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Banks in Indonesia and Asia in general must remain prudent
with their lending and continue to strengthen their capital so as to
shield themselves against potential shocks, an industry analyst warns.
The potential shocks in question could arise from not only outside the
system, but also from inside in the form of bad loan management,
including that of the property and consumer sectors, Asian Bankers
Summit advisory council chairman William Siedman said Tuesday.
Quoting a saying in the banking business that "bad loans are made in
good times," Siedman warned banks that Asia's fast-paced economies were
in fact the reason to be on high alert for lending problems, like those
that had lately become apparent in the U.S. housing sector.
The recent problem in the U.S. mortgage market was the burst the
followed the previous lending bubble to the subprime market. Economists
have said that if the problem worsens, it could slow down the world's
largest economy, and thus drag down Asia and the rest of the world with
it.
"The potential risks for banks in Asia, including in Indonesia, is,
therefore, the question of whether they have sufficient capital to meet
a downturn that might be caused by anything, including a U.S.
recession," Siedman said during a media briefing at the summit.
"The capital levels and the accuracy of accounting for those capital
levels is something that needs to be considered. In other words, is
your system ready to absorb the shock of a recession?"
Siedman, who chaired a U.S. government enterprise set up to resolve the
savings and loans crisis in the housing sector in the 1980s, said that
it was in the hands of the authorities in each country to look out for
potential lending risks, assess them and set out precautionary policies.
In Indonesia, the central bank has set the industry's minimum capital
adequacy ratio (CAR) -- the ratio between a bank's capital and its
risk-weighted assets -- at 8 percent. Bank Indonesia is also requiring
all the banks in the country to have a minimum capital of Rp 80 billion
(some US$8.8 million) by next year, and Rp 100 billion by 2010.
Siedman said that potential risks would differ from country to country,
but referred to dangers in the housing and consumer-loans sectors, and
possibly the energy sector in Indonesia's case.
"Indonesia is really just getting into consumer lending, and, in that
way, the question is whether it's done on a sound basis," he said.
"We in the U.S. had to learn a lot about consumer lending. Before we
got sufficient reserves against down payments, we had to amend our
bankruptcy laws so that people couldn't just charge a lot of debt on
credit cards and declare themselves bankrupt."
Indonesia was the worst affected in the region during the 1997-1998
Asian financial crisis as many under-capitalized banks had recklessly
disbursed too many loans amid a then booming economy, which had no
alternative financing sources given the underdeveloped state of the
capital markets.
Bank lending grew by a less-than-expected 14 percent to Rp 792.3
trillion last year after Indonesia actually saw its rate of economic
growth slow down, dampening loan demand. Consumer loans accounted for
Rp 226.3 trillion of total lending.
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