The liquidation of Bank IFI sent out a wake-up call to all depositors, that banks can just fail without any advance warning. It also sent out a strong message that there is no safe haven when it comes to saving or investing money.
Almost 54 percent of the third-party funds at Bank IFI were not covered by the deposit insurance scheme. This money will be reimbursed to its depositors only if there are enough assets left after the bank is liquidated, which is highly unlikely.
Gone are the days when saving money in a bank was safer than putting it under the mattress. This may sound strange but this is exactly what the government has been aiming to do, i.e. to raise public awareness that every investment carries a risk.
It is therefore important to choose where to bank, carefully. We all want to ensure that our hard-earned money is safe. But just how do we do this with the myriad banks operating in Indonesia? Are there such thing as ratings for banks?
While such a rating system is indeed much needed and would be highly appreciated, unfortunately it will never exist. Bank Indonesia, as the bank supervisory authority that knows every bank inside-out, has never issued any kind of bank rating.
Such a rating system would not be conducive to maintaining stability in the financial sector. Instead, it would create havoc as customers shifted their money from one bank to another based on fluctuations in the ratings.
Customers are therefore expected to become knowledgeable about good banking practices in order to make informed decisions. There are at least three issues a prospective customer should consider when choosing where to bank.
First is to ensure that the bank is part of the Deposit Insurance Agency /LPS, that will reimburse customers if the bank fails. Involvement with the LPS is usually advertised with a bright-yellow logo on banks' windows or doors.
In itself, however, LPS membership is not sufficient. Not every deposit will be reimbursed if a bank fails. The LPS scheme does not cover deposits with interest rates exceeding the LPS rate and/or in amounts exceeding the maximum allowed per person.
Both the LPS rate and maximum amounts insured may change from time to time, so it is important to always get the latest updates. Even more important is to comply with these two rules. At the time of liquidity crisis, just as now, banks often offer high deposit interest rates to attract funds. While getting fat interest is tempting, it is not worth the risk of losing all the money should the bank fail.
In fact, offering a high deposit rate beyond the LPS rate is arguably a sign that the bank is having a liquidity problem.
The second issue is the bank's financial soundness. The strength of a bank is indicated by the size of its capital relative to its risks, commonly known as Capital Adequacy Ratio /CAR. CAR shows the capacity of a bank to meet its liabilities and to absorb a variety of risks. In the most simple formulation, a bank's capital is the "cushion" for potential losses, which protects the bank's depositors from losing their money.
An intelligent customer would also scrutinize the bank's financial statement. Since not everybody is skilled at reading a balance sheet, it might be useful to ask for help from a competent friend. One should look for important indicators such as asset quality and net interest margin. These numbers can provide insight into a bank's performance.
The third determining factor in selecting a bank is services offered. It is good to understand beforehand what your needs are, and then find the bank that is the best fit. Some people love to bank online, others avoid it like a plague. A businessman needs a bank account that can provide him with sophisticated features while a retiree thinks an ATM service is sufficient.
Along with services comes fees. A savings account will slowly diminish if the interest earned cannot make up for account fees charged. There can also be hidden fees to watch out for. Always ask a potential bank what they charge for specific services that will be used frequently. Just remember the old adage that there is no such thing as a free lunch.
When selecting a bank, we are choosing what could be a lifelong personal and business partner. It is always better to do a little homework before committing.
Almost 54 percent of the third-party funds at Bank IFI were not covered by the deposit insurance scheme. This money will be reimbursed to its depositors only if there are enough assets left after the bank is liquidated, which is highly unlikely.
Gone are the days when saving money in a bank was safer than putting it under the mattress. This may sound strange but this is exactly what the government has been aiming to do, i.e. to raise public awareness that every investment carries a risk.
It is therefore important to choose where to bank, carefully. We all want to ensure that our hard-earned money is safe. But just how do we do this with the myriad banks operating in Indonesia? Are there such thing as ratings for banks?
While such a rating system is indeed much needed and would be highly appreciated, unfortunately it will never exist. Bank Indonesia, as the bank supervisory authority that knows every bank inside-out, has never issued any kind of bank rating.
Such a rating system would not be conducive to maintaining stability in the financial sector. Instead, it would create havoc as customers shifted their money from one bank to another based on fluctuations in the ratings.
Customers are therefore expected to become knowledgeable about good banking practices in order to make informed decisions. There are at least three issues a prospective customer should consider when choosing where to bank.
First is to ensure that the bank is part of the Deposit Insurance Agency /LPS, that will reimburse customers if the bank fails. Involvement with the LPS is usually advertised with a bright-yellow logo on banks' windows or doors.
In itself, however, LPS membership is not sufficient. Not every deposit will be reimbursed if a bank fails. The LPS scheme does not cover deposits with interest rates exceeding the LPS rate and/or in amounts exceeding the maximum allowed per person.
Both the LPS rate and maximum amounts insured may change from time to time, so it is important to always get the latest updates. Even more important is to comply with these two rules. At the time of liquidity crisis, just as now, banks often offer high deposit interest rates to attract funds. While getting fat interest is tempting, it is not worth the risk of losing all the money should the bank fail.
In fact, offering a high deposit rate beyond the LPS rate is arguably a sign that the bank is having a liquidity problem.
The second issue is the bank's financial soundness. The strength of a bank is indicated by the size of its capital relative to its risks, commonly known as Capital Adequacy Ratio /CAR. CAR shows the capacity of a bank to meet its liabilities and to absorb a variety of risks. In the most simple formulation, a bank's capital is the "cushion" for potential losses, which protects the bank's depositors from losing their money.
An intelligent customer would also scrutinize the bank's financial statement. Since not everybody is skilled at reading a balance sheet, it might be useful to ask for help from a competent friend. One should look for important indicators such as asset quality and net interest margin. These numbers can provide insight into a bank's performance.
The third determining factor in selecting a bank is services offered. It is good to understand beforehand what your needs are, and then find the bank that is the best fit. Some people love to bank online, others avoid it like a plague. A businessman needs a bank account that can provide him with sophisticated features while a retiree thinks an ATM service is sufficient.
Along with services comes fees. A savings account will slowly diminish if the interest earned cannot make up for account fees charged. There can also be hidden fees to watch out for. Always ask a potential bank what they charge for specific services that will be used frequently. Just remember the old adage that there is no such thing as a free lunch.
When selecting a bank, we are choosing what could be a lifelong personal and business partner. It is always better to do a little homework before committing.
