Fri, 19 Mar 1999

Banking reform

The liquidation of 38 commercial banks was announced as an initial measure to save the national banking industry. As banks serve as the main pillars of economic activities, local banks must first be subjected to revamping before the real sector can be revived. In response to this government policy on the banking sector, a number of things need to be put forward as follow-up measures in the national banking reform.

The reform of Bank Indonesia: The fact that there was a credit crunch and banks were being squeezed by their financial trouble and eventually liquidated must have involved quite a complicated process of credit extension. The extension of a loan to a bank must be conducted under the supervision of the monetary authorities, namely Bank Indonesia (BI).

In this respect, we are familiar, for example, with the "triple L" (Legal Lending Limit) regulation. If many of the loans extended by a bank turn into bad debts, the bank itself is to blame because the process of loan extension must have been in violation of the loan extension provisions stipulated by the bank itself. These loans, which have turned into outstanding debts, must have been approved months or even years before.

This shows that BI does not exercise its supervision effectively and this may be caused by any or all of the following reasons: (a) a poor supervising system; (b) corrupt personnel and (c) external intervention.

One thing that may clearly indicate that BI supervision is not effective is the tendency on the part of private banks to place BI people or pensioners as "bumper commissioners" or "bumper directors". Maybe the banks concerned will argue that these BI people/pensioners are hired because of their professionalism, an argument that I cannot accept because BI is a central bank while a commercial bank, unlike BI, is profit oriented.

I tend to believe that they are hired because they can quickly get access to valid information from BI and easily "deal with" their BI colleagues or "juniors" who audit the banks. All these years we have pretended to be ignorant of and turned a blind eye to this ulterior motive behind the hiring of BI people/pensioners by private banks. Therefore, BI must reform itself so that it will be a truly independent monetary authority (in practice, not only in words).

Moral responsibility of the board of directors: Recapitalization or other policies supporting an improvement in the banking industry will not be of much help unless the personnel are subjected to a fundamental reform. As banks undertake a service, we can say that the collapse of the banking industry is attributable to the greedy and careless behavior of banking personnel.

Therefore, it is necessary for BI to continue supervising its members of the board of directors involved in the extension of nonperforming loans to a bank already liquidated but being transferred to another bank before the loans turn into backlogged debts.

Theoretically, it is possible to estimate from the very beginning whether or not a loan will eventually become a bad debt. Even if a loan becomes outstanding later, this credit facility is covered by adequate collateral, in terms of value and legality, set out in complete and orderly credit documentation.

If necessary, BI could also demand that these members of the board of directors should be held accountable, at least morally, for the loans they initially approved. Moral responsibility is an inseparable part of a trust-based business.