Financial deregulation, banking development, and the likelihood of banking fragility: the case of Indonesia

Transcription

1 University of Wollongong Thesis Collections University of Wollongong Thesis Collection University of Wollongong ear 2001 Financial deregulation, banking development, and the likelihood of banking fragility: the case of Indonesia Siti Astiyah University of Wollongong Astiyah, Siti, Financial deregulation, banking development, and the likelihood of banking fragility: the case of Indonesia, Doctor of Philosophy thesis, Faculty of Commerce, University of Wollongong, This paper is posted at Research Online.

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3 APPEDIX Table 2.1a: Monetary and Banking Policies 1983-June 1997 Period Pohcies 1983 March Devalued mpiah by 28%) June Removed administration of deposit and credit interest rates on state banks Removed credit ceilings for all banks 1984 Febmary Introduced Certificate of Bank Indonesia (SBI) Introduced discount window facilities 1985 Febmary Introduced money market securities (Surat Berharga Pasar Uang-SBPU) 1986 May Allowed foreign companies to invest in sectors that were open for domestic companies as long as they involved cooperative entities September Devalued mpiah by 31 % Removed ceiling of banks' foreign exchange swap 1987 June Minister of Finance instmcted 4 large state enterprises to transfer their funds in state banks to SBIs Banks have to buy back their SBPU from Bank hidonesia July Introduced managed auction system for issuing SBIs and SBPUs December Permitted foreign investors to buy shares in the stock exchange up to 49%o of the total shares listed on the stock exchange Established secondary stock exchange 1988 October Eased to allow domestic banks, domestic bank branches and joint venture banks to open Eased the restrictions to become foreign exchange banks Allowed non-bank state enterprises (BUM) and non-bank local government enterprises (BUMD) to deposit maximum 50%) of their deposit outside state banks Eased to open mral banks (BPR) Allowed a non-bank financial instittition (BFI) to issue certificate of deposit Allowed foreign banks branches to open sub-branch office in 7 major cities Improved swap arrangement by extending the mattirity of swap premium from 6 months to 3 years Infroduced legal lending limit as follows: i. Credit to a single borrower maximum 20% of the capital of bank/bfi ii. Credit to a group of borrower maximum 50% of bank's/bfi's capital iii. Credit to tiie members of business of the board of commissioners who are shareholders maximum 5% of bank's/bfi's capital iv. Credit to the members of business of the board of commissioners who are not shareholders maximum 15%) of bank's/bfi's capital 284

4 V. Credit to shareholder or owner of the busmess maxunum 10% of tiie share of equity participation in bank/bfi vi. Credit to shareholder and his/her busmess group maxmium 25% of tiie share of equity participation in bank/bfi vii. Credit to members of the board and employees should be Imked to their repayment capacity Lowered banks' reserve requirements from 15% to 2% Introduced income tax from mterest eamed from time deposits and certificates of deposits at a flat 15% which is with the possibility of tax restitution Allowed banks and BFI to raise capital through the issuance of new shares on capital market Banks had to buy SBI of 3 and 6 months to absorb liquidity as a result of reducing reserve requirement December Allowed establishment of a private stock exchange outside Jakarta Allowed foreign investors to participate in the ownership of joint-venttire securities companies and finance companies 1989 January Activated the secondary market of SBI March Issued several decrees as a follow up of October 1988 package April Allowed state saving bank to accept checking deposits May Introduced net open foreign exchange position (OP) for all foreign exchange banks at 25% of their capital Allowed foreign exchange domestic banks (and BFI) to borrow offshore Restricted swap transactions of foreign bank branches with Bank Indonesia September Allowed foreign investors to purchase up to 49% of stocks in the primary October market but did not allow to purchase stock issued by private banks Allowed 100%) of foreign investor ownership as long as the company located in bonded zone of Batam island and exported 100% of their product December Simplified criteria of different taxes for small saver which is free tax income for the maximum balance of a saving account not exceeding Rp.5 million within 1 month Deregulated saving scheme. Allowed banks to develop their saving schemes and BI did not regulate Tabanas and Taska and not guarantee them 1990 January Reduced liquidity credit which is only provided for 4 categories: credit for small farmers, cooperatives, food and sugar procurement, and investment All domestic banks, included BPR, had to allocate minimum 20% of their total credit to small scale industries. Foreign banks and joint venture banks are exempted from this requirement Allowed joint venture banks and foreign bank to operate in Batam island 1991 Febmary Ministry of Finance required 12 large state enterprises to fransfer their deposits in state banks to 1 year SBIs. At the same time. Bank Indonesia bought SBPUs with various maturities from affected banks by 75% of their deposit losses Improved pmdential banking regulation which included as follows: i. Required certain minimum standard of banks' owner, board of directors and board of commissioners 285

