I stood here dumbfounded, hardly able to believe that greed in the Indonesian banking industry was not inferior to that in Europe. In Europe, people have long acknowledged that greed caused 2008-2009 banking crisis, which has now spread to the real economy. Greedy bankers made excessive gains without a sense of responsibility for the safety of the financial system and the interest of the wider public.
This apprehension was triggered by concerns voiced by the National Banks Association (Perbanas) that saving interest is already high. Perbanas supports lowering interest rates on lending, but simultaneously deposit rates must be reduced and interest rates kept low. According to Perbanas, Japan's savings interest rate is zero percent. In other countries, a customer is charged a fee for administration and therefore only interest makes savings products
attractive.
Perbanas is critical of the low savings rate among the public and hopes this can be changed without requiring high interest rates. The public, on the other hand, has made complaints about low interest on savings. According to Perbanas, a low interest rate is necessary for the performance of banks so that the banking industry can be healthier and not burdened by high costs.
Perbanas has further underlined that if interest rates on savings are raised, so too much be the interest on loans. That is the consequence. If people want higher gains, Perbanas recommends they invest in capital markets, such as stocks, bonds and so on.
As we see in the above table, interest on savings at top-tier Indonesian banks is relatively lower than those of peers in India but on par with the peers' rates in Malaysia and the Philippines.
However, in terms of current account deficit, Indonesia's data is worse than Malaysia and the Philippines. Higher magnitude of current deficit means that Indonesia needs to save more to support investment, which has grown rapidly in the last five to seven years due to necessary infrastructure projects.
And one way to incentivize households to save more is by giving them decent interest.
After having digested the data carefully, it is fair to say that Indonesian banks might not be entitled to align their saving interest rates with the rates of banks in Malaysia and the Philippines because Indonesia's inflation is much higher.
In a way, India's higher inflation, weaker general government balance and bigger current account deficit are worse than Indonesia's and consequently India has higher saving interest rates.
Despite the lower saving interest rates, Indonesian banks enjoy a generous interest rate of currently 4.75 percent over excess liquidity that banks place at Bank Indonesia in the form of Facilities Bank Indonesia and Fine Tune Operation totaling Rp 191.4 trillion in May 2013.
Does the excess liquidity contain saving funds? There are several types of retail funding. Current accounts should stay at banks as the funds are used to facilitate daily transactions. Time deposits are programmed in line with the maturity of loans given and therefore there is no uncertain liquidity that makes it necessary to place funds at the central bank. Because savings are interest-bearing funds and can be withdrawn at any time, it could be concluded that excess liquidity deposited with the central bank is largely composed of savings deposits.
Hence, BI, which is a public institution, remunerates banks with 4.75 percent interest on the excess cash, while the public has to accept interest of only 1 to 2.25 percent. This is an unfair easy lunch. The Indonesian banking industry already gains the largest profit compared to other industries and even the banking sectors in Asia.
A key driver of the profitability is the very high spread between interest on loans granted by banks and cost of funding.
Favoring lower compensation on savings seems to indicate that their staggering profitability is still not enough. Moreover, although being among the most profitable sectors, Perbanas, as a lobby group for banks, argued in the recent past that the contribution for the Financial Services Supervisory Authority (OJK) should be low and could be taken from premiums paid to the Deposit Insurance Corporation (LPS).
In my view, it is unfair that banks' contribution to the LPS is the same for conservative banks as it is for risk-taking banks, that is, a premium of 0.1 percent, with the bailout cost of Bank Century accounting for nearly 29 percent of the equity of LPS in 2012.
Perbanas' recommendation that the public invest in the capital market could mislead the public, because the banking sector is strictly regulated and savings are guaranteed by the LPS.
The general public mostly has little idea of banking risks. Imagine a mother-housewife or a taxi driver being recommended to trust in an asset manager to venture into the capital market. They could be easily deceived and all their savings could be lost.
Looking back, it can be said that banking crises are mostly caused by greed. Smarter greedy bankers took huge risks to get excessive rewards while banking supervisors were out of step with the times. This has happened time and time again. As said by Nouriel Roubini "bankers are greedy and have been for 1,000 years" and "nothing is going to change".
But for the authority it is a prime challenge. The authority should take the necessary steps to ensure consumer protection and the safety of the financial system. As an example, the Turkish authority had courage to recently impose largest fines on banks totaling US$620 million.
The fines were due to collusion in fixing deposit rates, interest on credit cards and commissions and fees for card services. Such assertiveness should be adopted by the OJK so that, in conjunction with other regulations, a banking crisis can be prevented and the public well protected.
Indonesian interest savings rates should be increased. If slashed even more, then we would have serious issues with the banking industry, such as a lack of competition and regulatory ignorance.
The writer, who has worked in the Dutch banking sector since 1998 as a credit analyst and accountant, is a credit risk portfolio analyst at DHB Bank in Rotterdam.
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