VIEW POINT: Our banks: Grossly inefficient, yet highly profitable

Do you know that our banks are among the most inefficient yet the most profitable in the ASEAN region?

Perusing the financial reports of the publicly-traded banks, one would see banks in Indonesia enjoying an average net interest margin of 5.53 percent or nearly twice that of their peers in other ASEAN countries.

What is strange is that their cost to income ratio stood at almost 80 percent as of January, compared to 40 to 60 percent in neighboring ASEAN countries, indicating operational inefficiency.

But how could such an anomaly have occurred, while the market is crowded with more than 120 city-based banks, not to mention hundreds of secondary banks in the rural areas? Oligopoly, says the government anti-monopoly watchdog (KPPU).

The KPPU told a hearing with the House of Representatives on Wednesday it had found strong indications of oligopolistic practices in the banking industry whereby the top 10 largest banks control almost 80 percent of the market, leaving the other 110 banks with the remaining 20 percent. 

Further analysis reveals that the five largest banks, of which four are state owned, control more than 60 percent of the banking market.

It was this oligopoly that had enabled the largest banks to control lending rates and keep their net interest margin — the difference between the lending rates banks charge to borrowers and the interest paid by banks to depositors — unusually high, according to KPPU chairman Nawir Messi.

The five largest banks, as the market leaders, control the deposit market and set the trends in lending rates, but the other 115 banks, due to their negligible market share and their small deposit base cannot do much to challenge the market leaders.

So the mid- and small-sized banks simply follow the leaders.

Leaders of the banks association (Perbanas), who also attended the hearing with the House, certainly rejected the observations of the KPPU, blaming the high lending rates in Indonesia on high inflation (5 percent a year), the vast areas across the world’s largest archipelago that have to be served with branches or ATM networks and high business risks.

The central bank’s benchmark interest rate currently stands at a historic low of 5.75 percent, but data at Bank Indonesia (BI) shows that the average interest rates for working capital, investment and consumer credit currently stand at 11.5 percent, 11.3 percent and 14.3 percent, respectively.

These rates are charged only on the prime customers. The interest burdens could exceed 30 percent for high-risk borrowers such as credit card holders and small- and medium-scale businesses.

Another glaring shortcoming is the fact that only about 4 percent of banks’ third-party funds are placed in the interbank market, while only the 10 largest banks enjoy excess liquidity.

This not only causes oligopoly in the market but also forces the other 110 banks to compete fiercely for deposits, offering depositors rates higher than the 5.5 interest ceiling set by the Deposit Insurance Corporation (DIC), thereby further contributing to raising interest rates.

BI deputy governor Halim Alamsyah has confirmed that competition to raise deposits has been so fierce lately that several banks have been luring depositors with interest rates higher than the ceiling of 5.5 percent set by the DIC, putting depositors at risk of losing their money.

The Deposit Insurance Law stipulates that any bank with savings or time deposit accounts offering interest rates higher than the maximum rate set by DIC would not be refunded if the bank went bust.

Extremely high lending rates, acutely inadequate infrastructure and grossly inefficient logistics systems have become a big disadvantage for businesses in Indonesia. 

The interest costs Indonesian businesses have to pay are twice as high as those charged on their counterparts in Malaysia, Thailand, Singapore and China. These high capital costs have deterred new investments because new businesses have to generate unusually high returns.

It is simply unfair and economically unwise to allow commercial banks to continue to enjoy net interest rate margins of 5 to 6 percent while a large chunk of their funds have been ploughed into the financial market. The government, if necessary, should pressure state banks, which still account for around 40 percent of the industry’s total assets, to act as the trend setters, leading credit expansion at reasonably low rates to the government-selected priority sectors.

Seen from their multiplier impact on the economy, it is much better for the state banks to significantly expand lending to the real sector at relatively low credit interest rates, rather than booking high profits but at the expense of economic growth. 

The government therefore should inject more competition into the banking industry by allowing mergers between mid-size banks to build up strong competitors to the five largest banks.

One way of doing this is by approving the planned merger between Singapore’s Bank DBS and Bank Danamon and the planned acquisition by Bank of Tokyo-Mitsubishi UFJ, the largest bank in Japan, of Bank Tabungan Pensiunan Nasional to build strong contenders to the top five players.

However, only jawboning banks to lower lending rates may compromise the quality of their risk management.

It is also imperative for the government to reduce the persistently high business risks by accelerating reform measures in the civil service, taxation, customs and legal sectors. Adverse business condition would expose businesses to high risks of debt default.

It would be better for banks’ credit risk management if BI kept improving the capacity of its credit bureau to provide lenders with more reliable, comprehensive information on debtors. 

The writer is senior editor at The Jakarta Post.

