its compliance with the BCPs, BI declared that it was fully
complaint with two, largely compliant with 20, and non-compliant with 3 of the BCPs16.
The willingness and seriousness of BI to enforce regulation and perform its role as banking
supervisor have showed significant improvements since the crisis. For instance, in August
2002 BI publicly placed two private national banks under special surveillance due to their
14 A new state owned enterprise, PNM (Permodalan Nasional Madani), has been created and all past BI
subsidized credit activities have been transferred to this agency.
15 A complete list of BI’s banking regulations can be viewed at BI’s website. http://www.bi.go.id
16 Bank Indonesia 2002 Annual Report.
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inability to meet the 8% CAR requirement. After both banks’ managements and
shareholders took remedial measures deemed adequate by BI, these banks were returned to
normal status in October 200217. In another instance, BI denied forbearance to a state bank
regarding bypassing the limit on buying NPLs from IBRA and on loan-loss provision
requirements for such NPLs. In other cases, BI has also shown keen interest in working with
other institutions in the country as evidenced by its cooperation with the capital market
supervisory authority (BAPEPAM) in the latter’s investigations on alleged publications of
misleading financial statements18 and with PPATK (Indonesia’s anti-money laundering
authority and financial intelligence unit) on investigations of suspected money laundering
transactions. More recently, in April 2004, Bank Indonesia shut down two relatively small
banks – Bank Asiatic and Bank Dagang Bali – citing their non-compliance with prudential
capital requirements and weak capital adequacy.
IV.
Impact of financial sector reforms on state owned banks in Indonesia
In the early 1980s, Indonesia recognized that it would need to support economic growth and
development of the real economy with a financial system that would be able to provide
resources cheaply and efficiently. It implemented a series of financial sector reforms in the
decade of 1983-92 aimed at liberalizing the financial sector. Liberalization, combined with
rapid economic growth, poor corporate governance, and weak regulation and supervision of
the banking sector led to extremely rapid growth of banks with poor asset quality. By the
mid-1990s, several banks in Indonesia had failed and the rest of the system was beginning to
show signs of weakness. The economic and political crisis in 1997/98 exposed the full extent
of the problems in the banking sector. The government implemented a series of policy
packages during 1997-99 aimed at bringing the banking sector back to health – including
many actions focusing on insolvent and weak banks. By 2000, the major process of
restructuring the banking sector had largely been completed – although the sector had still a
long way to go before it could begin to function effectively. Since 2000, efforts have focused
on further strengthening regulation and supervision, continuing divestment of intervened
banks and assets, strengthening governance of SOBs, and (partially) privatizing them.
This section presents a brief overview of the various reform measures implemented over the
last two decades in the financial sector and their impact on the evolution of SOBs.
A.
Period prior to the 1983 reforms
As briefly discussed above, liquidity credit programs of BI played a key role in the early
evolution of the SOBs. Under the scheme, banks obtained refinancing at a low interest rate
from BI for credit extended to certain borrowers. Directed credit programs were an
17 These banks are Bank CIC and Bank IFI. Further information is available from BI’s website.
http://www.bi.go.id
18 The case involves a dubious valuation of foreclosed assets at Bank Lippo that led Lippo’s CAR to fall below
the minimum level. Market manipulation of the bank’s share price was alleged.
10
important part of the Government's overall development strategy, especially as the need to
present a domestic "balanced budget" and to recycle large government revenues from oil and
gas exports provided a powerful stimulus to the growth of extra-budgetary lending.
However, this facility was provided only to SOBs and selected private banks, which satisfied
certain minimum criteria related to soundness ratings. This discouraged banks from
mobilizing funds from the public because the deposit interest rates were less competitive
compared to interest rates for the liquidity support scheme. By 1982, the total assets of all
banks were only 25 per cent higher than the total assets of BI (Cole and Slade (1996))
indicating the high degree of dependence of the banks on BI.
In 1982, for example, deposit rates for rupiah denominated deposits was 6 per cent per
annum at SOBs and 18.5 per cent per annum at private banks while subsidized interest rate
from BI ranged between 3 - 6 per cent per annum. Lending rates for eligible borrowers
under the BI schemes averaged 12 per cent per annum at SOBs and ranged between 9 - 20
per cent per annum at private banks. Lending rates for normal credit ranged between 15 - 21
per cent at SOBs and 21 - 36 per cent at private banks (Table 5). Because of this policy,
subsidized credits from government accounted for over half of total bank credits (Santoso,
(2000)). This dominance of subsidized credits was backed up by a government financed
credit guarantee agency that guaranteed banks/BI against defaults19.
The policies of this early period impacted the SOBs in various ways. First, they had little
incentive to gain experience in mobilizing deposits – as much of their financing came from
BI. Second, they developed little expertise in credit evaluation. They simply acted as channels
to provide government subsidized credits to selected sectors/customers. Third, the regime
ensured that they developed few strengths in overall notions of risk involved in banking. The
structure of their operations and of the role of BI ensured that their exposure to credit risks,
foreign exchange risks, and interest rate risks was low. The major risk that they were exposed
to was operational risk.
By the mid-1970s, financial development began to be constrained by the imposition of
various interest rate and credit ceilings on banks. The crunch came in the early-1980s when
the oil price boom abated and, in its wake, external payments and fiscal deficits widened
considerably. Inflationary pressures were also aggravated. The decline in oil revenues and a
consequent deterioration of the balance of payments led to the shrinkage of resources of
both the Government and the private sector. The mobilization of domestic resources thus
became a top priority.
B.
The 1983 reforms
In 1982 – prior to the first major reforms implemented in the Indonesian financial sector banking system assets as a ratio of GDP stood at 33 percent. The major deposit money
Askrindo is a credit insurance company established in 1971 by MoF and BI. It started as a provider of
insurance for loans to SMEs provided by commercial banks but now it also provides credit management
services, surety bonds, customs bonds, and L/C guarantees.
19
11
banks, along with BI, dominated the financial system with a share in total assets of over 95
percent (Hanna, 1994). Among the deposit money banks, the five SOBs had a dominant
position accounting for about three-fourths of total assets (Table 1b).
The 1983 reforms were motivated by the difficult balance of payments and fiscal situation
facing the country after the oil-price boom abated in the early 1980s. The government
initiated the reform process through a scaling back of the requirement to provide directed
credits to some low-priority sectors in August 1982. In June 1983, the Government initiated
a major financial sector reform which involved deregulation of SOB deposit rates on time
deposits longer than six months, elimination of credit ceilings and their replacement with a
system of reserve money management, and rationalization of the subsidized directed credit
program. As discussed above, BI also moved to limit its direct lending activities and relied
instead on refinancing the banking sector and introduced SBIs and SPBUs for reserve
money management.
The 1983 reform resulted in SOBs taking their initial steps in moving to more market-based
banking, although they were still operating in highly protected environment. On the funding
side, after the reform, BI continued to provide refinancing (liquidity support) for small-scale
credits and high priority credits to help weak and small enterprises in improving their role in
the economy as well as for lending to support non-oil and gas exports. However, an
important aspect of the reform was also that lending to non-priority sectors would now need
to be fully financed through public deposits. This meant that all banks – including SOBs –
needed to seek alternative source of funds to replace the BI liquidity support in order to
finance loans extended to large borrowers. This meant that the SOBs would have to learn to
compete with private banks in attracting public deposits. Importantly, SOBs would need to
manage their own funds to comply with minimum reserve requirements without using
interest rate subsidies from Government. The SOBs responded to this challenge by
increasing their interest rates on three and twelve-month time deposits – although they
continued to maintain them at levels lower than the private banks (Table 5, and Cole and
Slade (1996)). The extensive branch network of the SOBs as well the public’s perception that
these were institutions were less risky than private banks led to a rapid increase in time
deposits at SOBs (mostly deposits below 12-months of maturity, Table 1a and 1b).
With the relaxation of credit ceilings, private banks began to lend more aggressively. The
share of private banks in total loans doubled over the 1983-87 period (Table 1d). Much of
this market share was lost by the SOBs. There was thus a clear difference between the SOBs
and the private banks as a result of the reforms. Customers preferred to place their deposits
with SOBs – perceiving them to be safer as well as because of their more extensive branch
network. However, customers also preferred to borrow from private banks - which were
probably less bureaucratic and also because the transactions costs of dealing with SOBs –
including corruption – probably made effective borrowing rates higher than those at private
banks, although nominal lending rates of SOBs were lower.
In order to permit sound reserve management for banks, BI had introduced discount
window facilities and SBIs to help banks to maintain their liquidity20. However, there were
SBI is used to absorb excess liquidity of banks, while discount windows facilities provide a mechanism for
banks to borrow funds from BI when they are short of liquidity. BI also maintained 15% reserve requirements.
20
12
implementation problems with this liquidity management mechanism and the inter-bank call
money market became the primary venue of liquidity management for banks21. The SOBs
played a key role in this market – largely due their ability to access more deposits from the
public due to their large branch network as well as their incentive to find higher yields due to
the gradual implementation of a zero interest rate for excess reserves at BI. Private banks’
expansion of loans was not balanced with a corresponding growth of deposits. Interbank call
money was the main source of funds for private banks and state banks were the main
suppliers. Because the interest rates in the interbank market were lower than that on
deposits, private banks were better off using sources of funds from interbank call money
market. SOBs therefore effectively became financiers of private bank lending.
SOBs were also the primary beneficiaries of BI refinancing as their lending activities
continued to focus on channeling subsidized credits (Table 4). The subsidized credit
programs also kept the financial market fragmented, as characterized by large differences in
access to credit and its cost for individual borrowers, adversely affected long-term funds
mobilization, contributed to distortions in the use of financial resources, reduced
transparency, and weakened financial discipline. Following a deceleration in 1983/84,
resulting from the June 1983 reforms, directed credits increased rapidly. However, because
total domestic credit rose even more rapidly over the period, the share of directed credit
declined, from around 50 percent of total domestic credit in 1982 to about 28 percent in
1989. About 80 percent of all directed credits were channeled through SOBs.
The motivation for the deregulation of 1983 was concern about the tighter resource position
resulting from the weakening of oil prices. By allowing greater flexibility in deposit interest
rates, the deregulation measures significantly increased the volume of resources mobilized
through the financial system. However, success in other areas was limited and several issues
remained. First, despite the reform, competition remained weak due to regulatory
restrictions on operations, branching and entry barriers. SOBs enjoyed preferential
treatment on branching, capital and loan-loss provision requirements, and access to deposits
from public enterprises (which were restricted from dealing with private financial
institutions). Lack of competition was reflected in relatively high intermediation costs (Table
5). Second, the expansion of directed credit lending further fragmented the financial market
and adversely affected long-term fund mobilization. Third, the ability of SOBs to refinance a
substantial proportion of their loans with BI at subsidized rates and liberal credit insurance
provisions for these loans resulted in perfunctory credit analysis which led to weak portfolio
performance of some of these banks. Finally, the legal, information and regulatory
framework for the financial sector remained weak and the pace of financial innovation was
slow.
After the implementation of June 1983 reform, SOBs still dominated the market share in
total assets, deposits and loans. In 1987, prior to the next round of reforms, SOBs held twothirds of total deposits and loans and 71 per cent of total assets of the banking system.
However, private banks had nearly doubled their share in deposits, loans, and assets in the
banking system. Interest rates on deposits paid by both SOBs and private banks began to
converge. The stability of banking industry was sensitive to interest rate risk due to
21
For more on problems with implementation of reserve management issues, see Santoso (2000).
13
liberalization of interest rates and credit risk due to rapid credit expansion by private banks.
SOBs were exposed to private bank credit risks through their interbank lending.
C.
The 1988-97 period
During October-December 1988, the Government introduced a comprehensive set of
reform measures aimed at further enhancing financial sector efficiency and significantly
lowering barriers to entry. While the measures contained reforms to both bank and nonbank financial institutions, the major reforms to the banking sector were: (a) permitting the
entry of new private banks, including joint ventures with foreign banks; (b) allowing
domestic banks to open branches throughout Indonesia; (c) permitting new rural banks to
be established in districts outside the capital; (d) easing the requirements for a bank
permitted to transact foreign exchange; (e) allowing state enterprises to place up to 50
percent of their bank deposits with private banks and NBFIs; (g) stipulating loan
concentration ratios for banks and NBFIs that limited lending to a single borrower or group;
(h) specifying minimum capital requirements for banks; (i) eliminating differential reserve
requirements for banks by establishing a uniform and lower rate of 2 percent and removing
restrictions on inter-bank borrowings; (j) extending the maturities of SBIs and SBPUs, and
taking steps to develop a secondary market for them; (k) determining the swap premiums on
the interest rate differentials between domestic and international markets; (1) reducing the
discrimination against the public holding securities market instruments as compared to
holding term deposits with the banks; (m) permitting banks and NBFIs to raise capital from
the securities market; and (n) allowing banks to have subsidiaries that were multi-service
financial companies providing leasing, factoring, consumer finance and venture capital
facilities.
