Government told to start plans on bank supervising agency

JAKARTA (JP): The government must immediately start making preparations to create a new independent body to take over Bank Indonesia's banking supervisory role by 2002, a senior official at the central bank said on Friday.

Bank Indonesia director for bank licensing Sukarwan said in a seminar that the new body would help allay fears that the country would suffer another banking crisis if supervision continued to be in the hands of Bank Indonesia. Many people have accused the bank of being partly responsible for the current banking troubles.

"This (the new agency) will improve banking supervision. It will be a totally new agency run by new faces," Sukarwan said. "But I don't know if this idea will be realized. My impression is that it's drifting away," he added.

He said that certain measures could be implemented now, as 2002 was not so far away, and the measures taken could be endorsed by the new bank supervisory agency later.

Sukarwan was responding to a growing demand for the liquidation of Bank Indonesia, seen in the past as a corrupt and weak institution, to create a totally new and clean central bank like in the Philippines to help prevent another banking crisis.

"There's no need for that (liquidating Bank Indonesia). The solution I believe is in a new supervisory agency," he said.

The House of Representatives approved in April last year a new law on Bank Indonesia which guarantees its independence.

Under the new law, Bank Indonesia must transfer its bank supervisory role to a new independent agency starting in 2002.

The government said last year that the new agency was expected to supervise not only the banking sector but also financial institutions including the capital market, multifinance companies, insurance firms and pension funds.

The country's banking crisis, which started in 1997, caused the government to close down over 60 banks, nationalize a dozen more and provide financing for the country's bank recapitalization program at an estimated cost of more than Rp 500 trillion (US$53 billion).

Both the government and Bank Indonesia have already taken several measures to help prevent a second crisis, including introducing fit and proper tests for controlling owners and managers of banks.

But many have said that the blame for the banking crisis should also be shouldered by Bank Indonesia.

Critics have said that the central bank was responsible for the mushrooming of banks in the country in the late 80s without implementing proper supervision.

Some have also alleged that the massive legal lending limit violations, channeling most of the bank's money to affiliated business groups, were made with the knowledge of central bank officials.

Fit and proper test

"If we want to prevent a similar (banking) crisis from reoccurring, the infrastructure and the human resources must be revamped," Sukarwan said.

He said that the implementation of fit and proper tests was a key measure to ensure that bank owners and managers had the necessary integrity and competency.

Sukarwan explained that fit and proper tests were only applied to people already in the banking sector, while those who had never been in the industry but had been proposed to run a bank or to become a controlling owner would only have to go through an interview process to know his or her "vision."

He said that integrity had the largest weighting in the fit and proper tests, while competency only counted for 5 percent.

"Bankers who are not too savvy should not be too worried about failing the test," he said, adding that fit and proper tests were based on the bankers' past track records.

He said that the integrity factor had the highest weighting in the test because many bankers had violated bank rulings in the past including credit mark ups, and practiced 'financial engineering' to escape legal lending limit stipulations.

Sukarwan also said that failing a fit and proper test was not a "death penalty" for bankers.

"If (unsuccessful) bankers can prove that they have changed after 1-2 years they can be considered to be accepted back into the industry," he said.

The central bank's fit and proper test has attracted controversy. Reports have alleged several key executives from the state Bank Rakyat Indonesia (BRI) failed such a test, and that President Abdurrahman Wahid asked Bank Indonesia to repeat the test to allow his preferred men to run the bank.

Bank Indonesia Governor Sjahril Sabirin, now under the detention of the Attorney General Office over alleged involvement in the high-profile Bank Bali scandal, rejected the President's demand.

Others have questioned the credibility of the central bank's fit and proper test.

Former owner and CEO of Bank Bali Rudy Ramli said that fit and proper tests could easily be manipulated by Bank Indonesia to achieve its own goals.

Rudy said that fit and proper tests must be conducted in a transparent way with a clear set of criteria.

He suggested that the criteria be designed by an independent consultant.

He also said that there must be a mechanism for a banker to make an appeal if he or she had been judged to have failed a test. (rei)