BI defends intervention in banking

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)