New banking landscape
Indonesia's banking industry will be further consolidated under a national banking structure the central bank launched last week for implementation, beginning this year, to build a sound, strong and efficient financial system.
The application of higher standards of capital and good corporate governance and the implementation of the core principles of effective banking supervision that were launched by the Basle-based Bank for International Settlement in 1997 will create a completely new banking landscape in Indonesia in 2014.
The central bank maintains minimum capital for a new bank at Rp 3 trillion (US$353 million) but requires existing banks to increase their capital to a minimum of Rp 100 billion ($11.5 million) within seven years. Judging from these capital standards alone, 55 commercial banks will have to close down or become secondary (rural) banks if they fail to meet the new capital requirement through fresh equity injection or mergers with larger banks.
Bank Indonesia Governor Burhanuddin Abdullah foresaw that the national banking industry, which would result from the implementation of the new banking structure, would be a leaner one, much smaller than the current total of 138 banks.
The banking crisis in 1997 to 1999 sharply reduced the number of commercial banks from more than 220, but the remaining 138 are considered still too many and their capital standards too low to allow for sound, strong banks.
He forecast that the national banking landscape would feature two to three banks of international class with capital exceeding Rp 50 trillion ($5.8 billion) and three to five national anchor banks with Rp 10 to Rp 50 trillion in capital. These banks will be supplemented by 30 to 50 smaller, specialized banks with capital ranging from Rp 100 billion to Rp 10 trillion and thousands of rural or community banks with capital of less than Rp 100 billion.
However, higher capital standards alone are not sufficient to build a sound, strong and efficient banking system. Hence, the two other main pillars set for the new banking structure -- good corporate governance and effective supervision -- are equally vital to the achievement of the ultimate goal.
These two pillars support each other. Good corporate governance is the foundation for developing an effective internal control system and reliable risk management. However extensive and intensive the banking supervision system may be, this mechanism cannot be effective without the establishment of good corporate governance.
It is of great comfort to know that as part of the new banking structure, the central bank will phase in the application of the 25 Basle core principles of banking supervision because the enforcement of these will further force banks to improve their governance.
These principles cover, among other things, detailed provisions for effective banking supervision, licensing and structure, prudential regulations, methods of ongoing supervision, information requirements, formal powers of supervisors and cross-border banking operations.
The heavy emphasis on the development of effective banking supervision to international standards will not only help create a highly competitive banking industry but will also lay stronger foundations for the gradual construction of a single supervision authority in the financial services industry. That, according to the recently amended central bank law, must be completed in 2008.
The new banking structure should therefore be welcomed, as it provides a clear direction for banks ten years down the road. Implementation of the new structure will not likely cause a big shock within the banking industry as the 10-year period allotted for the entire program is considered more than adequate to allow banks to make the necessary adjustments.
The phasing out of the blanket guarantee on bank deposits and claims, beginning next year under a bill on financial safety net currently under deliberation at the House of Representatives, will unleash market forces fully to screen out unhealthy, inefficient banks. This, in turn, will help improve further the overall environment within which the new banking structure is being implemented.
_____________