New banking landscape

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.

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