Vincent Lingga | Opinion | Sun, March 17 2013, 9:47 AM Paper Edition | Page: 5

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Singapore national eye center looks to closer ties with Indonesia

The Jakarta Post Body and Soul Wed, March 06 2013, 1:25 PM Paper Edition Page: 22

An eyeful: Doctor Donald Tan (left) operates on a patient at Singapore National Eye Center. The center is eyeing closer ties with Indonesia. (Courtesy of Singapore National Eye Center)
The Singapore National Eye Centre (SNEC) last week invited journalists from Indonesia, including Vincent Lingga from The Jakarta Post, for a two day visit and briefing from its renowned ophthalmologists. His report:

We happened to bump into Winawati Sutisna from Jakarta who was on a visit to the International Patient Service department at the SNEC to consult with an ophthalmologist about treatment for her 10-year old daughter’s strabismus, or squint-eye.
“I learnt from an ophthalmologist in Jakarta that the SNEC is the best place in the region to treat my daughter’s problem,” Winawati said.

She paid S$90 (US$72.30) for a consultation which she said was not much more than the fees charged by a senior ophthalmologist at a modern private eye hospital in Jakarta.
Winawati is just one of the tens of thousands of Indonesians seeking quality healthcare or simply having health checkups at government or private hospitals in Singapore.

The latest data from the health ministry shows that last year around 18,000 visitors from Indonesia went to Singapore for medical attention. That’s almost 50 percent of the total number of foreigners who travel to there for health services.

The Indonesian government has been trying to encourage private investment in healthcare, allowing foreigners to hold up to 100 percent equity in private hospitals in the hope that an increased foreign presence will motivate state hospitals to improve their services.

Despite this expansion, Indonesians who can afford it prefer to go abroad. They are the major contributors to medical tourism in neighboring countries, notably Singapore and Malaysia
According to the Mayapada Health Care group, Indonesians spend more than US$750 million annually to travel to Singapore, Malaysia or Australia for medical purposes.

As the most modern, well-equipped specialist in eye care in the region, the SNEC has become increasingly popular for Indonesians from cities other than Jakarta, which do not have modern eye hospitals.

Since its opening in 1990, the center has steadily expanded and now covers nine subspecialties: in cataract and comprehensive ophthalmology; corneal and external eye disease; glaucoma; immunology and vitreo-; neuro-ophthalmology; ocular inflammation; oculoplastic and aesthetic eyeplastic; paediatric ophthalmology and strabismus; and refractive surgery.

Last year alone, the SNEC managed 275,000 outpatient visits, 20,000 surgeries and more than 13,000 laser procedures.
Doctor Ho Ching Lin, head of the glaucoma department at the SNEC, said as the local and regional referral center for secondary and tertiary management of glaucoma, her department manages more than 40,000 glaucoma attendances annually.

“About 2,000 of them are visitors from Southeast Asia, including Indonesia,” Ho added.
SNEC Medical Director Donald Tan, however, did not see the increasing popularity of his center as a zero-sum game with eye care hospitals or clinics in Indonesia.

“The SNEC complements eye hospitals in Indonesia. We are actively involved in clinical trials and research into the causes and treatment of major eye conditions such as myopia and glaucoma.
“Thousands of ophthalmologists from the region, including Indonesia, have participated in SNEC courses and meetings, which are organized annually,” added Tan, who last year was elected as first non-American president of the US-based Cornea Society.

“I myself and several senior ophthalmologists from the SNEC have visited Indonesia often for lectures or conferences with Indonesian eye specialists. We also cooperate with several eye hospitals in Indonesia like the Jakarta Eye Center and the National Eye Center in Cicendo, Bandung,” Tan said.
SNEC ophthalmologists and eye specialists from the region regularly exchange views and best practices through the annual meetings of the Asian Association of Eye Hospitals.

The best competitive advantage of SNEC has is the Singapore Eye Research Institute (SERI), one of the largest eye and vision research institutes in the Asia Pacific region in terms of staff numbers, grant income, research initiatives and innovations and inventions.

SERI director Wong Tien Yin said the multi-ethnic composition of the Singapore population is really an advantage because therapies and diagnoses that have been developed in the West may not be directly
applicable to Asia.
“Its ability to test diagnostics and therapeutics with patients of three major ethnic groups positions makes SERI the eye laboratory for the whole Asian market,” Wong added

Research at SERI, which is attached to the SNEC complex, has helped the SNEC develop and apply new eye care services, for example, Lasik, a wonders of modern medicine and technology to improve vision and do away with spectacles or contact lenses.

Cataract extraction and intraocular lens implantation is the most common operation performed at the SNEC with more than 10,000 cataract procedures each year, by a team of over 55 full time ophthalmology specialists.

“Those who plan to have laser vision correction can now look forward to a new technique beyond LASIK, with the introduction of SNEC ReLEx,” said Cordelia Chan, head of the refractive surgery service.

