Ruling allows depositors to assess bank record

Berni K. Moestafa, The Jakarta Post, Jakarta

The public will soon have greater access to gauge the performance of their bank under a new central bank ruling that, among other things, requires banks to publish financial reports every month and to disclose information in a more detailed and transparent fashion than they do at present.

Bank Indonesia said on Thursday its new ruling, which will come into effect on Dec. 31, marked a major shift towards opening up the banking sector to the public.

"The aim of this policy is the creation of market discipline among banks through transparency of the financial conditions of each bank," Bank Indonesia Governor Sjahril Sabirin said in a press meeting.

Bank Indonesia ruling No.3/22/2001 on the transparency of bank financial conditions, is one of three rulings issued this month to improve management practices among banks.

It is also part of the economic reform targets under the current Letter of Intent (LoI) with the International Monetary Fund (IMF), which is tied to millions of dollars of loans to the government.

The other two items concern banks' minimum capital requirement and the transfer of ailing banks to the Indonesian Bank Restructuring Agency (IBRA).

Sjahril said greater transparency would eventually breed better management, as banks fall under tighter public scrutiny.

The transparency ruling requires banks to submit their financial reports each month to Bank Indonesia for publication on its website, www.bi.go.id.

At present, banks must publish their financial reports only on a quarterly basis.

Sjahril said banks were already reporting their financial condition to Bank Indonesia each month, but the central bank did not reveal the records to the public.

"We did have concerns that disseminating information on banks might trigger runs against them. But with the government blanket guarantee scheme intact, this concern is somewhat mitigated," he said.

The blanket guarantee scheme covers a bank's third party liabilities, including public funds that they have accumulated, in case of a bank liquidation.

Without this scheme, banks may face a repeat of the massive runs against them which occurred in 1997 and sparked a wave of bank closures.

The new ruling demands that banks comply with new accounting standards that Sjahril said would improve the accuracy and integrity of the information that the public can access.

On a quarterly basis, banks must also publish consolidated financial reports that cover the parent companies and subsidiaries in which they are associated.

The information open to the public has also been widened to include, among other things, a detailed report of the capital adequacy ratio (CAR) and the bank's legal lending limit status.

Under the legal lending limit rule, a bank's loan exposure to affiliated parties is limited to 20 percent of its total loans.

If a bank breaches this limit, it must disclose the percentage of its violation in its quarterly report as well.

Penalties for violating this transparency ruling can be as much as Rp 100 million (about US$9,600) and Bank Indonesia said it would publicize the names of banks that fail to comply.

Bank Indonesia ruling No.3/21/2001 on minimum capital requirements, makes it harder for banks to show an increase of their CAR levels.

CAR measures a bank's risked, weighted assets, such as loans, against the capital it possesses to back up the risk of loan default.

In 2001, the central bank raised the minimum CAR level from four percent to eight percent.

But under the new ruling, Bank Indonesia will no longer recognize the often dubious components that banks sometimes use to calculate their total capital in CAR, which is in accordance with international best practice standards.

For instance, a bank's capital assets in affiliated companies will no longer be accounted for as capital under the new ruling. In addition, deferred tax payments must also be scrapped from the new CAR calculation.