Banking restructuring still a long way off

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.