Further reforms were introduced in subsequent years. In March 1989, regulations were
issued that clarified aspects relating to lending limits, joint venture bank capital requirements,
bank mergers, definition of bank capital, reserve requirements, and bank investments in
stocks. Absolute limits on external borrowings for banks were replaced with restrictions on
net open positions (NOP) in foreign exchange (maximum of 25 percent of equity). Banks no
longer needed BI’s approval for offshore lending. This implied that banks could borrow
freely abroad as long as they covered their positions by lending in foreign exchange. In
January 1990, directed credit programs were further reduced. Priority programs were
reduced from thirty seven to four22. One important sector excluded from directed credit was
export finance. Interest rates were moved closer to the market level and the portion of credit
available for refinancing was lessened. Mandatory, subsidized credit insurance was abolished.
All these measures were additional incentives for originating banks to more carefully select
and monitor their borrowers. As a political compromise, the elimination of directed credit
programs for small businesses was replaced by a requirement that 20 per cent of a bank's
loans be made to small borrowers. The next set of reforms, announced in March 1991,
The four programs were: (a) investment and working capital credits to members of rural and primary
cooperatives; (b) one-year credits to rural cooperatives to finance procurement and other productive activities;
(c) credits to BULOG, the national food buffer stock maintenance company; and (d) investment credits of
minimum five-year maturity by development banks and plantation credits through commercial banks.
22
14
returned once again to prudential regulations. New professional standards were set for bank
directors. Loan-loss provisioning standards were overhauled, now involving a financial
analysis of customers rather than simply a check of whether their payments were current. A
new, more quantitative evaluation of bank soundness, based on capital, asset quality,
management, equity and liquidity, (CAMEL) was implemented. Finally, banks were obliged
to adopt the risk-based capital adequacy standards (as stated in the Basel Agreement) by the
end of 1993 (subsequently extended to 1994). The Banking Law issued in early 1992
eliminated all legal distinctions between private banks and SOBs other than status of the
owners – although the Law also required that the government retain 51 percent shares of all
SOBs.
The 1988 reforms had a strong positive impact on the diversification of the country's
financial structure. They also set the stage for extremely rapid expansion of the banking
sector within the context of a weak regulatory and supervisory framework and an even
weaker structure of enforcement. By the mid-1990s, SOBs as well as several private banks
began to show signs of weakness. Well before the 1997 crisis, several banks in Indonesia
had begun to fail.
The easing of entry restrictions increased competition for SOBs considerably. The number
of private and joint-venture banks increased from 77 in 1988 to 206 in 1994, while the
number of SOBs remained at seven (Table 1a). Branches of private and joint-venture banks
increased from 666 in 1988 to 3286 in 1994, while those of SOBs increased from 1004 to
1171 over the same period. The share of SOBs in total loans decreased from over 71 per
cent in 1988 to less than 40 per cent in 1995. In terms of total assets, the share of SOBs,
declined from over two-thirds in 1988 to under 40 per cent in 1995. Correspondingly, the
share of private banks in total assets nearly doubled between 1988 and 1994 from 24 to 48
per cent (Table 1b-1d). Deposit rates at SOBs converged to those at private banks (Table 5)
as SOBs tried to attract more deposits.
The reform of the subsidized directed credit system was particularly important for its
resource allocation effects. The stock of outstanding liquidity credits declined by 20 percent
to Rp14 trillion by October 1991, and their share in total domestic credit declined from 28.4
percent in 1989 to 12.6 percent in 1991. SOBs continued to remain the dominant suppliers
of BI liquidity credits, although the importance of liquidity overall declined. Liquidity credits
had formed 41 per cent of total loans in 1982; by 1995, they accounted for less than six
percent (Bank Indonesia, Pangestu (1996), Rahardjo (1995)).
The combined impact of reduction in liquidity credits, greater competition from private
banks, as well as the newly imposed capital requirements exposed the weak state of SOBs’
balance sheets. Having been accustomed to lending at the behest of the government, with
little credit analysis and not having had to take credit risks adequately into consideration
earlier, the SOBs realized that their capital levels were far below those required under the
new capital adequacy rules. The government committed to recapitalizing these banks to
bring them up to the full 8 per cent CAR by 1992; however it did not adequately recognize
the extent of capital infusions that these banks would require (Cole and Slade (1996)). Given
that the government was facing budgetary constraints at the time, it did not want to finance
the recapitalization through infusion of budgetary resources. A solution was therefore
structured whereby the World Bank would provide a loan of US$ 300 million to the
15
government which the latter would use towards SOBs’ recapitalization. In addition, earlier
loans from the World Bank to the SOBs (which had been provided for the purposes of onlending to specific sectors) would be converted to government equity. Thus recapitalization
could take place with no infusion of fresh cash from the government. This was the latest in
a series of recapitalizations of SOBs that the government undertook. It was expected that
after this most recent recapitalization, no further calls would be made on government as
SOBs were expected to raise fresh capital either from retained earnings or from the capital
market – implying the possibility of privatization of the SOBs. However, even partial
privatization of SOBs would come much later – largely after the 1997 crisis during which the
government would once again be forced to recapitalize SOBs.
Another impact of this round of reforms was that SOBs no longer focused purely on
developmental activities. This shift of focus had been in the making over the years and the
regulatory removal of all distinctions between private banks and SOBs simply formalized the
situation that the activities of SOBs were now much more in line with the “political view” of
state ownership than with the developmental view. SOBs were extensively funding politically
connected projects and persons. Several examples of such activity were discovered during
the investigation phase of SOBs prior to their recapitalization under the World Bank loan.
Investigations revealed that a relatively small group of conglomerates with strong political
connections had availed themselves of large loans from SOBs and had not serviced them.
These loans were non-performing – although they had not been classified as such and the
loans exceeded the prudential regulations for borrower concentration established by BI. In
mid-1993, there were newspaper reports containing the list of 50 largest borrowers from
SOBs – many with political connections23.
The weak governance of SOBs – which had always been a problem – was further aggravated
during the years after liberalization of the banking sector. Many of the scandals involved
mismanagement by SOBs and allegations of corruption in SOBs. Until some high profile
chief executives of SOBs were replaced or jailed in the early 1990s, many of these CEOs
were considered politically “untouchable”. BI’s position as an arm of the government did
little to rein in the activities of the SOBs in this situation.
Prior to the crisis in 1997, SOBs still played a major, though no longer dominant, role in the
banking system. At the end of 1996, SOBs controlled 36 per cent of assets, 37 per cent of
loans, and 32 per cent of deposits in the banking system.
V.
Impact of the crisis on SOBs in Indonesia
Credit quality in banks had been deteriorating for many years prior to the crisis in 1997. Lack
of credit analysis was the main problem for SOBs as credit decisions were largely made at
the behest of the government and/or top government officials. Non-performing loans at
private banks were normally related to loans extended to the group that owned the bank.
Enforcement of the legal lending limit regulation was very weak from BI due to lack of
A highly publicized case of the politicization of SOB lending was the Bapindo-Golden Key scandal involving
a loan of Rp. 1.3 trillion.
23
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independence. In 1995 for example, SOBs accounted for 40 per cent of total loans (Table
1d), while they accounted for about 73 per cent of total classified loans of the banking
system(Table 5)24. By April 1997, prior to the crisis, SOBs accounted for 36 per cent of loans
and 66 per cent of classified loans of the banking system. By December 1998, classified loans
of the SOBs had reached 49 per cent of the loan portfolio of SOBs. Private bank loan
portfolios had also been deteriorating for several years prior to the crisis (Santoso (2000)).
A combination of poor loan portfolios, outright frauds, asset-liability mismatches, lending to
group companies by private banks, unhedged foreign exchange positions, and deficiencies in
bank supervision led to a series of bank failures in Indonesia prior to the 1997 crisis.
Among the SOBs, Bapindo essentially collapsed in 1993, after the well publicized Golden
Key scandal in which the sponsors of the borrowing firm disappeared after taking loans
from Bapindo of more than 140 percent of the bank’s capital. Complicity of the bank’s
officials with the sponsors was alleged and highlighted again the weak state of governance of
the SOBs as well as the inadequate supervision that permitted the SOB to be so exposed to a
single borrower. An assessment by the World Bank in mid-1997 (prior to the crisis) revealed
that Bank Bumi Daya (another SOB) was also in trouble and the authorities announced a
merger plan for BBD and Bapindo in June 199725.
It was in this context of a steadily weakening banking system that Indonesia encountered the
economic and political crisis of 1997/98. Much has been written elsewhere about the crisis
(Enoch et. al. (2001), Kenward (2003), World Bank (1998, 2000), and the papers in Bulletin
of Indonesian Economic Studies (April 2004)) and this paper does not discuss issues related
to the crisis in detail. The crisis did, however, have a major impact on the SOBs in
Indonesia.
As the crisis broke and deepened in 1997 and the first half of 1998, audits were conducted of
all commercial banks by well reputed international auditors and BI as part of IMF supported
programs. These audits revealed that much of the banking system was insolvent and that
NPL levels were much higher than had been anticipated by the authorities – both in SOBs
and in private banks (Table 6). Credit defaults were at the root of the problems of almost all
banks within the context of a corporate sector that had borrowed heavily in foreign currency
and that was now faced with a depreciation of the Rupiah from Rp. 2500/US$ to over Rp.
15000/US$ at one stage in the crisis. The main cause of NPLs in private banks was
connected lending – with private banks being used as vehicles to channel credits to bank
owners. In the case of the SOBs, the main cause was state-directed lending to unviable
projects. Interestingly, in only one SOB – Bank Exim – were foreign exchange losses the
proximate cause of insolvency26. Supervision by BI was ineffective and weak. In some cases
the supervisors lacked adequate capacity, and in others, they were politically constrained
from carrying out their functions.
In response to the findings of these audits, the government announced a series of steps that
directly affected the banking sector. For the private banks, the government adopted an
Classified loans include sub-standard, doubtful, and bad debt.
This merger was not implemented until the 1999 merger of both these banks with Bank Mandiri.
26 There was speculation at the time that Bank Exim’s foreign exchange trading losses were part of a failed
government attempt to shore up the value of the Rupiah.
24
25
17
approach wherein banks were classified in terms of their capital adequacy ratios (CAR) into
three categories that would in turn determine whether they would be left un-intervened,
recapitalized or closed27. For the SOBs, however, it was felt that they were too big to fail and
hence they would be recapitalized by the government after undertaking certain operational
changes28. As of June 1997, SOBs accounted for about 40 per cent of the banking system
assets. By the end of the bank restructuring process, they would absorb over two-thirds of
the recapitalization resources spent by the government (Table 7). Each SOB entered into
performance contracts with the government which laid out the operational steps that were to
be undertaken and the changes that were to be made in management in return for the
government’s recapitalization.
As the crisis intensified, depositors initially shifted funds from private banks to SOBs –
perceiving them to be safe havens. SOBs share of deposits increased from 32 per cent in
1996 to 48 per cent in 1998. By late 1997, given the uncertainties in the banking system, a
group of 24 banks – including all the SOBs and some well known foreign and private banks
– were transacting almost exclusively between themselves – resulting in a situation of excess
liquidity for this group while the rest of system faced increasing rates in the interbank market
(Enoch et. al (2001)). While Bank Indonesia’s liquidity support (BLBI) was extensively used
(and often misused) by the private banking system, the SOBs – with the sole exception of
Bank Exim - needed almost no liquidity support throughout the crisis. Bank Exim suffered
losses of about Rp. 20 trillion in failed foreign exchange derivative transactions – and BI
provided it with liquidity of an equivalent amount. After the announcement of the blanket
guarantee of deposits, the government also used the SOBs (largely BNI) as receivers of
deposits of closed banks – with matching government bonds on the asset side. The SOBs
also served as a source of talent for private banks taken over by IBRA in which the old
management was replaced and new management was sourced largely from the SOBs.
