Bank Indonesia to install bank inspectors next week

JAKARTA (JP): Bank Indonesia will permanently install its supervisory officials in domestic banks starting early next week in a bid to improve the effectiveness of its banking supervisory function, a senior official of the central bank said on Wednesday.

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

He said the on-site supervision would begin at the giant state Bank Mandiri and later at state Bank Rakyat Indonesia, Bank Tabungan Negara and Bank Negara Indonesia, and five recapitalized banks, including Bank Lippo, Bank Central Asia, Bank Niaga, Bank Internasional Indonesia and Bank Danamon.

He said two supervisory officials would be installed in each bank, with four in Bank Mandiri because of its size.

"At the first stage, the on-site supervision will only cover the nine banks, given their dominant role in the industry," he added.

Idris said the central bank had yet to decide on whether the new measure would also cover foreign banks operating in the country.

He said the supervision was part of an agreement with the International Monetary Fund (IMF), which is providing the country with a multibillion dollar bailout package.

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

He said an off-site supervision system was not able to detect and anticipate the potential risk of banks and to formulate immediate corrective and proactive action.

He explained that under the on-site supervision system, Bank Indonesia officials installed in the banks must report their findings routinely to the central bank and the IMF.

He said the findings would be discussed first with the top management of the monitored banks before they were reported to the central bank.

Idris said that if the findings were significant enough, Bank Indonesia would immediately order the particular bank's management to take corrective measures.

Indonesia's banking sector had been poorly managed in the past and was seen as one of the primary factors sending the country into its current economic and financial crisis.

The government has been spending the equivalent of billions of dollars to help finance the costly bank recapitalization program.

Bank Indonesia must ensure that banks were operating prudently in order to avoid a similar crisis from reoccurring in the future, Idris said.

Bank Indonesia sent inspectors to foreign banks last week to ensure that they met banking regulations, notably the rules on minimum net open positions in foreign exchange deals.

The move was mostly seen by analysts as an effort by the central bank to curb speculation on the rupiah.

The rupiah plunged to a 21-month low of 9,570 per dollar two weeks ago amid domestic political uncertainty ahead of the crucial General Session of the People's Consultative Assembly (MPR) in which President Abdurrahman Wahid will deliver an accountability report on his first year in power.

Political tension has increased in the run-up to the August session of the MPR, the country's highest legislative body which can unseat the President. (rei)