Analysts warn BI over on-site inspection plan

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)