As the macroeconomic condition stabilized in late 1998, the authorities put in place a
comprehensive strategy to restore the health of the banking system. For the SOBs, this
strategy involved merging four of the weakest SOBs as well as the corporate loans of BRI
into the newly created Bank Mandiri – a new SOB that would control about 25 per cent of
the banking system assets29. Mandiri was recapitalized in late 1999 and its CAR was
brought up to 4 per cent (Tier 1) and 8 per cent (total). NPLs of the component banks
were transferred to IBRA. NPLs from other SOBs were also moved to IBRA and these
banks were recapitalized. Recapitalization of the component banks of Bank Mandiri cost the
government Rp. 178 trillion (41 per cent of the total cost of recapitalization of the banking
system). BNI absorbed 14 per cent of the total recapitalization resources, while the
remaining two SOBs accounted for les than 10 per cent of the total cost (Table 7).
Private banks whose CAR was over 4 per cent were to be considered essentially sound, those with CAR
between 4 per cent and minus 25 per cent were to be considered for recapitalization, while banks with CARs
less than minus 25 per cent were to be closed.
28 Audits revealed that most SOBs were insolvent. Had the authorities adopted the same criterion for SOBs as
they did for the private banks, most SOBs would have been classified in the weakest category of CAR and
would have to be closed.
29 Bank Mandiri initially operated as holding company holding the shares of the four SOBs. The formal merger
was completed in 1999.
27
18
SOB recapitalization has been one of the most expensive elements of the Indonesian bank
restructuring efforts. SOBs’ recapitalization cost the government Rp. 283 trillion as
compared to private bank recapitalization of Rp. 147 trillion. In addition to the weak state of
their asset portfolios with which SOBs entered the crisis, another reason for the large cost
was also the incentive effects of the too-big-to-fail principle adopted for the SOBs. SOB
managements had little incentive to aggressively try to collect on loans and as a result NPLs
rose substantially during the crisis30. Deposit rates at these banks were also the highest – as
they were indifferent to resulting negative spreads. For the first time in their history, SOBs
were paying higher interest rates than private banks on their deposits (Table 6). System wide
loan-deposit spreads had fallen from 6 per cent in early 1990s to minus 20 per cent in 1998,
although there was not much lending occurring in 1998 (Chart 1). SOB loan-deposit ratios
(LDR) also began to fall – even prior to the recapitalization by the government - as deposits
rose more than proportionately to loans until 1998 (Table 8). BNI, which had a LDR of 103
per cent in 1997, had an LDR of 87 per cent in 1998. Subsequently, the recapitalization by
the government would further dramatically reduce LDRs.
VI.
Current role of SOBs in Indonesia
Where do SOBs in Indonesia stand today? Within the context of the systemic bank
restructuring that has occurred in Indonesia since the crisis, SOBs continue to play a major
role in the banking system. The total number of banks in the system has been reduced to
138 in 2003 from its peak of 240 prior to the crisis31. This reduction has largely occurred due
to closures of several banks and mergers of some of the smaller banks with larger ones.
Banks continue to dominate the financial system. As of December 2003, the banking sector
80 per cent of assets of the financial system (Table 2). Also at the end of 2003, SOBs
controlled 46 per cent of assets, 42 per cent of deposits, and 38 per cent of loans of the
banking system. Viewed from their pre-crisis levels, the restructuring process has led to an
increase in the role of SOBs in the banking system. The two largest SOBs – Bank Mandiri
and BNI - now account for nearly one third and the four SOBs together control over 46 per
cent of system assets (compared to 37 per cent of system assets before the crisis). Bank
Mandiri alone controls a fifth of all system assets. The government has begun the process of
privatization of the largest SOBs – and has sold 30 per cent of the equity of Bank Mandiri
and 40.5 per cent of the equity of BRI in initial public offerings (IPOs) recently. The
government also intends to undertake a significant secondary offering of the equity of BNI
during 200432. BTN continues to be fully government owned and there are no plans yet for
its privatization. Overall reported performance of SOBs has improved since the crisis.
Despite these efforts, however, SOBs continue to face significant challenges.
It is very likely that some of the growth in the NPLs during the crisis occurred as a result of poor credit
decisions prior to the crisis. However, it is difficult to disentangle such loans from those that went bad due to
poor incentives.
31 Two relatively small private banks have been closed in April 2004.
32 There is ongoing speculation about the government’s intention to merge Bank Mandiri and BNI – which
would create an SOB that would be thrice as big as its nearest competitor.
30
19
As Indonesia recovers from the 1997 crisis, the environment in which the banking sector
operates is undergoing profound transformations. Interest rates on BI’s SBI’s have come
down from 40 per cent in 1998 to 7.5 per cent in April 2004. In line with this, nominal
deposit rates at SOBs have come down from their high of over 35 per cent in 1998 to under
9.6 per cent by the end of 2003. Lending spreads have, however, not declined in line with
declines in interest rates in the rest of economy. SOBs continued to enjoy a spread of almost
700 basis points on their working capital loans – and these spreads are higher than those of
private banks (Table 5 and Chart 1).
The restructuring process of both the banking sector and the economy since the crisis has
had a significant impact on the structure of SOB balance sheets. As of December 2003, for
the overall banking system, nearly 30 per cent of assets are government securities, while for
the SOBs, nearly 40 per cent of their assets are in government bonds (Table 9). Liquid assets
and BI certificates (SBIs) account for a quarter of the assets of the overall banking system.
On the liability side, deposits account for 75 percent of all liabilities for the overall banking
system, and two-thirds for the SOBs. Prior to the crisis in 1996, holdings of government
bonds in the banking system were zero and loans accounted for over three-quarters of assets
of the system. For the SOBs, loans accounted for over 70 per cent of assets in 1996. The
ratio of government bond holdings to total assets for the banking system overall has been
declining from its peak of over 43 per cent in 2000 to 30 per cent in 2003 as banks have
begun lending again33. For the SOBs, these ratios have declined from 62 per cent to 40 per
cent over the same period.
The flip side of large government bond holdings is low loan to deposit ratios. The overall
banking system’s load-deposit-ratio (LDR), which was over 103 per cent in 1996 had
declined to 38 per cent in 2002 and has picked up again to nearly 50 per cent at the end of
2003 (Table 9). SOBs have faced similar declines (Table 8). BNI had an LDR of 93 per cent
in 1996, and 44 per cent in 2003. BRI’s LDR declined from 138 per cent to 62 per cent over
the same period. All banks have experienced a significant rise in LDRs since 2001.
As mentioned above, the overall banking system as well as the SOBs are also highly liquid
simply in terms of their holdings of cash and liquid assets. This liquidity increases further if
government bonds were to be counted as also being liquid (Table 10)34. This high level of
liquidity combined with revival of economic growth in the country provides the incentive
for banks to look for new lending opportunities. Data for the overall banking system
indicate that credit has grown in real terms since 2001 (Table 11), although much of the new
lending is retail consumer loans – mainly financing durable goods and housing and the
overall level of credit is still below 1998 levels. Consumer lending has increased from 15 per
cent of loans in 2000 to 25 per cent of loans by end of 2003, while investment loans have
remained stable at 22-23 per cent of loans, and working capital loans have declined from 61
per cent to 53 per cent of loans. For SOBs, consumer lending is beginning to show signs of
rapid growth recently (Table 12), although working capital and investment lending remain
33 Some part of this decline is also due to banks selling government bonds to mutual funds – called reksadanas.
The total size of the mutual fund industry at the end of 2003 was Rp. 70 trillion.
34 It is not entirely clear how liquid recap bonds would be – especially if there were to be a large demand for
liquidity.
20
the bulk of their portfolios. Despite the growth in credit, a significant share of approved
loans lie unused. The total stock of loans at the end of 2003 was Rp. 440 trillion. The
banking sector had off balance sheet – approved but undisbursed – credit lines of a further
Rp. 103 trillion. SOBs have about a third of the systems’ total approved but undisbursed
credit lines (Table 12).
Banks consider consumer loans to be less risky than corporate lending. This is borne out by
the past good experience of BRI in its microfinance lending. Even at the peak of the crisis in
1998/99, BRI’s NPLs from its microfinance lending were less than 6 per cent as compared
to corporate loans where the NPL ratios were much higher (Robinson, 2000). Corporate
sector lending has not yet revived due to a variety of reasons. Incomplete corporate
restructuring, possible low capacity utilization in certain sectors35, past poor experience of
banks with corporate lending, consumer-spending led economic growth over the past two
years, and the overall view that in Indonesia it is the large borrowers that are potential bad
credits while the small borrowers usually pay even at the worst of times – have all
contributed to this phenomenon. To the extent that corporate lending is being done, the
usual form is working capital loans.
The reason why the banking system currently holds such a large share of its assets in
government bonds is that the worst NPLs from all SOBs and many private banks were
transferred to IBRA and replaced by government bonds. The gross NPL ratio for all banks
declined from almost 50 percent of outstanding loans at end-1998 to their per-crisis level of
8 percent at end-2002 (Table 9). The SOBs were the worst affected by the NPL problem. In
1998, SOBs’ NPLs stood at 48 per cent of outstanding loans36. By 2002, NPLs for the SOBs
had declined to 6 per cent by 2002, although they have since gone up to 7.3 per cent by 2003
(Table 9). Banks have also set aside substantial provisions (over 11 per cent of outstanding
loans at the end of 2002 – Table 13) with SOBs having set aside over 9 per cent of total
loans as provisions. SOBs therefore report that they are over-provisioned and the net NPLs
for the SOBs stood at minus 2.3 per cent at the end of 2003. These reported NPL numbers
need to be interpreted with some caution as they are likely to be overstating the true quality
of the asset portfolios – especially at the SOBs. Two of the SOBs – Bank Mandiri and BNI
carry a substantial portion of “restructured” assets on their balance sheets (Table 14). A part
of these are loans that were originally taken over by the Indonesian Bank Restructuring
Agency (IBRA), in return for which banks obtained government bonds. The two SOBs
bought some of these loans back from IBRA at steep discounts – even though they were
effectively not restructured in any real sense. BI loan classification rules allow such loans to
be considered performing for one year from the date of purchase. The other portion of the
restructured loans are those that have been restructured by the banks themselves, but usually
through rollovers, maturity extensions, or debt-equity conversions. Recent reports indicate
that some of these so called restructured loans may be non-performing again37. In addition,
some banks include foreclosed assets and equity received in restructuring deals as
Firm data on capacity utilization across industrial sectors are not available. Current estimates range from 50
per cent in certain industries to 70 per cent in others. It is also likely that a portion of the capacity is now
obsolete.
36 The precise level of NPLs of SOBs at this time is difficult to estimate. These numbers are drawn from BI’s
1998/99 annual report. Some observers have quoted higher numbers.
37 For example, Bank Mandiri bought a loan of a large debtor – Kiani Kertas – with a face value of Rp. 1.7
trillion at a discount of 80 per cent from IBRA. This loan has recently reported to be non-performing again.
35
21
performing assets. If these types of loans are reclassified as NPLs, the NPL numbers for
SOBs – especially Bank Mandiri and BNI - get substantially worse38. Table 14 shows an
analysis under two scenarios - where 50 per cent and 100 per cent of restructured loans of
SOBs are considered to be non-performing. The net NPL ratios for the SOBs as a whole
now increase to 7 per cent and 16.3 per cent in the two scenarios respectively, significantly
higher than the reported numbers39. This implies that if a significant fraction of the
restructured loans were to turn non-performing again, the SOBs would be significantly
under-provisioned. The banking system has also been reporting high capital adequacy ratios
(Table 9) of nearly 20 per cent. SOBs have also reported high CARs (Table 14). One reason
for this high ratio is that many of the worst loans were taken over by IBRA and replaced
with government bonds – which have a zero risk weight. Another reason is that, as stated
above, banks have been reporting that they are over-provisioned for their current level of
NPLs. If restructured loans are more conservatively provided for, the CAR situation
changes significantly. For example, for Bank Mandiri and BNI, if 50 per cent of the
restructured assets on the balance sheets are considered to be NPLs, the CAR falls from the
reported nearly 28 per cent to about 17 per cent. If all the restructured loans were to be nonperforming, its CAR falls to 5.8 per cent. The corresponding numbers for BNI are 10 per
cent and 1.7 per cent respectively40.
Moving from the balance sheet to bank profitability, SOBs (and many private banks) have
been experiencing improved profitability since 2000 (Table 9). As a group, SOBs – which
reported a loss of Rp. 35 trillion (before taxes) in 1999 – reported profit before taxes of Rp.
