BI calls on banks to improve their internal controls
BI calls on banks to improve their internal controls
JAKARTA (JP): Bank Indonesia (BI) Governor J. Soedradjad
Djiwandono has called on banks to tighten their internal controls
to ensure all division, especially credit and treasury divisions,
do business prudentially.
He said at a seminar Thursday that internal controls became
more important when a bank entered fee-based income business
involving sophisticated financial techniques and products like
derivatives.
"Almost all bank failures were caused not by the complexity of
financial instruments or inadequate risk management but more by
the failure to observe the basic principles of internal control
and audit," Soedradjad said.
Banks were often lured into taking excessive risks when using
transaction tools like derivatives, Soedradjad said.
He cited Nick Leeson, a former securities trader at Barings in
Singapore, as an example of a bank executive who took excessive
risks in derivative transactions. The huge loss inflicted by
Leeson's transactions caused his bank to collapse in early 1995.
"Observing prudential principles in business is always
important not only for the banking industry but also for the real
sector," Soedradjad said.
"Yes, the systemic risk is in the financial sector. However,
if the financial sector is spoiled, it will affect other
sectors," he said.
The governor called on local firms in the real sector to
improve their equity financing, saying most local firms were
still highly leveraged and burdened the banking industry with
large bad debts.
Bad loans at the country's 239 commercial banks reached Rp
10.4 trillion (US$4.34 million) as of the end of November. This
was 3.26 percent of their total credits.
Soedradjad said Bank Indonesia was preparing a blue print for
the development of an efficient, secure and reliable national
payment system to anticipate the increase in noncash
transactions.
Increasing noncash transactions have challenged the government
to provide legal frameworks to minimize pressure on the current
account deficit and inflation, he said.
Noncash transactions involve a wide range of noncash payment
instruments, ranging from cheques and drafts to credit cards.
Noncash transactions have increased tremendously as is shown
by the increasing volume of daily interbank clearances organized
by the central bank. These have risen from Rp 4.5 trillion in
1991 to Rp 25 trillion (US$10.5 billion) now.
Soedradjad said many central banks were devoting greater
attention to their payment systems and shared similar concerns
about the safety of such payment systems.
He said the payment system had considerable potential risks
that could affect national economic stability.
"Just-in-time services are important but they must be safe
because white collar crimes, like banking fraud, have been
increasing," he said.
He said the blue print detailing matters relating to
institutional organization, policies, legal provisions,
infrastructure, procedures and programs would be developed
progressively.
In the short term, the central bank plans to introduce an
electronic clearing system in Jakarta to speed up the clearing
process, which is still handled manually.
The manual clearing system has caused inefficiencies in the
payments system because it depends on traffic and other factors.
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