BI to seek IMF help in monitoring banks

Tony Hotland, The Jakarta Post/Jakarta

The central bank is currently making preparations to join an International Monetary Fund and World Bank-sponsored program to monitor the country's banking sector.

Bank Indonesia head of financial systems stability Muliaman Hadad said the program would help Bank Indonesia detect problems in the banking industry before they turned into crises.

He said joining the program would also help increase the credibility of Indonesia's financial sector in the eyes of the international market.

"It's called the financial sector assessment program, under which the two agencies dispatch teams to evaluate the stability of our financial systems. They also will assess all of the financial authorities here to assure that they comply with the best (international) practices," Muliaman said during a two-day seminar held by the Indonesian Economists Association, which ended on Thursday.

However, he could not say exactly when Indonesia would be able to join the program, as the country first must meet certain conditions, which he did not go into detail about.

"Having such teams evaluate us will also be a form of feedback to the government and the financial authorities to help pinpoint our own vulnerabilities. It's like preparing to prevent a crisis," he said, adding that over 100 countries had already joined the program.

Muliaman, who is also the coordinator of Indonesian Banking Landscape, said it was difficult for the central bank to monitor the banking sector by itself, and that internal controls on the part of the banks themselves was essential.

Indonesia's banking sector was badly affected by the regional financial crisis that struck in late 1997, leading the country to seek an IMF bailout program.

The situation worsened when the then government closed a number of banks at the recommendation of the IMF, resulting in a run on banks. The government at the time did not provide a blanket guarantee on bank deposits prior to the closures, which fueled the run. The IMF has acknowledged that this was a costly mistake.

The government also set up in 1998 the now-defunct Indonesian Bank Restructuring Agency to restructure the banking sector, spending billions of dollars to bail out banks, causing the state budget deficit to balloon.

After six years, the government concluded its relationship with the IMF last year. Many analysts have said the banking sector has improved, but critics point out that banks still have not returned to their main intermediary role. Many banks are also still heavily dependent on government bonds, which were injected into banks in the wake of the crisis, as their main source of revenue.

Muliaman also said the central bank had warned banks about prudent loan disbursements, due to the tighter competition among banks in providing credits, particularly to the consumer sector.

"The more you disburse loans, the more responsibility and chance (of bad debts) you incur. But they are just regular warnings to make sure that the banks abide by the prudent procedures in disbursing loans," he said.