12.7 trillion in 2003. In terms of returns on assets, SOBs as a group have been improving
their performance with ROA increasing from 0.56 per cent in 2000 to 2.3 per cent in 2003
(Table 15). A large part of bank incomes is still driven by earnings on government bonds,
although this has been declining steadily. For the system as a whole, the proportion of banks’
income from interest on government bonds has been reduced to 17% of total income in
2003 (as compared to 22% in 2002). The majority of the banking sector’s income already
comes from loans. It is, however, difficult to evaluate bank profitability given the
uncertainty about NPLs as discussed earlier. SOBs continue to depend heavily on recap
bonds for their income. In addition, some SOBs carry high cost deposits on their balance
sheets, with low ratios of core deposits to total deposits, which make ongoing profitability a
challenge.
NPL ratios for some of the private banks also increase quite substantially, especially for BII and Lippo.
Some market analysts disagree with the view that restructured loans could be a source of problems for SOBs
and have expressed the view that these loans have been bought at such steep discounts that they will be
profitable. However, the situation is not yet clear – as all the restructured loans have not yet been reclassified
based on the standard classification rules. Only after this is done, will the true performing status of restructured
loans be known.
40 The CARs of some of the large private banks also drop substantially. Analysts have reported that under these
scenarios, the CARs of the largest banks in the system could drop to any where between 5-12 per cent from the
reported levels of over 20 per cent (ADB, 2004).
38
39
22
VII.
Governance of state owned banks
It is well recognized that governance plays a key role in the effective functioning of financial
institutions (Litan et. al. (2002)) and papers and references therein). Banks, and SOBs in
particular, face special problems of governance (Caprio and Levine (2002)). As discussed
above, governance issues have also played a major role in the banking crisis in Indonesia41.
Given the importance of this issue, this section presents a brief discussion on the evolution
and current governance of SOBs in Indonesia.
SOBs in Indonesia traditionally viewed themselves as agents of development and as arms of
the government – with a correspondingly weak credit culture, inadequate provisioning, and
poor risk management. They were subject to weak supervision by BI and even when
supervised, sanctions were rarely imposed due to political considerations. SOBs also
operated in an environment where they had no real “owner”. Although the Ministry of
Finance (MoF) has always been the legal owner of the SOBs, since 2001 it delegates day-today responsibilities of oversight of SOBs to the Ministry of State Owned Enterprises
(MoSOE). This joint responsibility has created further potential for difficulties in
governance. Historically, selected individuals in the SOBs controlled the banks – and the
owner was seen as not exercising adequate authority over these banks. The SOBs were also
influenced directly and indirectly by Parliament as well as by the Supreme Audit Authority
(BPK).
Prior to the 1997/98 crisis, SOBs’ organization structure typically consisted of a Board of
Directors and a Board of Commissioners. Boards of Directors consisted of one President
Director and a number of directors. They were appointed by the President of Indonesia
upon the recommendation from the Minister of Finance for a five-year tenure. Members of
the Boards of Directors were typically career state bankers from within that same SOB or
other SOBs. The Board of Commissioners was chaired by one President Commissioner and
usually had two other commissioners42. President Commissioners at SOBs were usually
retired military or police top brass appointed by the President of Indonesia. Members of
Boards of Commissioners were usually drawn from active senior officials of Ministry of
Finance or retired BI officials. While technically, the Board of Commissioners were
mandated to represent the owner – the State - and the Boards of Directors were responsible
for day-to-day operations of the banks, in practice, the mandates of both these boards was
often unclear with overlapping responsibilities. Given the composition and unclear
mandates, the Boards of Commissioners usually did not act effectively to safeguard the
interest of the owner and in general had weaker bargaining positions and political power visà-vis the Boards of Directors. Boards of Commissioners were often viewed as sinecures with
the real power resting with Boards of Directors – who were an integral part of SOB
management.
41 Enoch et. al. (2001), World Bank (1998, 2000), Grenville (2003), Santoso (2000), and ADB (2003) provide
discussions of governance issues in Indonesian SOBs.
42 The number of directors and commissioners varies across SOBs.
23
After the financial crisis in 1997, the government implemented reforms to the governance
structures. Boards of Commissioners and Directors have been appointed with greater
considerations of professionalism, experience, and technical skills. The Boards now are
appointed based on five year contracts with clear business plans and quantifiable
performance indicators. Many efforts have been made to improve governance and quality of
management of SOBs by all parties involved – the government, BI, and - after their partial
privatization – the Capital Market Supervisory Agency (Bapepam).
As part of the restructuring process of the SOBs, and in order to keep itself better informed
about developments in the banks, the MoF appointed a Monitoring and Governance Unit
(MGU)43. The MGU is a strong resource to aid the government in better exercising its rights
as a shareholder of the SOBs and thereby to aid in better governance. The MGU is,
however, scheduled to end its operations in mid-2004 and it is unclear whether any other
mechanism will be put in place. The MGU reports to both the MoF and the MoSOE. In
August 2001, the MoF delegated the responsibility for day-to-day exercise of the shareholder
function to the MoSOE. The monitoring capacity within the MoF largely moved to MoSOE
at that time, but the MGU stayed within the MoF. The Minister of Finance signed the
recapitalisation agreements with the SOBs44– under which the SOBs are required to perform
according to agreed upon business plans and performance contracts. The MoF also retains
the right to approve changes in the corporate structure of the SOBs.
Regulations issued by BI and the Capital Market Supervisory Agency (Bapepam) – with the
latter playing a role after the partial privatization of the SOBs - require the appointment of
independent commissioners as well as audit committees at the SOBs. Since 1999, BI also
requires members of boards of directors and commissioners to pass fit and proper tests. BI’s
efforts to improve prudential supervision of SOBs have reinforced this process, particularly
through the appointment of a Compliance Director45 in each bank, more intrusive
supervision through the permanent presence of on-site supervisors at the SOBs, and
requirements for quarterly publication of SOB accounts. BI has placed a lot of emphasis on
strengthening of internal control systems in banks and this undoubtedly has led to
improvements in internal control and audit procedures. However, it is clear that significant
weaknesses in governance and internal controls remain in the SOBs. Indications of these
weaknesses are provided by recent scandals involving a large fraud at BNI, a somewhat
smaller fraud at BRI, and concerns regarding aggressive expansion of loans by some SOBs46.
of significant In the BNI case, the bank had admitted to failure of its internal control
systems – and the Board of Directors was largely replaced by the government as a result.
Another key governance issue is that despite partial privatization of three of the four SOBs,
the government continues to retain a “golden share” that gives it complete authority with
regard to the boards of commissioners and directors. This structure provides little incentive
The work of the MGU was financed by a grant from the Australian government.
These agreements were signed with both the Directors and Commissioners of the SOBs as equal signatories
– a further indication of the lack of clarity of the roles of these two bodies.
45 BI required this appointment since Sept 1999.
46 BNI faced losses of over US$200 million in a recent scandal involving letters of credit honored by officials of
one branch in collusion with certain politically connected parties. BRI reported losses of Rp. 300 billion
million in another case of fraud. Newspaper reports (Bisnis Indonesia, March 5, 2004) indicate that the IMF
has expressed concerns over rapid expansion of lending by certain banks.
43
44
24
for bank management to change from its traditional culture of viewing themselves as agents
of development and acting at the behest of politicians to one where commercial
considerations and maximization of shareholder value plays a greater role.
Therefore, although the government has taken many steps in the right direction in
improving the governance of SOBs , they continue to face significant challenges with regard
to governance. Although BI is now an independent regulator, it still faces challenges when
trying to supervise SOBs. International evidence shows that government ownership of banks
is negatively associated with development of the banking sector and positively associated
with several measures of bank inefficiency (Barth et. al. (2001a and b)). Research also shows
that countries enjoy better developed financial systems with a lower likelihood of crises
when private sector entities can monitor banks better - a situation which is unlikely in
Indonesia unless there is a significant reduction in the share of government ownership of the
sector.
VIII. Policy issues and conclusion
Much progress has been made on the SOBs in Indonesia. In addition to recapitalization and
restructuring, the government has begun reducing its stake in state owned banks (SOBs)
through initial public offerings of minority equity stakes in Bank Mandiri and BRI. Overall
banking sector as well as SOB financial performance shows signs of improvement – despite
continued concerns discussed earlier. BI’s regulation and supervision of the sector has been
strengthened substantially. However, the recent large frauds at a SOBs as well as concerns
that banks are being too aggressive in new lending raise continuing questions regarding the
extent to which reforms have taken root and raise issues regarding the fragility of the
banking sector. Much still remains to be done in financial sector overall, in the banking
system in particular, and with regard to the SOBs specifically, in order to create a strong
satisfactorily restore its function as a sound intermediary and financier of growth in
Indonesia. This section summarizes some of the main policy issues facing the SOBs.
Arguably the first issue that the government needs to address is the role of the state in the
future of SOBs. As discussed above, SOBs have a long history of weak governance and
poor performance in Indonesia and the state has had to recapitalize them repeatedly. SOBs
have also moved from their developmental focus and the crisis has exposed the full extent of
the political nature of SOB operations. BI has faced continuing difficulties and challenges in
supervising the SOBs. Many attempts have also been made in the past to try to improve the
governance of the SOBs – without relinquishing the state’s role as owner. Despite these
efforts, SOBs still pose a challenge for the government. Keeping all these issues in mind,
there is little rationale for the government to continue to be a shareholder in the SOBs. The
government has made significant progress in cleaning up the rest of the banking sector after
the crisis, having sold the majority of intervened banks to foreign investors. Continuing to
retain majority ownership of the SOBs weakens incentives for their performance and
exposes the government to the risk of future recapitalizations, in case of weak performance.
Full privatization of the SOBs – along with the change of incentive structures that
accompanies such change - will go a long way in strengthening the Indonesian financial
sector. International experience with SOBs also points to the benefits of such action. While
25
capital markets do focus more on the performance of the SOBs as result of their partial
privatization, there is little that they can do to effect change as long as the government
continues to retain its “golden share” and the rights to appoint and change management.
The government will, therefore, have to find a way to give up its “golden share” in the SOBs
– which will require legislative actions – and thereby increase the political challenges to the
further privatization process. The challenge – especially for the two largest SOBs – Bank
Mandiri and BNI – will be identifying buyers who will be interested in such large institutions.
This might require some restructuring of these institutions in order to make them more
attractive to potential investors.
Some observers argue that BRI presents an interesting case of an SOB which is generally
considered to be well managed, and hence is a case where the state may not necessarily have
to relinquish its role. BRI was built on government subsidized programs for the rural sector.
While it might have been the case that commercial banks would not have ventured on their
own into this area, with government support in favor of a social objective – making banking
services available to the poor - and good performance in a niche area, BRI has become one
of the more attractive and profitable banks in Indonesia. However, now that its role has
been firmly established and many commercial players also see the attractiveness of such
opportunities, there is also a case to be made for the government relinquishing its control
over BRI.
Much as the above outcome of full privatization is desirable, it is likely that it will take some
time before it comes about. In the interim, and in the short-term, a key focus of the
government needs to be on further improving the governance of the SOBs. Closer
involvement in the design and execution of the corporate strategies of these institutions,
holding the SOBs accountable to their shareholders (the largest being the government), as
well as close monitoring of their performance on an ongoing basis would provide a basis for
such improvement. BI’s supervision of the SOBs needs to be brought in line with those of
the private banks and its regulations better enforced. Another issues that the SOBs (and the
government, as their majority shareholder) need to focus on is the challenges that arise in an
environment where lending is increasing as economic growth resumes. The new lending will
occur in a highly competitive environment. Ongoing trends indicate that many banks are
wary of lending to the corporate sector and the focus of new lending is shifting to the small
and medium enterprises and consumers. SOBs are also moving in this direction. As a result,
SOBs will need new credit assessment and delivery skills as well as substantial upgrading of
risk management expertise.
SOBs need further operational restructuring. Given the large volumes of government paper
on their balance sheets – and the likelihood that this will continue for some time – SOBs
need to recognize that the nature of their banking business has changed and that they need
to adapt operationally to the new scenario. In an environment of excess liquidity, deposit
taking will be less of a priority and focus on costs and profitability will become important.
The nature of credit business will change as small and medium sized borrowers are likely to
become increasingly important as a business line. While the new private owners will drive
this process for the privatized banks, the government needs to drive this process for the
SOBs.
