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.