A Strange Scheme
The government must be very careful in paying in bank liquidity assistance. The 1998 Bank Indonesia Liquidity Assistance problems must not happen again.
THERE are many ways to save banks that are in trouble. During the 1998 crisis, the government established the Indonesian Bank Recovery Agency. Then, 10 years later, Bank Indonesia applied the protocol for dealing with problematic banks in the Bank Century case with the support of the Financial Sector Stability Committee.
With the Covid-19 pandemic ravaging so many companies, from large to small, the government is trying a different method. This crisis has led to non-performing loans and has put pressure on the liquidity of every bank in Indonesia. The government is to inject Rp87.6 trillion into anchor banks, or participating banks that will later act as helping hands from the government to assist banks experiencing liquidity problems and provide working capital for companies, especially micro, small and medium-sized enterprises (MSMEs) that have been impacted by the Covid-19 pandemic.
At first glance there is nothing wrong with this policy. The funds placed with anchor banks will be in the form of deposits and deposit certificates, with a yield equivalent to that of government bonds purchased by Bank Indonesia. Therefore, these anchor banks that have been appointed to help the government will not lose money. But on closer examination, there are risks with this liquidity assistance scheme.
Firstly, a number of these perspective anchor banks are also facing financial pressure because of the loss of liquidity after restructuring customers’ problem loans. As of June 2, there were 5.94 million debtors, from MSMEs as well as non-MSMEs. The restructuring funds channeled through 99 conventional public and sharia banks will total Rp609 trillion.
Secondly, if these anchor banks are not selected carefully, the risks associated with the implementation of the program will be transferred to the anchor banks, namely systemic banks, which will ultimately have the potential to endanger the banking industry as a whole. They will not only face pressure because of internal liquidity, but also of being overwhelmed with work because they will have to select the implementing banks that will put forward the loan proposals. These anchor banks will be referees who will determine whether other banks live or die. Clearly there is a potential for conflicts of interest.
Under this scheme, the liquidity assistance for other banks will eventually be guided by commercial considerations of profit and loss, not simply the desire to restore liquidity of the banks receiving assistance. Although in its implementation this program will involve the Financial Services Authority (OJK), Deposit Insurance Corporation (LPS) and the Development Finance Comptroller (BPKP), is this a guarantee that there will be no collusion between anchor banks and implementing banks in order to help themselves to state funds?
Experience to date has shown that there is always moral hazard when rescuing banks in trouble, as was seen during the 1998 crisis and the rescue of Bank Century. In both these cases, owners who had destroyed their own banks still managed to reap a profit from the rescue process. And the funding for this program came from the state budget, which originated from the issuing of bonds absorbed by Bank Indonesia.
This method is dangerous because it will increase inflation, while the additional amount of money in circulation could close the rupiah to lose value. Unlike the dollar or the yen, the rupiah is not a currency that can readily be traded around the world. We must not bear unnecessary risks while at the same time failing to restore bank liquidity. Therefore, rather than using a new risky strategy, the government should use the method it has tried before, but after making improvements.