26
Indonesia’s financial sector is at a crossroads. It has been rescued from a debilitating crisis at
a huge cost to the tax payer. Much of the crisis management work is behind the
Government. The overall effort in the financial sector focus now needs to be on
development of a strong diversified sector that is able to finance economic growth in future
on a sustainable basis. The emphasis in the banking sector needs to be on developing a
banking system that avoids destabilizing crises, provides secure payments, offers savers
secure deposits, intermediates efficiently between savers and investors and provides access to
financial services. SOBs should, in future, contribute to this process. Indonesian history and
international experience suggests that a good way to achieve this objective is to reduce the
role of SOBs in the Indonesian banking sector.
27
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30
Appendix 1
Details of state owned banks in Indonesia
Bank Negara Indonesia 1946 (BNI 46 and subsequently BNI) was the first state bank after
Indonesia gained its independence in August 1945. BNI 1946 was established in 5 July 1946 initially to
assume the role of a central bank for the country. However in 1951 the government nationalized De
Javasche Bank, a de-facto central bank during the Dutch colonial era, and made this bank the central
bank of Indonesia. De Javasche Bank subsequently changed its name to Bank Indonesia in 1953.
Meanwhile, BNI 46 was given new mandate to operate as a commercial and development bank since
1955. In 1965, the government merged Bank Indonesia, BNI 1946, Bank Koperasi Tani dan Nelayan
and Bank Tabungan Negara to become Bank Negara Indonesia (BNI). The operations of Bank
Indonesia and BNI 1946 were put under BNI Unit I and BNI Unit III respectively. In 1968, under
laws No 13 and 17 BNI Unit III was spun off and Bank Negara Indonesia 1946 was recreated. In
1992 BNI 1946 changed its name to Bank BNI and continues to operate as a commercial bank now.
Bank Rakyat Indonesia (BRI) was officially formed in 1946 although its history can be traced back
to the formation of Bank Priyayi in 1896. In 1958 the government also established Bank Koperasi
Tani dan Nelayan and merged this bank with BRI in 1960. Also in that year, the government
nationalized Nederlandsche Handles Maatschappij (NHM) and merged it into Bank Koperasi Tani
dan Nelayan. In 1965, Bank Koperasi Tani dan Nelayan was acquired by BNI. BRI’s operation was
placed under BNI unit II for rural sector and NHM’s operation was under BNI unit II as an import
bank. Under Law no 13 of in 1968, the two units were spun off again. BNI unit II for rural
development became Bank Rakyat Indonesia based on Law No 21 issued in 1968 whereas BNI unit
II for exim became Bank Ekspor Impor Indonesia (Bank Exim) based on Law No. 22 issued in
1968. BRI is still in existence Bank Exim was merged into Bank Mandiri in 1999.
Bank Dagang Negara was created when the Indonesian government nationalized Escompto Bank
in 1960. Bank Dagang Negara was given a mandate to operate as a commercial bank since the
establishment. In 1965 the government decided to merge BDN into BNI but in practice the two
banks kept operating independently. BDN continued to operate as a commercial bank until it was
merged into Bank Mandiri in 1999.
Earlier in 1959 the Indonesian government also nationalized Nationale Handelsbank. The bank
changed its name to Bank Umum Negara and operated as a commercial bank . Later in 1965 Bank
Umum Negara was acquired by BNI and become BNI Unit IV. After that in1968 BNI unit IV was
spun off and became a separate bank with a name Bank Bumi Daya. Bank Bumi Daya continued to
operate as a commercial bank until 199 when it was merged into Bank Mandiri.
Bank Pembangunan Indonesia (Bapindo) was originated from Bank Industri Negara which was
created in 1951. Based on Law No. 21 in 1960 Bank Industri Negara was changed to Bapindo. Bank
Tabungan Negara has its origin from the Dutch’s Postpaarbank that was formed in 1934. In 1950
the bank changed its name to Bank Tabungan Post which then changed again to Bank Tabungan
Negara in 1963. In 1965, BTN was acquired by BNI and become BNI Unit V. Subsequently in 1968 it
was separated from BNI again and finally through the issuance of Law No. 20 the government
established Bank Tabungan Negara not remains in operation.
31
Table 1a
Indonesia : Number of Banks and Branches
(1981 – 2003)
Number of Banks
Period
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Number of Branches
State National Foreign
State National Foreign
Banks Private
JV
Regional Total Banks Private
JV
Regional Total
Bank
Bank
Bank
Bank
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
5
5
5
5
5
74
73
72
71
71
67
67
66
90
109
129
144
161
166
165
164
144
130
92
81
80
77
76
11
11
11
11
11
11
11
11
21
28
29
30
39
40
41
41
44
44
40
39
34
34
31
26
27
27
27
27
27
27
27
27
27
27
27
27
27
27
27
27
27
27
26
26
26
26
118
118
117
116
116
112
112
111
145
171
192
208
234
240
240
239
222
208
164
151
145
142
138
Source : Indef (2003), Bank Indonesia
32
838
854
874
898
909
952
992
1,004
1,009
1,018
1,044
1,066
1,076
1,171
1,301
1,379
1,527
1,602
1,579
1,506
1,522
1,590
1,761
311
326
353
386
429
466
538
631
1.493
2.145
2.742
2.855
3.036
3.203
3.458
3.964
4.15
3.976
3.581
3.228
3.332
3.411
3,821
32
35
36
37
37
37
37
35
41
48
53
56
75
83
83
86
90
121
93
95
92
88
101
180
196
203
213
222
229
235
270
341
352
408
425
426
431
446
490
541
555
554
550
574
585
666
1,361
1,411
1,466
1,534
1,597
1,684
1,802
1,940
2,884
3,563
4,247
4,402
4,613
4,888
5,288
5,919
6,308
6,254
5,807
5,379
5,520
5,674
6,349
Table 1b
Indonesia : Deposits Growth and Market Share by Type of Banks
(1981 – 2003)
Share (%)
Growth (%)
Years Deposits State National Foreign Regional
State National Foreign Regional
Rp Trillion Bank Private
JV
Dev. All Banks Bank Private
JV
Dev.
Bank
Bank
Bank
Bank
Bank
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
8.0
8.7
12.3
15.4
20.0
23.3
29.1
37.5
54.0
81.6
95.1
111.4
142.5
170.4
214.8
281.7
357.6
573.5
625.6
720.4
809.1
845.0
888.6
76.0
71.1
68.1
65.2
64.4
65.2
62.2
60.1
54.8
49.7
44.0
47.2
43.3
37.7
35.4
32.1
37.2
47.3
45.8
45.6
45.6
44.6
41.7
10.7
13.7
17.2
19.6
22.7
23.1
27.4
29.7
36.0
40.5
45.4
42.8
47.2
52.2
54.7
58.6
49.5
41.1
40.4
38.7
37.8
40.1
42.4
9.0
10.5
10.6
10.6
8.8
8.3
7.1
6.7
6.1
6.6
7.3
6.7
6.1
6.5
6.3
6.3
10.8
9.7
11.6
12.9
12.0
9.9
10.0
4.4
4.7
4.0
4.6
4.1
3.4
3.3
3.5
3.1
3.1
3.4
3.3
3.4
3.6
3.6
3.0
2.5
1.9
2.2
2.8
4.6
5.4
5.9
Source : Indef (2003), Bank Indonesia
33
7.8
41.8
24.9
30.4
16.2
25.0
28.7
44.3
51.0
16.6
17.1
27.8
19.6
26.0
31.2
26.9
60.4
9.1
15.1
12.3
4.4
5.2
0.9
35.8
19.7
28.8
17.6
19.2
24.4
31.6
36.9
3.1
25.8
17.3
4.2
18.1
18.1
47.1
104.1
5.5
14.7
12.4
2.0
(1.8)
37.7
78.5
42.4
50.6
18.6
48.3
39.5
74.9
69.9
30.4
10.5
41.2
32.1
32.1
40.5
7.4
33.0
7.3
10.3
9.5
10.8
11.2
25.8
44.1
24.3
8.5
9.0
7.5
21.7
30.2
65.7
27.9
7.7
16.3
26.9
23.3
30.9
117.0
43.7
30.4
28.6
4.6
14.0
6.5
17.4
20.9
40.8
17.9
-3.4
19.7
36.3
28.8
52.3
26.6
14.5
29.4
29.3
26.3
9.1
3.2
24.3
28.2
41.9
86.4
23.9
15.0
Table 1c
Indonesia : Asset Growth and Share by Banks
(1981 – 2003)
Share (%)
Period
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Growth (%)
Total State National Foreign Regional
State National
Asset Bank Private
JV
Dev. Total Bank Private
Rp trillion
Bank
Bank
Bank
Bank
12.5
15.3
19.9
26.5
33.7
40.8
48.2
63.3
93.0
132.6
153.2
180.1
214.0
248.1
308.6
387.5
528.9
762.4
789.4
984.5
1,039.9
1,059.8
1,213.5
79.8
79.6
77.0
74.8
73.4
72.1
71.3
66.8
59.0
53.3
50.6
51.8
46.8
41.9
39.6
36.4
37.5
39.6
48.7
50.3
46.6
47.3
45.8
9.4
9.9
11.2
13.9
15.3
17.6
19.5
24.0
31.9
36.4
37.9
36.9
41.0
45.6
47.6
51.7
46.2
45.7
36.3
34.9
35.8
38.0
38.0
6.9
6.9
8.6
7.8
7.8
6.9
6.2
5.1
5.5
7.4
8.5
8.4
9.2
9.4
9.7
9.2
14.0
12.8
12.7
12.2
13.6
9.4
10.7
3.9
3.6
3.2
3.5
3.5
3.4
3.0
4.1
3.6
2.9
3.0
2.9
3.0
3.2
3.2
2.8
2.3
1.9
2.3
2.5
4.0
5.3
5.5
22.3
30.6
32.7
27.2
21.2
18.1
31.3
47.0
42.6
15.5
17.6
18.8
15.9
24.4
25.6
34.5
44.2
3.5
24.7
5.6
1.9
14.5
Source: Indef (2003), Bank Indonesia
34
22.0
26.3
28.9
24.9
19.0
16.9
23.1
29.8
28.8
9.6
20.5
7.2
3.7
17.6
15.4
42.9
50.9
28.5
29.0
2.4
(2.7)
10.9
28.7
47.0
64.9
39.6
40.1
30.3
61.7
95.4
62.9
20.5
14.2
32.1
28.8
29.9
36.4
23.8
41.5
(17.1)
20.2
13.4
9.9
14.6
Foreign
JV
Bank
Regional
Dev.
Bank
21.3
64.2
20.2
27.4
7.4
6.3
6.9
60.2
90.3
32.4
16.1
30.4
18.9
28.5
18.4
110.8
31.3
3.7
20.0
23.1
(7.1)
29.8
13.3
15.7
45.5
27.3
17.3
6.0
79.3
28.5
15.4
19.5
14.3
23.0
21.1
23.3
10.0
14.4
18.6
29.2
35.1
76.7
25.5
18.2
Table 1d
Indonesia : Loans Growth and Market Share by Type of Banks
(1981 – 2003)
Period
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Share (%)
Growth (%)
Total State National JV Regional
All State National JV Regional
Loans Bank Private Bank
Dev.
Banks Bank Private Bank
Dev.
