Bank supervision tightened

Bank supervision tightened

The measures being taken to cope with problem loans and the new
mechanism of bank supervision being implemented by the monetary
authority reassure us of the long-term, sound foundation of the banking
industry. The US$440 million loan scandal at the state Development Bank
of Indonesia (Bapindo) seemed to teach all of us a great, though an
expensive, lesson.

As Minister of Finance Mar'ie Muhammad and Bank Indonesia's (central
bank) Governor Soedradjad Djiwandono explained in hearings with the
House of Representatives over the last three days, the banking industry
is being set to the tough tasks of overall consolidation to restore it
to stronger footing. This includes subjecting it's operations to
increased scrutiny.

The way that the monetary authority is coping with the huge sum of
problem loans is encouraging because, besides being ad-hoc measures to
remove the overhang non-performing assets, a more effective mechanism of
bank supervision is being enforced to prevent a recurrence of bad loans
and to force banks more accountable and transparent in their lending
operations.

The emphasized scrutiny on the 50 largest borrowers from state banks
makes a lot of sense. The bulk of the Rp 18.8 trillion ($8.7 billion) in
doubtful and bad loans were incurred by state banks. And as the case of
the Bapindo loan scandal indicated, we reckon the bulk of the problem
loans also are owed by big business conglomerates.

We should commend the special team of the finance ministry and
central bank for its courage and integrity in thoroughly investigating
the largest borrowers and for pressuring them to settle their overdue
loans and interest arrears, because we know that many of them have
strong political connections. It is also encouraging to know that
Finance Minister Mar'ie is closely monitoring the team's work. Mar'ie
recently showed his consistency regarding the enforcement of prudent
fiscal and monetary policies by resisting strong political lobbying to
approve a large budget for the procurement of used war ships from
Germany.

Many are welcoming the new mechanism of bank supervision because the
new system will keep bank executives and owners on their toes. The new
mechanism seems to promise better results because each step of the chain
of supervision is being enforced. For example, the central bank has
required banks to keep them apprised of all large loan approvals, are
improving the standards of credit reports and are obliging bank
commissioners (supervisors) to report the findings of internal auditors.

Bank internal supervision also is being strengthened by requiring
internal auditors to report directly to commissioners, imposing tougher
requirements for the appointment of commissioners and obliging banks to
report periodically on any large loans extended to individual or
corporate borrowers related to bank executives or owners. Bank
commissioners are obliged to thoroughly examine projects and assess the
quality of credit securities in case a loan application involves more
than Rp 50 billion.

The new system thus provides the central bank with an early warning
system regarding problem loans.

We hope the measures will not only force banks to fully implement the
prudential rulings but also strengthen the moral courage of bank
executives, notably those at state banks, to resist strong political
lobbyings for loans outside the prudent credit standard procedures. As
Mar'ie himself has admitted over the weekend, and as the Bapindo case
has shown, part of the problem loans had also been caused by
"intervention" by unauthorized parties into bank lending decisions.