5 ii. hnproved the requirement to open sub-branch offices by adopting subject of banking soundness in. Reduced OP from 25%) to 20%o of bank's capital iv. hnposed capital adequacy ratio (CAR) gradually: 5%; 7% and 8% at the end of March 1992, March 1993, and December 1993 respectively V. Requirement to have reserve allowance to cover risks for all classified assets at the minimum of 1%) of total earning assets plus: * 3%) of total eaming assets classified as substandard * 50%) of total eaming assets classified as doubtful * 100%) of total eaming assets classified as unproductive vi. Allowed domestic bank to open overseas branches and invest in equity participation in foreign financial institutions vii. Reduced maximum bank swap to Bank hidonesia from 25%) to 20%) of the capital viii. Regulated the margin trading of foreign currencies September Established commercial offshore team 1992 March Promulgated of new banking act no. 7 of 1992 October Increased minimum paid-up capital for opening new banks from Rp. 10 billion to Rp.50 billion and for joint venture increased from Rp.50 billion to Rp.lOO billion 1993 Febmary Allowed foreign investors to buy commercial bank shares to a maximum 49% of shares listed on the stock exchange Maximum listed shares of state banks is 49%) of the total shares issued May Relaxed some pmdential banking regulation such as the following: i. Total profit from the previous year can be calculated as a component of capital which was previously only 50%) ii. Reduced risk weighting for claims to state owned enterprises and unused credit facilities which previously were assigned a 100% risk weighting to 50%) respectively iii. Reduced the requirement of reserve allowances from the minimum of 1%) to 0.5%) of total eaming assets iv. Widen the scope ofcredit to small scale enterprises Strengthened legal lending limit especially related with group debtor: i. The existing credit is subject to phased reduction from 50%o to 35%) of capital by December 1995 and 20% by December 1997 ii. ew credit was a maximum 20%) of capital Undertaken a serious examination of the problem loans at state banks June Adopted a stop out rate system in the auction of open market operations December Widened the spread of spot of foreign exchange ttansaction from 0.5% to 1% Widened tiie spread of fransaction of bank notes from Rp2 to Rp.3 of Bank Indonesia's rate 1994 January Bank Indonesia stopped issuing indicative foreign exchange rates September Widened the spread of spot exchange fransaction with Bank Indonesia from Rp.20 (1%) to Rp.30 (1.5%) Widened the spread of transaction of bank notes from Rp.3 to Rp.5 of 286

6 Bank Indonesia's rate Changed announcement of conversion rate from in the morning to the aftemoon Increased overau OP and OP for off-balance sheet from 20%) to 25%) of capital and removed the OP for per currency 1996 Febmary Increased statutory reserve requirements from 2% to 3%) June Widened the intervention bands from 3% to 5% July Issued ankee Bond on the ew ork market September Increased statutory reserve requirement from 3% to 5% which will be effective on April 1997 Widened the intervention bands from 5% to 8%) 1997 March Reduced legal lending limit for group debtor and connected debtor to 20%o and 10%) respectively Regulated bank's offshore borrowing that is minimum 80%) need to be used to finance export credit Sources: Bank Indonesia, Annual Report, Various Issues, asution (1994), Cole and Slade (1996) 287