Rp trillion
Bank
Bank
Bank
Bank
11.4
11.5
15.0
20.9
24.9
30.3
41.7
50.4
62.9
97.0
112.8
122.9
150.3
188.9
234.6
292.9
378.1
487.4
225.1
269.0
307.6
365.4
440.5
85.8
80.8
79.0
78.0
76.7
75.3
67.8
71.3
62.9
55.2
53.1
55.5
47.6
42.4
39.8
37.2
40.5
45.3
49.9
37.9
38.1
40.0
39.5
7.3
10.4
12.5
14.6
16.5
18.2
25.2
22.5
29.6
36.1
37.1
34.4
40.2
45.7
47.6
51.2
44.6
39.7
24.9
30.6
33.1
37.5
40.0
4.8
5.8
5.7
5.0
4.3
4.0
4.2
3.8
5.0
6.4
7.5
7.6
9.8
9.7
10.3
9.4
12.9
13.7
22.2
27.7
23.8
16.7
13.8
2.2
3.1
2.7
2.4
2.6
2.5
2.7
2.4
2.6
2.4
2.3
2.5
2.4
2.2
2.2
2.2
2.0
1.4
3.0
3.8
5.0
5.9
6.7
Source: Indef (2003), Bank Indonesia
35
0.9
-4.90
30.3 27.5
38.9 37.1
19.4 17.3
21.3 19.1
37.9 24.3
20.9 27.1
24.7 10.0
54.2 35.2
16.3 11.8
8.9
14.0
22.3
4.8
25.7 11.8
24.2 16.8
24.9 16.5
29.1 40.7
28.9 44.0
(53.8) (49.0)
19.5 (9.1)
14.4 14.7
18.8 24.7
20.4 19.2
43.5
57.5
61.4
34.9
34.1
91.4
7.7
63.8
88.1
19.6
1.2
42.8
42.8
29.4
34.3
12.5
14.6
(71.0)
47.2
23.6
34.5
28.5
21.5
29.3
21.5
2.6
12.2
44.8
9.8
62.8
98.3
37.8
9.6
57.9
24.7
32.0
13.8
76.2
37.3
(25.0)
48.7
(1.6)
(16.8)
(0.3)
44.5
15.1
24.1
25.5
19.7
49.7
4.3
35.9
41.7
13.6
15.3
17.9
18.2
24.8
23.2
16.8
(12.9)
4.0
48.8
52.6
39.6
36.2
Table 2
Indonesia : Structure of Financial System
(End-2003)
Banks
10 largest banks a/
State-owned
Ex IBRA - owned b/
Foreign & joint
128 other banks
State
Regional
Private domestic
Foreign & joint
OFIs c/
Finance companies
Insurance companies
Life
Non-life d/
Pension funds
Securities firms
Pawnshop (state-owned)
Rural institutions e/
Mutual funds
Venture capital companies f/
Private bond issuers g/
TOTAL h/
Number
of
institutions
138
10
4
5
1
128
1
26
71
30
9,875
120
159
52
107
332
157
1
9,106
131
60
171
Assets
(Rp trillion)
1,213.5
850.6
551.2
275.6
23.7
362.9
4.9
66.4
186.1
105.5
295.0
29.8
88.6
29.3
59.3
37.4
10.1
2.7
9.3
69.5
2.7
44.9
10,013
1,508.5
Percent
of
total assets
80.4
56.4
36.5
18.3
1.6
24.1
0.3
4.4
12.3
7.0
19.6
2.0
5.9
1.9
3.9
2.5
0.7
0.2
0.6
4.6
0.2
3.0
Average asset
size
(Rp trillion)
8.8
85.1
137.8
55.1
23.7
2.8
4.9
2.6
2.6
3.5
0.2
0.6
0.6
0.6
0.1
0.1
2.7
0.5
0.0
0.3
100.0
Notes:
a/ 10 largest banks are Bank Mandiri, BCA, BNI, BRI, Danamon, BII, Bank Permata, BTN, Bank Lippo and Citibank
b/ Ex IBRA-owned banks are those banks that already had been privatized
c/ Data as of end September 2003 unless stated otherwise
d/ Non life insurance co includes Jamsostek, Taspen and Asabri
e/ Rural institutions include rural and non-rural credit agencies, funds and institutions
f/ Data as of end 2002
g/ Non financial issuers only
h/ Total assets includes some Rp. 60 trillion of double counting as most assets of insurance companies
and pension funds are held as deposits in banks.
Source: Bank Indonesia, Bapepam, ADB (2003), authors’ estimates
36
-
Table 3
Bank Indonesia Liquidity Credits (KLBI)
NO.
1
(KLBI)
Working Capital Credit for
Farmers (Kredit Usaha Tani/ KUT)
RECEPIENT
Farmer & families
through the
cooperative
TERMS
According to
necessity
TENOR
1 year
OBJECTIVE
To increase farmer’s
income
2
Credit for members of Primary
Cooperatives (Kredit Kepada
Koperasi Primer Anggotanya/
KKPA)
Organization
Members of the
KKPA
Organization
Maximum
Rp 50 million
1-15 year
Credit scheme given to
increase capital quality
3
Credit for Cooperatives (Kredit
Kepada Koperasi –KKOP)
Cooperative and
Village Cooperative
Rp. 350
million
1-10 year
To facilitate working
capital & cooperative
investment
4
Working capital credit for
development of People’s Credit
Banks and Syariah Bank (Kredit
Modal Kerja Pengembangan BPR/
Syariah)
For BPR/BPRS
credit scheme for
productive sector
Rp. 15 million
Maximum
1 year
To support Peoples
Credit Banks
5
Credit for primary cooperative
members in sugar cane plantations
(Kredit Kepada Koperasi Primer
untuk Anggota Tebu Rakyat)
Sugar cane
plantation farmers
Maximum
Rp. 50 million
2 years
To facilitate working
capital for cooperatives
involved in sugar cane
plantation intensification
6
Credit for primary cooperative
members who are transmigrated
farmers in east Indonesia (KKPAPIR
Trans Kawasan Timur Indonesia
Small farmers in
east Indonesia and
new transmigration
areas
Rp. 50 million
3 years
To facilitate working
capital for plantations
7
Credit for primary cooperative
members who are Indonesian
laborers abroad (KKPA-Tenaga Kerja
Indonesia)
Indonesian workers
abroad
Max 85% of
total cost in
organizing
workers to go
abroad
8
Credit for cooperative members
based on profit sharing (KKPA Bagi
Hasil)
Small sized
entrepreneurs in
productive sector
Maximum
Rp. 50 million
11 to 15
years
Working and investment
capital for small size
entrepreneurs under a
profit sharing scheme
9
Credit for small size entrepreneurs
(Kredit Pengusaha Kecil and Mikro/
KPKM)
Small scale
individual or group
entrepreneurs
Maximum
Rp. 25 million
5 years
To develop small scale
industries
10
Credit for applied technology (Kredit
Penerapan Teknologi Tepat Guna/
KPTTG)
Credit scheme for
the poorest
segment of society
Rp. 50
million/group
1 year
To eradicate poverty
11
Working Capital credit for SME
(Kredit Modal Kerja Usaha Kecil dan
Menengah)
Cooperative
organization &
SME
Rp. 3 billion/
customer
1 year
To develop small sized
entrepreneur
Rp. 400
million
1 year
To developed primary
provincial manufactured
products
12
Credit for applied technology in
Cooperative
prime provincial manufactured
organization &
products (Kredit Penerapan
SME
Teknologi Produk Unggulan Daerah)
Source: Bank Indonesia, Center for Financial Policy Studies (2000)
37
To prepare the
Indonesian labor force
that works abroad
Table 4
Bank Indonesia’s Credit (1963 – 2003)
Rp billion
1963
Amount
Share b/
Bank
Indonesia a/
56
46.4%
State
Bank
Other
59
48.4%
62
51.6%
121
100%
Liquidity
Credit a/
75
61.9%
1974
Amount
Share
233
14.8%
1,135
72.1%
439
27.9%
1,574
100%
294
18.7%
1978
Amount
Share
1,933
36.3%
2,832
53.2%
2,492
46.8%
5,324
100%
682
12.8%
1982
Amount
Share
2,519
21.9%
9,292
80.8%
2,208
19.2%
11,500
100%
4,086
35.5%
1990
Amount
Share
763
0.8%
53,544
55.2%
43,456
44.8%
97,000
100%
1,978
2.0%
1991
Amount
Share
777
0.7%
59,897
53.9%
52,903
46.9%
112,800
100%
2,026
1.8%
1995
Amount
Share
n/a
0.0%
93,375
39.8%
141,236
60.2%
234,611
100%
10,423
4.4%
1997
Amount
Share
n/a
0.0%
153,258
40.5%
224,877
59.5%
378.134
100%
15,112
4.0%
2000
Amount
Share
0.0%
102,059
37.9%
166,942
62.1%
269,000
100%
9,736
3.6%
2002
Amount
Share
0.0%
145,981
40.0%
219,429
60.1%
365,410
100%
8,507
2.3%
2003
Amount
Share
0.0%
177,137
40.2%
263,368
59.8%
440,505
100%
7,765
1.8%
Note:
a/ Bank Indonesia credit is not recorded in banks’ balance sheet
b/ share of total credits
Source: Bank Indonesia, Pangestu (1996), Rahardjo (1995), authors’ estimates
38
Total
6.0
18.5
NA
-3.5
9.0
NA
12.0
NA
NA
2.5
NA
NA
6.0
NA
NA
9.5
Nominal Deposit Rates a/
State Banks
Private Banks
All Banks
Real Deposit Rates c/
State Banks
Private FX Banks
All Banks
Nominal Lending Rates b/
State Banks
Private Banks
All Banks
Real Lending Rates c/
State Banks
Private Banks
All Banks
Nominal Spread
State Banks
Private Banks
All Banks
Memo Items:
Annual CPI Inflation
4.7
-0.7
6.4
5.2
10.6
19.5
17.4
15.3
24.2
22.1
11.3
13.1
12.2
16.0
17.8
16.9
1985
5.8
3.8
7.5
5.7
12.7
17.2
15.3
18.5
23.0
21.1
8.9
9.7
9.6
14.7
15.5
15.4
1986
a/Weighted average rates for Rupiah six-month time deposits
b/Weighted average rates for Rupiah working capital loans.
c/ Rates calculated using the actual annual inflation rate
Source: Bank Indonesia, authors’ estimates
1982
December of
9.3
2.7
-14.9
-16.3
10.7
-5.7
-7.2
20.0
3.6
2.1
8.0
9.2
9.1
17.3
18.5
18.4
1987
8.0
2.0
4.2
3.3
12.2
15.8
14.3
20.2
23.8
22.3
10.2
11.6
11.0
18.2
19.6
19.0
1988
6.4
2.5
3.5
3.3
13.3
15.3
14.6
19.7
21.7
21.0
10.8
11.8
11.3
17.2
18.2
17.7
1989
39
7.8
1.8
5.1
3.4
13.4
17.3
15.2
21.2
25.1
23.0
11.6
12.2
11.8
19.4
20.0
19.6
1990
9.4
2.8
4.9
3.4
15.7
18.8
16.7
25.1
28.2
26.1
12.9
13.9
13.3
22.3
23.3
22.7
1991
9.4
1.1
2.6
2.3
7.8
11.0
9.8
17.24
20.46
19.27
6.7
8.4
7.5
16.13
17.84
16.95
1995
7.9
0.7
2.8
2.3
9.0
12.3
11.1
16.88
20.24
19.04
8.2
9.5
8.9
16.14
17.42
16.78
1996
6.15
2.8
4.6
5.0
12.3
17.6
15.8
18.49
23.72
21.98
9.5
13.0
10.8
15.66
19.17
16.96
1997
Table 5
Indonesia : Interest Rates at Commercial Banks (1982-2003)
(Annual, in percent)
58.48
-10.1
3.0
-4.5
-33.4
-22.1
-26.2
25.09
36.37
32.27
-23.3
-25.1
-21.7
35.17
33.34
36.78
1998
20.54
11.8
19.0
14.6
5.7
12.0
8.3
26.22
32.58
28.89
-6.10
-7.0
-6.3
14.44
13.55
14.25
1999
3.69
6.4
4.6
5.1
16.2
14.1
14.7
19.85
17.76
18.43
9.73
9.5
9.6
13.42
13.16
13.31
2000
11.50
2.6
3.6
3.0
7.6
7.7
7.7
19.15
19.16
19.19
5.05
4.1
4.7
16.55
15.58
16.18
2001
11.88
5.0
4.3
4.5
7.0
6.3
6.4
18.85
18.21
18.25
1.98
2.0
1.9
13.86
13.91
13.79
2002
6.59
8.2
6.0
6.8
9.6
8.1
8.5
16.18
14.66
15.07
1.37
2.1
1.7
7.96
8.65
8.25
2003
Table 6
Indonesia : Loan Classification (1995 – 2003)
(Percent)
April December December December December December December
1995 1996 1997
1997
1998
1999
2000
2002
2003
Total Loans (Rp. Trillion) 234.6 292.9 350.0 378.1
487.4
225.1
269.0
365.4
440.5
Panel A
Sub-standard
Doubtful
Bad-Debt
Panel B
State-owned Banks
Private Banks
Regional Development
Banks
Foreign and Joint Venture
Banks
Panel C
All Banks
State-owned Banks
Private Foreign Exchange
Banks
Private Non-Foreign
Exchange
Classified loans as a share of total %
2.7 2.6 2.8
2.6
10.4
10.2
7.8
2.4
2.4 3.3 3.5
2.5
15.2
12.8
4.6
2.1
3.3 2.9 2.3
3.2
23
9.9
7.7
3.0
Distribution of Classified loans by bank ownership %
72.7 67 65.9
52.7
38.9
52.6
33.1
32.6
16.3 22.8 24.5
42.3
52.7
23.1
22.7
28.0
5.5 4.9 4.8
0.43
0.1
1.2
1.6
1.5
43.4
31.3
1.6
5.5
23.6
5.3
4.8
4.6
8.4
23.2
42.6
37.9
2.9
1.1
2.7
Classified loans as percentage of total credit by bank ownership (%)
10.4 8.8
8.3
48.6
32.9
20.1
7.5
6.8
16.6 13.4
4.4
18.9
17.3
17.4
6.0
7.3
3.7 4.3
2.8
21.1
7.3
16.2
5.8
5.5
13.8
1.1
0.7
4.5
Note:
Data for Panels B and C are not available using the same classification.
