Analysts warn BI over on-site inspection plan

JAKARTA (JP): Bank Indonesia's recent measure to carry out an on-site inspection at commercial banks will succeed only if the officials assigned to carry out the job have a strong frame of mind, analysts have warned.

I Nyoman Moena, a senior banking analyst and former Bank Indonesian (BI) director, said here on Saturday that the central bank's supervisory officials must be strong to ensure that past wrongdoing does not reoccur.

"It's very important for the banking supervisory officials to maintain a strong mentality," Moena added.

Bank Indonesia plans to install its banking supervisory officials in nine domestic banks starting on Monday by placing four officials at the giant state-owned Bank Mandiri.

BI said last week that the on-site inspections were aimed at improving the effectiveness of its banking supervisory function. The measure is, in fact, nothing new at all. In the past such an assignment was an integral part of the central bank's supervision task but it did not really work.

Some sources claim it has become public knowledge that many of the banking supervisory officials are easily bribed by bank owners and managers to allow them to break banking rules.

Many people believe that the country's banking crisis, which started in late 1997, was partly caused by the central bank's ineffective and poor supervision system.

But Moena said many of the officials were actually "clean". He said that only a small number of the officials were corrupt.

Moena said that it was unlikely that Bank Indonesia and its supervisory officials would dare repeat the past malpractice given the huge cost of the banking crisis.

"I think they have already learned their lessons from past mistakes," he said.

Moena also pointed out that the work of the supervisory officials would be carefully monitored by the central bank and the International Monetary Fund (IMF).

The implementation of the on-site supervision system is part of an agreement between Indonesia and the IMF.

Centre for Strategic and International Studies economist Pande Raja Silalahi also expressed confidence that the supervisory officials would not dare tamper with their job.

"I think they will no longer dare to commit wrongdoing. They have seen what happened to the Bank Indonesia governor," Pande said, referring to Sjahril Sabirin, who is now in detention at the Attorney General Office due to an alleged involvement in a high-profile Bank Bali scandal.

He said that the relatively higher salary of Bank Indonesia officials would discourage them from being corrupt.

But Pande said that to really prevent past misconduct from reoccurring, Bank Indonesia could introduce a rotation system like in the military, where each person does not have any idea to which bank he or she would be placed.

"It's only a matter of management," he said.

Both Pande and Moena expressed confidence that the on-site bank supervision system would improve the effectiveness of Bank Indonesia's supervisory function.

Moena said that in terms of technical ability, the Bank Indonesia officials would have no problem.

Bank Indonesia has said that in the first stage, the on-site supervision system would be introduced at four state banks: Bank Negara Indonesia, Bank Rakyat Indonesia, Bank Tabungan Negara and Bank Mandiri, and five private banks which had been recapitalized with the help of government financing: Bank Lippo, Bank Central Asia, Bank Niaga, Bank Danamon, and Bank Internasional Indonesia.

The nine banks control about 75 percent of the country's banking assets.

Idris Kadir of Bank Indonesia's banking supervisory division said last week the central bank supervisory officials were being assigned to identify and access the potential risk of the banks, including lending and foreign exchange risks.

Idris said that the on-site supervision system was deemed more effective than the current off-site system, which only focused on the analysis of financial reports.

Indonesia's banking system was badly hit by the currency crisis because many bank owners had violated banking rules, including the legal lending limit regulation by channeling most of a bank's money to affiliated business groups.

The government has closed down 65 banks since the crisis started, and has recapitalized some of the remaining surviving banks at a total cost expected to reach a staggering Rp 430 trillion. The government has issued bonds to finance the cost.

The government and Bank Indonesia are determined to ensure that the banking crisis does not repeat itself. Bank Indonesia has also introduced a fit and proper test for bankers to ensure that they have not been involved in serious banking crimes in the past. (rei)