Banking reform

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.

M. GDE SIRIANA YUSUF

Jakarta