Sat, 21 Feb 2004

Banking restructuring still a long way off

Dadan Wijaksana, The Jakarta Post, Jakarta

Despite years of painful and costly restructuring, the country's banking sector has yet to emerge as a fully sound financial system and remains vulnerable to shocks, banking experts said on Friday.

The massive restructuring work carried out since the late 1990s financial crisis is still in its early stages and focused mainly on improving banks' financial indicators, while little has been done to restructure banking operations such as mechanisms for risk management and internal control, the experts said.

"Improving the operational aspects will be the center of the next phase of the banking restructuring process, which will ensure that the financial health indicators can be sustained in the long run," Muliaman Hadad, head of Bank Indonesia's division on financial system stability, said at a seminar here.

The seminar, Post-IMF Efforts to Restructure and Salvage the Banking Sector, featured speakers such as Indonesian Bank Restructuring Agency (IBRA) deputy chairman Sumantri Slamet, Bank Negara Indonesia commissioner Dradjad Wibowo and Bank Mandiri vice president I Wayan Pugeg.

Muliaman said the reason behind the central bank's launch of the Indonesian Banking Architecture Blueprint was to strengthen the sector with regard to its asset structure, internal and external controls, including the ability to conduct proper risk assessments, and its ability to play an intermediary role.

The program lays out a policy direction for the banking sector, to be implemented in stages over the next 10 years to eventually create a sound, strong and efficient banking system. This assumes that a resilient banking system should form a key element in promoting economic growth and supporting financial system stability.

All of the speakers at the seminar shared Muliaman's view that there were still lots of work needed to improve the banking sector as a whole, not just its financial condition.

Dradjad of Bank Negara Indonesia said that although some indicators to measure a bank's financial shape -- such as capital adequacy ratio and non-performing loans -- had significantly improved since the start of the restructuring process, recent banking frauds exposed poor control mechanisms and risk assessment skills.

"In fact, it was those things that were the main reason why we had the banking crisis in the first place.

"It's clear that a failure to address those operational aspects may well lead us to another crisis," said Dradjad, who is also a director at the Institute for the Development of Economics and Finance.

Dradjad was referring to recent disclosure of lending scams at two of the country's banking heavyweights, Bank Negara Indonesia and Bank Rakyat Indonesia, in what he said were early warnings to bankers of how vulnerable the sector still was.

Indonesia embarked on a massive bank restructuring program in the late 1990s, spearheaded by IBRA, to help out the country's ailing banking sector, which was severely hit by the devastating crisis. The program cost about Rp 450 trillion worth of recapitalization funds, making it the costliest bank bailout among crisis-hit countries in the region.