7 Period 1997 July August Table 3.1a: Monetary and Banking Policies: July March 1999 Policies Widened intervention bands from 8%) to \2% Increased SBI rates and terminated SBPU facility Removed intervention bands on foreign exchange rates Placed state owned enterprises fiinds in SBI Controlled non-resident forward selling with a maximum US$5 million per bank, per customer, unless related to the needs of investment in Indonesia and export-import transactions September Government policies as a response to currency, monetary and banking sectors were as follows: i. Continued pmdential monetary and fiscal policies ii. Improved coordination among economics sector activities iii. Improved sound banking environment by providing liquidity for healthy banks encouraging unhealthy banks to merge with or to be acquired by other healthy banks iv. Abolished foreign investment limitations in capital market Declined SBI rates October ov. Payback state-owned enterprises fund in SBI Cut foreign currency-statutory reserve requirement penalty from 0.1 % to 0.04% per day Provided SBPU facility for banks with specific criteria (healthy, related to small scale, credit allocation, perform reserve requirement, 3 montiis mattirity) Government seeks IMF assistance Liquidated 16 banks: Bank Pacific Bank Industri Bank Andromeda Bank Pinaesaan Bank Harapan Sentosa Bank Kosagraha Semesta South East Asian Bank Bank Umum Majapahit Jaya Bank Mataram Dhanarta 10. Bank Citrahasta Dhanamanunggal 11. Bank Dwipa Semesta 12. Bank Jakarta 13. Bank Anrico 14. BankAstiiaRaya 15. Bank Guna Intemational 16. Sejahtera Bank Umum Conducted joint intervention with Bank of Japan and Monetary Authority of Singapore December Decided to allocate Rp.3 billion in cheap loans to help export oriented, small and medium companies and cooperatives. This credit scheme offered by state owned social security 288

8 1998 January April Announced the intention of government to merge 4 state banks into single bank Aimounced the intention to state saving bank (Bank Tabungan egara) to become subsidiary of Bank egara Indonesia In line with the plan for state banks merger the goverment will establish a credit settlement company to settle the non-performing loans of the merged banks Assigned letter of intent, which is: Monetary policy: i. Tight monetary stance ii. Introduced a credit temporary program for small scale enterprises at subsidised interest rates iii. Giving autonomy to Central Bank in formulating and implementing monetary policy Banking policy: i. Planning for privatisation of all state banks ii. Improved transparency and disclosure in banking iii. Removed restrictions on foreign bank branches iv. Eliminated all restiictions on bank lending, otherwise for pmdential reasons, support co-operatives and small scale enterprises V. Introduced government guarantee to all depositors and creditors of domestic banks vi. Established the Indonesian Banking Restmcturing Agency (IBRA) hicreased minimum capital paid-up for opening bank to Rp.250 billion Suspended the operation of 7 national private banks: 1. Bank Kredit Asia (Istismarat) 2. Bank Centris Intemational 3. BankDeka 4. Bank Subentra 5. BankPelita 6. Bank Hokindo 7. Bank Surya Taken over the management of 7 banks: 1. Bank Dagang ational hidonesia (BDI) 2. Bank Danamon Indonesia 3. Bank Umum asional (BU) 4. Bank Tiara Asia 5. BankPDFCI 6. Bank Modem 7. BankEXIM Assigned the letter of intent: Monetary policy: i. Keep tight monetary policy stance ii. Target of monetary program has moved from base money to net domestic assets of Bank Indonesia iii. Bank hidonesia will publish key monetary data on weekly basis iv. Bank hidonesia will appoint high level foreign advisor to assist in the conduct of monetary policy 289

9 May June July August Banking policy: i. Strengthened IBRA ii. IBRA took over the total cost of bank restmcttiring (including cost of recapitalising banks) and repaid the liquidity support of Bank hidonesia Excluded the position of Govemor of Centt-al Bank from tiie new cabuiet Assigned letter of intent: Monetary policy: i. Continued monetary policy stance and will be adjusted as necessary ii. The preparation of legislation on central bank independence Banking policy: i. Address the financial difficulty of the weak banks and establish a sound fiinctioning banking system through moving swiftly to recapitalised, merge or effectively close them ii. Presidential decree will be issued to provide legal power to IBRA Assigned letter of intent: Monetary and banking policies: i. Maintain tight monetary policy as a stabilisation strategy ii. Setting financial sector committee to set the overall strategy for bank restmcttiring Operation of Indonesian Debt Restmcturing Agency (IDRA) Frozen the operation of 3 national banks: 1. Bank Umum asional (BU) 2. Bank Modem 3. Bank Dagang asional Indonesia (BDI) September Announced the Jakarta Initiative Assigned letter of intent: Monetary and banking policies: i. Completed the legal requirement for merger of 4 state banks ii. Intended to issue government bonds to finance bank restmcturing operation 1999 March Closed 38 private national banks, taken over 7 national banks, and intention to recapitalised 9 national banks. Source: Bank Indonesia, Annual Report, Various Issues, IMF, Letter of Intent of the Government of Indonesia (website). The website of Bank Indonesia related to press release in monetary and banking policies. Various Issues 290

