BI to seek IMF help in monitoring banks

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.