BI defends intervention in banking

JAKARTA (JP): Bank Indonesia Governor J. Soedradjad Djiwandono defended the central bank's increasing intervention in the banking sector yesterday, arguing that it is part of its efforts to improve the soundness of the local banking system.

The governor noted that both regulation and deregulation in the banking sector is part of the central bank's adjustment policy to prepare the local banking industry to face the rapid changes in the global economy.

"As for the adjustment policy, sometimes we need to liberalize, sometimes we need to intervene," Soedradjad told a conference, organized jointly by the central bank and the International Monetary Fund.

"However, when intervening, we need to use market-friendly instruments and need to be more and more transparent," the governor added.

Some executives of local commercial banks often complain that they cannot form long-term strategies for services in the face of globalization due to the monetary authority's inconsistency in its policies.

In 1988, for example, the government deregulated the banking industry which resulted in the blossoming of new banks. However, now the government has reversed its policy about regulating banks, in terms of minimum paid-up capital, reserves requirement and credit limitation, they said.

Soedradjad, however, noted that the 1988 deregulation has created new problems which need further regulations to address them.

He noted that the deregulation resulted in the rapid expansion in the number of banks, from some 125 before 1988 to some 250 banks now, from 2,000 branches before 1988 to 6,500 branches now.

"You can see, the implication in the micro side, in terms of capital adequacy ratio, management and the number of bankers needed to run the 250 banks," Soedradjad said.

"That's only in terms of number, not yet in terms of quality," he noted, adding that many banks still face structural problems to meet prudential guidelines set by the central bank. In addition, many banks are still struggling to restructure their nonperforming loans.

He explained that the central bank's intervention in the local banking industry is to ensure that every bank follows prudent procedures in managing public funds.

"The objective is to make the 250 banks healthy and more competitive," Soedradjad said.

Supporting Soedradjad's argument, John Hicklin, assistant director of the Southeast Asia and Pacific Department at the International Monetary Fund, suggested that Bank Indonesia accelerate efforts to restructure nonperforming loans in the country's banking system.

In addition, the government should also improve its prudential regulations so that banks will also improve their prudential management of funds.

He noted that local banks currently still face both traditional risks and new risks, which are posed by globalization.

In terms of traditional risks, the management of banks in Indonesia -- and also in Malaysia, the Philippines and Thailand -- takes excessive risks in extending credit "because the government is standing behind them."

In terms of new risks, Hicklin said the complexity of financial instruments create new risks for banks, especially if the instruments are used incorrectly, and they can bear great losses for banks.

"This is a compelling issue in ASEAN countries at the moment. All ASEAN countries, except Singapore, face significant problems in managing these new risks," he said.

The Association of Southeast Asian Nations (ASEAN) groups Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam. (rid)