10 Banks Bank Aken Bank Sahid Gajah Perkasa Bank Putra Surya Perkasa Bank amura Intemusa Bank Dana Asia Bank Budi Intemational Bank akin Makmur Bank Lautan Berlian Bank Danahutama Bank Orient Bank Papan Sejahtera Bank Pesona Kriyadana Bank Tata Bank Intan Bank Asia Pacific (Aspac) Bank Sewu Bank Hastin Intemational Bank Dewa Rutji Bank Indonesia Raya Bank Baja Intemational Bank Dharmala Bank Indotrade Bank Uppindo Bank Ficorinvest Bank Sino Bank Kharisma Bank Alfa Bank Ciputra Bank Arya Panduarta Bank Umum Servitia Bank Central Dagang Bank Bepede Indonesia Bank Bumi Raya Utama BankBahari Bank Mashill Utama Bank Dagang dan Industri Bank Metropolitan Raya Bank Sembada Artanugraha Table 3.2a: Performance of the 38 closed banks CAR (%) , Total Asset (trillion Rupiah) , , ,281 1, , ,222 1,138 6, , ,566 1, ,008 4,131 2, ,213 1, Liabilities * (trillion Rupiah) , , , , , , , , , , , , , , , , , et Assets (trillion Rupiah) , , ,381-1, , , , umber of offices The ability of owner to add capital >20%** * It is own proxy of total liabilities such as deposits, inter-bank borrowing, and borrowing from Bank Indonesia based on the performance of the respectively banks (BI web site, 13 March 1999). But it does not cover the lay off cost and other liabilities. ** If the owner has ability to add the capital minimum of 20% of the amount to achieve CAR at 4% level but the bank is closed, it might be related to either fail in business plan or fit and proper test, or fail both of them. = no, =yes. Source: website of Bank Indonesia, 13 March

11 Table 3.3a: Performance of Taken Over Banks Banks 1 Bank Rama 2 Bank usa ational 3 Bank Tamara 4 Bank Pos usantara 5 Bank Risjad Salim Int'l 6 Bank Jaya Intemational 7 BankDuta CAR (%) Total Asset (trillion Rupiah) 1,484 6,033 3, ,716 1,133 5,750 Liabilities * (trillion Rupiah) 1,226 8,144 3,833 1,501 2,442 2,064 4,166 et- Assets (trillion Rupiah) 258-2, ,585 umber of OflBces The abihty of owner to add capital >20% *) It is a proxy of total liabil ities Source: website of Bank Inc lonesia, 13 March 1999 Table 3.4a: Performance of Recapitalised Banks Please see print copy for image *) It is a proxy of total liabilities Source: website of Bank Indonesia, 13 March,

12 Table 6.1a: F-Statistics of the LM tests by using VAR(3) for LFSR LGDPR RDR RDIF, 1983:1-1997:2 LM(1) LM(2) F(l,41) Critical value of F(l,41) and F(2,40) at 1% level are 7.27 and 5.18 F(2,40) Table 6.2a: F-Statistics of tiie LM tests by using VAR(l) for LFSR LGDPR RDR RDIF, 1983:1-1999:2 LM(1) LM(2) LFSR LGDPR RDR RDIF F(l,58).3437E Critical value of F(l,58) and F(2,57) at 1% level are 7.08 and 5.01 F(2,57) Table 6.3a: F-Statistics of the LM Test by using VAR(l) for LCREDITR LFSAR LBIR CAPER RLR RSBIR, 1984:1-1997:2 LCREDITR LFSAR LBIR CAPER RLIR RSBIR LM(1) F(l,45) LM(2) F(2,44) Critical value of F(l,45) and F(2,44) at 1% level are 7.21 and 5.12 Table 6.4a: F-Statistics of the LM Test by using VAR(4) for LCREDITR LFSAR LBIR CAPER RLR RSBIR, 1984:1-1999:2 LCREDITR LFSAR LBIR CAPER RLIR RSBIR LM(1) F(l,31) LM(2) F(2,30) Critical value of F(l,31) and F(2,30) at 1% level are 7.50 and

