Strong anchor for banks<\/p>\n
The criteria for national anchor banks that was announced by
\nBank Indonesia last week will accelerate the pace of
\nconsolidation of the 132 banks into a sound, strong and
\nefficient, yet leaner banking industry through mergers and
\nacquisitions.<\/p>\n
The sets of qualitative and quantitative requirements are so
\ncomprehensive that most of the existing banks will need to merge
\nwith bigger ones in order to survive as national-class banks, or
\nconvert into specialized or rural banks with tight restrictions
\non both their scope of business and their location. Only an
\nanchor bank will be eligible to acquire other banks and to
\noperate nationwide.<\/p>\n
These stringent requirements, combined with the phase out of
\nthe government's blanket guarantee on bank deposits and claims
\nthat will start next year, will unleash stronger market forces to
\nscreen out weak or under-performing banks.<\/p>\n
The central bank said none of the 132 banks had fully met all
\nthe requirements for national anchor banks, but 40 of them had
\nthe potential to do so, meaning that they had already met many of
\nthe criteria.<\/p>\n
The directives on the qualifications to become a national
\nanchor bank are part of the framework of guidelines set for
\nspeeding up the implementation of the 2004 national bank
\narchitecture, which the central bank considered too slow.<\/p>\n
The bank architecture, scheduled to be fully implemented by
\n2014, imposes even much tougher requirements in order to be
\nqualified as a national and international class bank. Based on
\nthis design, the national banking landscape will feature only two
\nto three international-class banks with capital exceeding Rp 50
\ntrillion (US$5.13 billion) and three to five national anchor
\nbanks with capital ranging from Rp 10 trillion to Rp 50 trillion.<\/p>\n
Thirty to 50 smaller, specialized or focused banks with
\ncapital ranging from Rp 100 billion to Rp 10 trillion, and
\nthousands of rural or community banks with capital less than Rp
\n100 billion will supplement the national anchor and
\ninternational-class banks.<\/p>\n
However, higher capital standards, though very important, are
\nnot sufficient to build a sound, strong and efficient bank
\nbecause, as the recent discovery of huge numbers of bad loans at
\nthe country's largest bank showed, effective risk management is
\nthe key to sound operations.<\/p>\n
The central bank, therefore, has rightly set two layers of
\ncriteria for a bank to become a national anchor bank. The first
\nlayer features requirements to become a well-performing bank that
\nincludes a minimum core capital of more than Rp 100 billion, a
\ngood governance system, effective risk-management and a minimum
\ncapital adequacy ratio (CAR) of 10 percent.<\/p>\n
The second layer covers a minimum CAR of 12 percent, minimum
\nreturn on assets of 1.5 percent, credit growth of 22 percent,
\nloan to deposit ratio of 50 percent, ratio of bad credit to total
\nlending at 5 percent, and being listed on the stock exchange.<\/p>\n
These two sets of criteria actually support each other. Good
\ncorporate governance is the foundation for developing effective
\ninternal control systems and a reliable risk management. Big
\ncapital is necessary to enable a bank to provide lifeblood to the
\neconomy and a bank must make reasonable earnings to further
\nstrengthen its capital and expand its operations. Effective risk
\nmanagement is pivotal for banks as banking inherently involves
\ntaking a wide array of risks.<\/p>\n
The requirements for becoming an anchor bank are so tough that
\none may rest assured that the country's banking landscape will
\nconsist only of sound and strong banks.<\/p>\n
This is, however, correct only on paper. The criteria are
\nmeaningless without proper enforcement and this in turn is
\npossible only if the central bank, as the supervisor of the
\nbanking industry, is capable of conducting effective supervision.<\/p>\n
Effective supervision requires Bank Indonesia's supervisors to
\nbe well appraised of the decision-making structures and
\noperations of all banks. Only well-informed supervisors with high
\nintegrity will be capable of assessing, from time to time, the
\nintegrity and competence of bank management and understanding the
\nrisks taken by banks and their current and future profitability
\nand earnings.<\/p>\n
Recent cases where lending frauds and other banking crimes
\nwent undetected for almost a year shows how the central bank has
\nto work much harder to improve the technical competence and
\nintegrity of its bank supervisors.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/strong-anchor-for-banks-1447893297",
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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