Chan explained that unlike conventional LASIK which destroys the inner corneal tissues, the new procedure does not create a flap in the cornea and uses only one laser for the entire process, thereby resulting in a much stronger eye and less immediate postoperative discomfort and tearing.

Tan and his team have developed and patented a new technique for cornea transplants, which used to require at least 20 stitches and a recovery of six months. The new technique, called DMEK, already used worldwide, minimizes invasive corneal transplantation, thereby reducing damage to the new cornea’s cell.
An increasing number of middleclass and high-income Indonesians, especially those in the resource-rich provinces with direct flights to Singapore, look for quality healthcare in the city state, well known as providing the best healthcare center in Southeast Asia.

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APEC Summit will speed up economic integration

Vincent Lingga, Singapore Opinion Tue, February 26 2013, 9:01 AM  Paper Edition Page: 6

Economic and technical cooperation (Ecotech) and connectivity were predictably the most vigorously debated topics during the two-day conference of the Pacific Economic Cooperation Council (PECC) that ended here on Saturday.

The first Pacific community seminar was held in September 1980 in Canberra, Australia, on the initiative of Masayoshi Ohira and Malcolm Fraser, then prime ministers of Japan and Australia. PECC is a unique organization which embraces and respects diversity. The group actively pursues and promotes a sense of common purpose in a peaceful and prosperous Pacific community based on diversity. PECC has consistently advocated strategies which will help regional economies to reduce the wide gulf in standards of living between members.

PECC has demonstrated a sustained commitment to open regionalism. It works to reduce obstructions to the economic integration of Pacific economies, without trying to divert economic activity away from other economies outside the region.

Leaders of the Asia-Pacific Economic Cooperation (APEC) agreed at their 1994 summit in Bogor to launch what has since become known as the Bogor goals: free, open trade and investment in the region by 2020. Ecotech was set as the third pillar of the agreement, to ensure the goals were politically acceptable in developing members.
Ecotech programs provide APEC’s developing economies with technical assistance to gear them up for free, open trade and investment with the more developed members.

Almost 18 years after the roadmap for Ecotech was drawn up in Osaka, Japan, in 1995 and strengthened at the 1996 summit in Manila, most developing members are disillusioned over the very slow pace of Ecotech activities. They complain about an acute lack of focus and accuse the developed economies of too much emphasis on trade and investment liberalization.

Indonesia’s Tourism and Creative Economy Minister Mari Elka Pangestu warned participants at the conference on Saturday that Ecotech programs in capacity building should be stepped up.
The rationale, according to Jusuf Wanandi, cochair of the conference, is that since the levels of development in the 21 members are not equal, it is impossible to enforce the same rules and timetables with equanimity for all members.

PECC, which was set up in 1980, is a tripartite partnership of senior individuals from business and industry, government, academic and other intellectual circles from more than 23 countries in the Asia Pacific.

Thousands of Ecotech projects have been launched to gather and share information, for training and development of best practices. Ecotech projects, however, are thinly spread out across many areas, lack cohesion and often overlap with similar bilateral activities.

Given the non-binding nature of APEC and in view of the limited funding available, APEC needs to redesign these projects and develop models of best practices in capacity building. Members need to focus on areas which will provide the greatest contribution to economic integration.

One area which caught the attention of conference participants is small and medium enterprises (SMEs). In some APEC countries SMEs account for 90 percent of all businesses and employ as much as 60 percent of the workforce but generate only about 30 percent of exports.
Governments need to improve the business environments to help SME networking and develop strong export-driven companies.

Teng Theng Dar, the director of Business Compass Consultancy in Singapore, wants closer cooperation between SME development centers and higher learning institutions as one of the most effective ways of transferring business competence to SMEs.

The APEC ministerial meeting on SME development in Bali in September in the run up to the Bali summit in October should review capacity-building Ecotech programs and focus them on the business environment and networking.

Improved connectivity was set by an APEC meeting in Jakarta last month as one of the three top priorities, along with free trade and sustainable growth, and became a key theme of discussions at the PECC conference.

But while developing the basic infrastructure for physical connectivity is challenging enough, especially in Indonesia, physical infrastructure is not enough to guarantee economic integration.
Minister Mari, citing the bitter experiences of African countries, noted that regulatory reform, or what she termed as “behind-the-border” rules such as customs clearance and port capacity, is equally important.

ASEAN countries have experienced how non-tariff barriers to trade, notably in the areas of technical standards and customs services, have hindered progress toward economic integration.
Free trade is not only a matter of cutting or removing tariffs. Different standards and assessment practices; different product registration and labeling rules; duplicate testing for quality certification, all increases costs.

As is a regional transit system that requires repeated export, import and transshipment of goods at national borders.
The bulk of the work in developing institutional connectivity lies in regulatory reform which is the domain of governments, not Ecotech programs.

The writer is senior editor of The Jakarta Post.

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