13 Table 6.5a: F-Statistics of the LM Test by using VAR(l) for LCREDITSR LFSASR LBISR CAPERS RLSR RSBIR, 1984:1-1997:2 LCREDITSR LFSASR LBISR CAPERS RLIRS RSBIR LM(1) F(l,45) LM(2) F(2,44) Critical value of F(l,45) and F(2,44) at 1% level are 7.21 and 5.12 Table 6.6a: F-Statistics of tiie LM Test by using VAR(2) for LCREDITSR LFSASR LBISR CAPERS RLSR RSBIR, 1984:1-1999:2 LCREDrrSR LFSASR LBISR CAPERS RLIRS RSBIR LM(1) F(l,45) LM(2) F(2,44) Critical value of F(l,45) and F(2,44) at 1% level Are 7.21 and 5.12 Table 6.7a: F-Statistics of the LM Test by using VAR(2) for LCREDITR LFSAR LBIR CAPER RLR RSBIR, 1984:1-1997:2 LCREDITR LFSAR LBIR CAPER RLIR RSBIR LM(1) F(l,38) LM(2) F(2,37) Critical value of F(l,38) and F(2,37) at 1% level Are 7.35 and 5.21 Table 6.8a: F-Statistics of the LM Test by using VAR(3) for LCREDITR LFSAR LBIR CAPER RLR RSBIR, 1984:1-1999:2 LCREDITR LFSAR LBIR CAPER RLIR RSBIR LM(1) F(l,38) LM(2) F(2,37) Critical value of F(l,38) and F(2,37) at 1% level Are 7.35 and

14 Table 6.9a: F-Statistics of the LM Test by using VAR(2) for LIPR LCREDITR LIGR LFPR, 1983:1-1997:2 LIPR LCREDITR LM(1) F(l,45) LM(2) F(2,44) Table 6.10a: F-Statistics oftiielm Test by using VAR(l) for LIPR LCREDITR LIGR LFPR, 1983:1-1999:1 LIGR CFPR E Critical value of F( 1,45) and F(2,44) at 1% level are 7.21 and 5.12 Critical value of F(l,56) and F(2,55) at 1% level Are 7.12 and

15 DATA DESCRIPTIO All of the data series that are used in this thesis are based on secondary data and most of the data have been published publicly. The description of the data are as follows. Saving through the banks is savings that can be mobilised by banks (deposits liabilities of banks) in both domestic and foreign currency denominations, consistmg of demand deposits, time deposits, and saving deposits. Saving after minimum reserve requirement is saving through the banks minus its minimum reserve requirement. Credit from banks is credit to the private sector in domestic and foreign currency denominations and it excludes credits extended to bank branches abroad. In addition, all nominal saving and credit are deflated by the GDP deflator to obtain the real term. The same procedure is applied for other variable to obtain the real value except for the real term of interest rates. Credit from banks by economic sectors is credit to the private sector in domestic and foreign currency denominations by economic sectors, such as agriculture, mining, manufacturing industry, frade, services rendering industry, and others. Investment is one of the components of gross domestic product (GDP) that is gross fixed capital formation. Private Investment and public investment since 1988:1-1999:1 is obtained based on data from Central Bureau of Statistics. The data of investment before 1988:1 is available quarterly in total (not separated between private and public investment). Therefore, the share of the private investment for 1983:1-1987:4 are proxied by using the share of private investment based on Chan and Pangestu (1996). Deposit Interest Rates is weighted average interest rates on three months mpiah tune deposit. 296

16 Lending Interest Rates is weighted average of interest rates on investment credit. Interest Rates of Certificate of Bank Indonesia (SBI) is the interest rates of 28 days of certificate of Bank Indonesia (the SBI rates). In addition, the real interest rates is calculated as the interest rates minus the expected inflation rates. The expected inflation rates is proxied by the rate of inflation (measured using the consumer price index) with a one-year lag. Capital is capital equity, which is included reserve and profit and loss. Total assets is obtained from total assets based on the official publication in hidonesian Financial Statistics. Depreciation of the domestic currency is calculated in yeariy basis as follows: DEPR, = (}ogexrate, -\ogexrate,_^)''\qo. hi addition, the same formulation is used to calculate the domestic inflation rates, which is as follows: IF, = (logcpi, - logcpi,_^)*\00, where CPI is the consumer price index. et capital flows of the private sector is obtained from the net private capital in capital transactions of the balance of payments. 297