Sources: Santoso (2000), Bank Indonesia
40
0.3
4.2
4.5
3.6
Table 7
Indonesia : Cost of Banking Sector Restructuring
Rp trillion
% of total
recapitalization
cost
% of GDP in
2000
State Banks:
Mandiri
BNI
BRI
BTN
Subtotal SOB
178.0
61.8
29.0
13.8
282.6
41%
14%
7%
3%
66%
14.1%
4.9%
2.3%
1.1%
22.4%
Taken Over Banks (14 banks)
Recapitalized Banks (7 banks)
Regional Banks (12 banks)
109.3
36.9
1.2
25%
9%
0%
8.7%
2.9%
0.1%
Subtotal - recapitalization cost
Guarantee program
Government credit program
Total cost
430.0
218.3
10.0
658.3
100 %
34.1 %
17.2%
0.8%
52.1%
Note: GDP in 2000 was Rp1,264.9 trillion
Source: Bank Indonesia, authors’ calculations
41
Chart 1
Indonesia: Interest Rate Spreads
Period average in percent p.a.
(1992-2003)
% interest rate
% interest spread
60.0
60.0
40.0
40.0
20.0
20.0
0.0
0.0
(20.0)
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001 2002
2003
Interest Spread
6.4
7.2
5.3
2.2
2.3
(1.0)
(19.4)
4.9
7.3
4.7
3.8
7.3
1-mo nth time depo sit
15.7
13.4
12.4
16.7
16.9
23.0
51.7
24.0
11.2
14.5
14.4
9.6
Wo rking Capital Lo an
22.1
20.5
17.8
18.9
19.2
22.0
32.3
28.9
18.4
19.2
18.3
16.9
1-mo nth SB I
13.5
8.8
12.4
14.0
12.8
20.0
38.4
12.5
14.5
17.6
12.9
8.3
(20.0)
Source : Bank Indonesia
Table 8
Indonesia : State Owned Bank Loan to Deposit Ratio
Banks
BNI
BTN
BRI
Mandiri
BBD
BDN
Bank
Exim
Bapindo
1994
103.6 %
190.3 %
130.3 %
n/a
129.6 %
139.1 %
74.9 %
1995
89.9 %
180.9 %
141.6 %
n/a
123.0 %
137.0 %
76.7 %
1996
93.3 %
202.0 %
137.6 %
n/a
98.2 %
133.3 %
78.3 %
1997
102.7 %
177.9 %
124.1 %
n/a
112.4 %
126.9 %
n/a
1998
87.3 %
75.9 %
99.9 %
n/a
n/a
n/a
n/a
n/a
230.3 %
193.1 %
201.9 %
n/a
1999
51.7 %
54.2 %
62.3 %
28.6 %
2000
36.1 %
46.1 %
52.2 %
25.4 %
2001
34.4 %
44.0 %
55.1 %
23.3 %
2002
37.7 %
50.2 %
55.2 %
32.5 %
Note:
Bapindo and Exim did not publish financial statements for 1994 and 1997 respectively
Bapindo, Exim, BBD and BDN did not publish financials statements for 1998 and were merged into Bank Mandiri in 1999.
Source: Banks’ Annual Reports
42
2003
43.6 %
58.3 %
62.3 %
41.6 %
Table 9
Indonesia: Summary Commercial Bank Data
(1996 – 2003, in Rp trillion unless otherwise indicated)
End of December
1996
1997
1998
1999
2000
2001
2002
2003
Number of Banks
238
222
208
164
151
145
142
138
(7)
(7)
(7)
(5)
(5)
(5)
(5)
(5)
387.5
528.9
762.4
762.4
984.5
1,039.7
1,059.8
1,213.5
(178.8)
(243.9)
(230.7)
(357.7)
(455.4)
(492.1)
(488.0)
(556.2)
0
0
0
281.8
431.8
435.3
419.4
344.6
(0)
(0)
(0)
(214.2)
(282.3)
(256.3)
(244.6)
(207.4)
292.9
378.1
487.7
225.1
269.0
307.6
365.4
440.5
(124.5)
(169.6)
(198.3)
(116.1)
(109.4)
(126.6)
(151.0)
(177.2)
281.7
357.6
573.5
625.6
720.4
809.1
845.0
888.6
(106.9)
(143.7)
(196.8)
(284.1)
(325.8)
(384.8)
(388.1)
(368.5)
37.1
46.7
-98.5
-21.6
50.6
66.8
93.7
112.4
(11.1)
(12.0)
(-97.4)
(-31.3)
(23.3)
(23.0)
(29.3)
(48.3)
22.8
32.9
276.7
92.0
56.9
38.7
27.8
29.9
n/a
n/a
n/a
(17.2)
(18.4)
(8.8)
(9.1)
(13.0)
4.7
-1.5
-178.6
-75.4
10.5
13.1
21.9
28.9
(2.2)
(1.9)
(-152.8)
(-35.0)
(1.2)
(6.9)
(10.1)
(12.7)
GDP at current prices
532.6
627.7
955.8
1,099.7
1,264.9
1,449.4
1,610.0
1,786.7
M1 over GDP
12.0%
12.5%
10.6%
11.3%
12.8%
12.3%
11.9%
12.5%
M2 over GDP
54.2%
56.7%
60.4%
58.8%
59.1%
58.2%
54.9%
53.5%
Bank Assets / GDP
72.8%
84.3%
93.7%
91.5%
81.5%
75.9%
69.1%
67.9%
Gov’t Bonds / GDP
-
-
-
25.6%
34.1%
30.0%
26.0%
19.3%
55.0%
61.7%
57.1%
25.2%
25.3%
24.7%
25.5%
24.7%
n/a
57.3%
18.4%
18.9%
20.3%
20.2%
21.5%
23.4%
52.9%
57.0%
60.0%
56.9%
57.0%
55.8%
52.5%
49.7%
Total assets
Government Bonds
Loans
Deposits
Equity
NPLs
Profit before tax
Loans/GDP
Loan to Private / GDP
Deposits / GDP
Gross NPL ratio
7.8%
8.7%
48.6%
32.8%
18.8%
12.1%
8.3%
6.8%
LDR
103.9%
105.7%
72.4%
26.2%
33.2%
33.0%
38.2%
49.6%
CAR
12.2%
4.3%
-15.7%
-8.1%
12.5%
20.5%
22.5%
19.4%
ROE
7.6%
11.8%
437.2%
110.8%
3.0%
13.9%
15.0%
20.4%
ROA
0.7%
1.4%
18.8%
6.1%
0.6%
1.3%
2.0%
1.9%
Notes:
Numbers in parentheses are those of state banks
1998 figures for state banks are estimated figures because Bank Exim, BDN, Bapindo & BBD did not publish 1998 financial statement
Bank Exim also did not publish a financial statement in 1997
M1 = currency outside banks + demand deposits
M2 = M1 + quasi money
Loan to Private is total loan minus loan to government entities and SOEs
Gross NPL ratio = NPL/ total loans
LDR = loans/deposits
CAR = capital/risk-weighted asset
ROE = profit after tax/ equity
ROA = profit after tax/ assets
Source: Bank’s Financial Statements, Bank Indonesia, authors’ calculations
43
Table 10
Indonesia: Summary Balance Sheet of Commercial Banks
(1997-2003)
End-period
1997
1998
1999
Claims on BI
17.4
Holdings of SBIs 47
16.5
Foreign assets
46.8
Liquid assets-1
80.7
Govt. bonds
1.0
Liquid assets-2
81.7
Credit
378.4
Other assets 48
68.8
Total assets =
total liabilities
528.9
Deposits
357.6
Borrowing from BI
23.1
Foreign liabilities
70.4
Other liabilities 49
48.5
Equity
46.7
34.2
58.8
115.7
208.7
0.7
209.4
487.5
65.5
42.7
86.9
94.5
223.5
268.7
492.2
225.1
72.1
Liquid assets-1
Liquid assets-2
Loans (LDR)
2000
2001
(in Rp trillion)
49.7
49.0
58.8
102.6
102.2
109.8
238.7
301.0
429.7
408.9
668.4
709.9
269.0
307.6
47.1
22.4
2002
2003
56.9
76.9
90.1
258.3
378.3
638.6
365.4
57.8
72.3
101.4
77.3
285.8
344.6
630.5
410.5
142.5
762.4 789.4 984.5 1,039.9 1,059.8 1,213.5
573.5 625.6 720.4
809.1
845.0
888.6
112.9
33.4 16.5
15.2
12.7
10.9
97.8
74.6 92.7
68.4
51.9
31.5
76.7
55.8 104.3
80.4
56.5
170.2
(98.5) (21.6) 50.6
66.8
93.7
112.4
(in percent of deposits)
22.6
36.4
35.7 33.1
37.2
30.6
32.2
22.8
36.5
78.7 92.8
87.7
75.3
71.0
105.7 72.4.0
26.2 33.2
33.0
38.2
49.6
Note:
Other assets and other liabilities are determined as residuals
Liquid assets – 1 consist of claims on BI and interbank claims
Liquid assets – 2 consist of liquid asset 1 and government bonds
Other assets mostly consist of fixed assets and other marketable securities
Other liabilities mostly consist of borrowings
Source: Bank Indonesia, ADB (2003)
Number from BI balance sheet
Determined as a residual
49 Determined as a residual
47
48
44
Table 11
Indonesia : Outstanding Credit by Type of Lending and Bank
(1998-2003)
End of period
1998
Rp tr
%
1999
Real
Growth
2000
Rp tr %
%
Rp tr
Real
Growth
2001
Real
Growth
2002
%
%
Rp tr %
%
Rp tr
Real
Growth
%
%
2003
Rp tr
%
%
100
14.0
22
8.9
Total credit
487.4 100 225.1 100
-21.1
269
100
15.8
307.6 100
2.8
365.4 100
6.9 440.5
Investment
141.5
-21.1
65.3
23
9.5
73.5
1.1
82.9
0.9
State banks
Regional banks
Private dom.
Foreign & JV
29
89.1
0.9
38.7
12.8
57.7
26
37.6
0.7
13.1
6.2
34.4
0.8
19.9
10.2
24
38.6
1.3
24.5
9.1
23
43.5
2.2
30.5
6.7
Real
Growth
95.8
49.6
3.1
37.7
5.3
Working cap.
314.2
State banks
115.9
Regional banks 3.4
Private dom.
142.6
Foreign & JV
52.2
64 143.4 64
61.3
3.3
36.8
41.9
-21.1
163.6
50.8
2.7
49.3
60.9
61
10.4
175.7 57
56.1
3.6
56.8
59.3
-4.1
202.7
73.2
5.8
76.1
47.6
55
3.5 233.5
83.7
7.5
95.7
46.6
53
8.6
Consumption
State banks
Regional banks
Private dom.
Foreign & JV
7
-20.8
40.1
16.8
6.6
13.3
3.4
15
62.7
58.4
22.4
10.6
20.6
4.8
34.1
79.8
29.3
13.5
30.5
6.5
22
24.8 112.1
43.8
17.8
41.1
8.6
25
32.8
31.8
15.7
2.2
12.1
1.7
Annual Inflation
rate (%)
24.1
13.4
2.8
6.1
1.8
10
20.5
3.7
19
11.5
Source : Bank Indonesia
45
11.9
6.6
Table 12
Indonesia : State owned bank lending
Nominal (Rp Trillion)
2000
2001
2002
2003
Share (%)
2000
2001
2002
2003
Growth (%)
2001
2002
2003
BANK MANDIRI
Working Capital
23.0
13.1
21.9
37.9
53.5
47.2
55.5
49.9
(43.1)
67.5
72.9
Investment
12.7
9.8
11.4
25.8
29.5
35.4
28.8
34.0
(22.8)
16.2
126.3
Consumer
0.8
1.0
1.9
4.1
1.9
3.6
4.9
5.5
20.0
94.9
113.6
Others
6.5
3.8
4.2
8.1
15.0
13.8
10.7
10.6
(40.8)
11.1
90.4
Total
43.0
27.7
39.5
75.9
100.0
100.0
100.0
100.0
(35.6)
42.5
92.2
Bank Rakyat Indonesia
Working Capital
Investment
Consumer
Others
16.3
2.3
5.6
2.8
21.1
2.9
7.8
1.8
24.0
2.8
10.0
2.5
29.5
3.4
11.2
3.4
60.4
8.6
20.8
10.2
63.0
8.6
23.2
5.2
61.0
7.1
25.5
6.4
62.0
7.2
23.6
7.2
29.3
24.4
38.3
-36.5
13.8
-3.6
29.1
44.5
22.8
22.2
11.6
35.8
Total
27.0
33.5
39.4
47.5
100.0
100.0
100.0
100.0
24.0
17.4
20.7
19.3
12.6
2.7
0.8
21.7
11.3
4.2
0.5
26.5
13.4
5.9
0.6
50.1
41.8
5.9
2.2
54.6
35.5
7.6
2.3
57.5
29.9
11.2
1.4
57.1
28.8
12.7
1.4
20.6
-6.0
43.4
16.7
12.6
-10.1
56.7
-35.3
21.9
18.4
39.6
20.8
32.0
35.4
37.8
46.4
100.0
100.0
100.0
100.0
10.7
6.8
22.8
BTN
Working Capital
Investment
Consumer
Others
0.2
0.0
7.4
-
0.3
0.0
8.1
-
0.5
0.1
9.6
-
0.5
0.0
10.6
-
3.0
0.2
96.8
-
3.5
0.1
96.5
-
4.9
0.8
94.3
-
4.2
0.0
95.8
-
26.4
(70.5)
9.8
-
Total
7.6
8.4
10.2
11.1
100.0
100.0
100.0
100.0
55.6
28.4
15.7
9.9
53.8
25.3
19.6
6.4
68.2
25.6
25.8
7.3
94.4
42.6
31.9
12.2
50.7
25.9
14.3
9.1
51.2
24.0
18.6
6.1
53.7
20.1
20.4
5.8
109.7
105.1
126.9
181.0
100.0
100.0
Undisbursed Credit Lines
Mandiri
8.1
BRI
3.9
Bank BNI
3.2
BTN
0.3
All SOB
15.5
Other banks
49.2
6.6
4.3
3.7
0.2
14.8
55.7
10.4
8.4
4.9
0.2
24.0
57.1
12.5
6.1
4.9
0.5
23.9
76.1
All Banks
70.5
81.1
100.0
Bank BNI
Working Capital
Investment
Consumer
Others
Total
ALL SOB
Working Capital
Investment
Consumer
Others
Total
16.0
13.4
1.9
0.7
64.7
17.0
7.6
7.4
0.3
32.3
70.7
103.0
73.0
1,577.0
18.7
-
(6.9)
(97.8)
10.3
-
10.2
21.4
8.6
52.1
23.5
17.6
6.7
(3.2)
(11.1)
24.6
(35.5)
26.7
1.1
31.9
14.2
38.4
66.6
23.4
66.4
100.0
100.0
(4.2)
20.8
42.6
9.3
6.1
5.3
0.3
21.0
79.0
12.8
10.4
6.1
0.3
29.6
70.4
16.5
7.3
7.2
0.3
31.3
68.7
(18.7)
10.5
18.0
(41.7)
(4.3)
13.2
58.4
94.8
32.2
27.1
62.1
2.4
63.5
(10.5)
50.2
34.0
34.4
23.9
100.0
100.0
100.0
9.0
14.9
27.0
Note: Consumer lending includes loan to employee. Working capital lending includes syndicated loans
Others lending mostly consist of program/ export loans
Lending figures are based on consolidated financial statements and includes channeling loans
Source: Banks’ annual reports and Financial statements
46
Table 13
Indonesia : Loan Loss Reserves and Provisions
(in percent)
1982 1988 1989 1990 1991 1995 1997 2000 2003
Loan Loss Reserve/ Total Loans
State Banks
Private FX Banks
Private Non-FX Banks
Foreign Banks
All Banks
3.2
1.7
0.7
0.6
2.7
4.2
1.2
0.7
2.0
3.3
2.3
1.0
0.5
1.6
3.3
4.4
0.8
0.6
1.4
2.7
4.5
1.1
0.9
1.9
2.8
2.8
2.8
1.3
2.2
2.0
2.7
2.0
2.2
3.5
2.4
Provision Expense/ Total Loans
State Banks
Private FX Banks
Private Non-FX Banks
Foreign Banks
All Banks
NA
NA
NA
NA
NA
1.2
1.0
0.9
1.1
1.1
0.6
0.7
0.7
0.7
1.0
1.3
0.8
0.6
0.6
1.0
0.9
0.7
1.2
0.8
0.8
1.2
0.6
0.7
1.4
0.9
1.3 (2.0)
1.8 1.1
1.1 1.5
3.6 1.5
1.7 0.3
2.5
2.7
1.0
0.0
1.4
Provision Expense/Interest Margin
State Banks
Private FX Banks
Private Non-FX Banks
Foreign Banks
All Banks
NA
NA
NA
NA
NA
44.9
20.7
17.1
17.2
29.2
36.0
16.3
16.7
12.8
28.2
35.5
18.1
13.4
8.7
22.3
47.3
14.9
27.2
14.6
23.4
26.2
12.9
12.0
16.7
18.6
38.7
38.9
15.0
45.0
38.4
22.2
26.3
10.5
0.0
13.4
Note: Negative or small ratios in 2000 because of reverse loan loss provisions
Source: Bank Indonesia, Banks’ Financial Statements, authors’ calculations
47
18.9 14.9
9.1 8.8
3.3 3.8
22.4 13.3
16.3 11.3
(4.5)
26.3
10.5
0.0
13.4
Risk Weighted Total Capital
Assets
CAR-1
CAR-2
CAR-3
Mandiri
91.9
25.5
27.7%
16.7%
5.8%
BNI
66.2
12.0
18.2%
9.9%
1.7%
BRI
46.2
9.6
20.9%
18.7%
16.6%
BTN
6.6
0.8
12.1%
11.6%
11.1%
CAR-1 is published Capital Adequacy Ratio.
CAR-2 is CAR-1 with additional loss provision of 50% of restructured assets.
CAR-3 is CAR-1 with additional loss provision of 100% of restructured assets.
Figures are in Rupiah trillions
Source: Banks’ Financial Statements and authors' calculations.
Bank
Panel C
73.3
45.9
47.5
11.2
Cat. 2
5.9
4.8
1.2
0
48
Assets
0.1
0.3
0
0
restructuring
0.1
3.3
0
0
Assets
20.2
10.9
2.0
0.1
Foreclosed Equity from. Tot.Restr.
6.5
2.6
2.6
0.4
Loan Loss
restr. asset Provisions
10.1
9.0
5.5
2.4
1.0
4.3
0
0.7
50% of
9.0
2.4
4.3
0.7
NPL-1
-3.5%
0.5%
-3.0%
-2.5%
Net
Net
132.8%
139.6%
91.8%
150.4%
164.9%
Net
35.7%
29.8%
35.0%
50.2%
41.6%
16.3%
245.8
131.2
94.7
26.8
Cat. 1
14.0
2.4
0.7
0.1
Restructured loans
3.4
0.5
0.9
0.2
Asset (%)
Total SOBs
498.6
177.9
12.4
17.3
12.0
0.5
3.4
33.1
16.6
16.5
-2.3%
7.0%
This table identifies total “restructured” and adjusts NPL to include 50% and 100% of those assets. After deducting loan loss provisions, three net NPL ratios are shown:
Net NPL-1 = (Total NPL - Loan Loss Provisions ) / total loans (published numbers)
Net NPL-2 = (Total NPL - Loan Loss Provisions + 50% of restructured loans) / total loans (adjusted numbers)
Net NPL-3 = (Total NPL - Loan Loss Provisions + total restructured loans) / total loans (adjusted numbers)
Mandiri
BNI
BRI
BTN
(C 3,4,5)
6.5
2.6
2.9
0.4
Total Loans Total NPLs
1.4
0.9
0.6
0.1
%
NPL-3
24.0%
24.2%
1.1%
-1.8%
Total Assets
1.6
1.3
1.4
0.2
Net (%)
NPL-2
10.3%
12.4%
-1.0%
-2.2%
Bank
Panel B
11.0
7.6
3.4
1.7
Provisions Gross (%)
-2.3%
55.8
35.7
41.2
9.0
(C 3,4,5)
Total NPLs Total Loan NPL Ratio NPL Ratio Prov./NPL Loan to
Total SOBs
498.6
177.9
141.8
23.7
4.5
3.0
4.9
12.4
16.5
7.0%
Notes: Gross NPL ratio reflects NPLs as percent of total loans. Net NPL ratio reflects NPLs less loan loss provisions as percent of total loans;
A negative net NPL ratio indicates that loan loss provisions exceed the amount of NPLs
73.3
45.9
47.5
11.2
Loan Classification
Category 1 Category 2 Category 3 Category 4 Category 5
-3.5%
0.5%
-3.0%
-2.5%
245.8
131.2
94.7
26.8
Mandiri
BNI
BRI
BTN
Total Loans
8.8%
5.7%
6.0%
3.8%
Total Assets
Bank
Panel A
Indonesia : Non-performing loans and capital adequacy of state owned banks – (December 2003)
Table 14
Table 15
Indonesia : Bank Costs and Margins
(percent of total assets)
1982
1988
1989
1990
1991
1995
1997
2000
2002
2003
Interest Income
State Banks
Private FX Banks
Private Non-FX Banks
Foreign Banks
All Banks
1.42
1.59
0.91
4.45
1.60
9.57
15.82
16.92
11.71
11.17
10.48
14.32
14.81
12.05
11.60
11.25
16.48
19.56
12.52
13.18
13.57
20.59
25.13
12.99
16.03
10.60
13.07
14.48
11.59
11.99
10.02 9.89
13.91 9.73
19.89 11.45
7.58 8.07
11.91 9.76
12.8
11.7
16.4
8.3
12.0
9.4
9.7
14.4
7.1
9.5
Interest Expense
State Banks
Private FX Banks
Private Non-FX Banks
Foreign Banks
All Banks
4.1
7.95
9.74
9.15
4.82
7.40 7.77 8.08 11.43 7.66 7.73
11.90 10.81 12.49 16.14 9.98 10.83
12.64 11.49 15.03 20.09 10.66 14.68
7.57 7.97 6.95 7.83 6.11 3.45
8.25 8.83 9.29 12.60 8.82 9.02
8.02
7.38
7.01
4.05
7.38
9.2
8.2
11.5
4.0
8.2
5.7
5.8
8.5
2.6
5.5
Net Operating Margin
State Banks
Private FX Banks
Private Non-FX Banks
Foreign Banks
All Banks
2.55
4.00
3.67
4.51
2.99
2.45
2.89
1.78
3.70
2.64
2.63
2.37
1.37
3.64
2.57
2.84
2.26
1.93
3.98
2.91
1.31
2.24
1.87
4.53
1.98
0.92
1.33
0.69
4.02
1.22
0.85
0.91
1.41
2.97
1.07
-1.76
1.61
1.34
1.90
-0.06
0.3
0.6
1.8
2.6
0.8
0.8
1.4
2.3
2.7
1.4
Pre-Tax Return on Assets
State Banks
2.40
Private FX Banks
3.60
Private Non-FX Banks 3.08
Foreign Banks
4.32
All Banks
2.81
1.40
1.93
1.29
1.78
1.68
1.55
1.68
0.78
2.80
1.67
1.78
1.39
0.97
3.02
1.99
0.31
1.24
0.91
3.39
0.97
0.96
1.44
1.09
4.13
1.32
0.74
0.92
1.30
2.89
1.01
0.56
0.67
1.51
2.79
1.01
2.0
1.1
2.1
4.5
2.0
2.3
1.8
2.4
4.1
1.9
Source: Bank Indonesia, Banks’ Financial Statements, authors’ calculations
49