Soedradjad's message

Soedradjad's message

The central theme of Bank Indonesia Governor J. Soedradjad
Djiwandono's speech at the 1997 annual bankers dinner on Jan. 8
might sound to analysts like the same old song. He has delivered
the same message on similar occasions since 1994. But his notes
of caution regarding prudential banking practices, foreign
borrowing, inflationary pressures and slackening export growth
not only reflect the consistency of his monetary policy but
accurately pinpoint the most challenging problems facing the
country's economy.

Time and again he has warned of the country's high
vulnerability resulting from depending on large capital inflow,
notably highly risky short-term, speculative funds. He reminded
banks of the great urgency of ensuring their foreign borrowings
be used for productive activities, particularly export-oriented
businesses.

Given the crucial role of a sound and competitive banking
industry in the process of creating money and maintaining the
stability of the national financial system, Soedradjad again
called on banks to fully comply with the prudential regulations.
He not only expressed disappointment about the large number of
banks which still fail to meet the legal lending limit but he has
taken firm action on it. The central bank has stepped up what he
calls cease and desist orders by enforcing, among other
strategies, the criteria of reprehensible acts precluding persons
from holding positions such as bank shareholders, management,
executives and related positions.

Late last year, he introduced regulations on the procedures
for bank liquidation, sending a strong signal that insolvent
banks could no longer expect to be bailed out by the central
bank. As if that was not enough to keep the banks on their toes,
he warned last week that the central bank would soon be vested
with the authority to conduct investigations into the technical
aspects of bank fraud. The police or the Attorney General's
Office will continue to be responsible for handling the criminal
aspects.

Bank Indonesia also has stepped up bank supervision by
assigning chartered public accountants to examine banks. He
initiated the drafting of a government regulation on banking
secrecy, which, many analysts have alleged, has frequently been
abused by banks to protect questionable debtors from public
scrutiny.

But he also fully realized that with the development of self-
regulatory institutions such as banks, repressive measures were
only part of the game. Supporting institutions are no less
important for further improving the role of banks in the national
payments system.

The central bank therefore has prepared a blueprint for the
future development of an efficient, secure and reliable payments
system which is vital for the creation of a more efficient
financial sector and for supporting the effectiveness of monetary
and banking policies.

The system will be supported by an electronic clearing system
in Jakarta which is now in the final stage of development. This
will be supplemented by a retail payments system and an
electronic funds transfer mechanism. All the efforts to improve
bank supervision and examination and the harsher repressive
measures enacted for bank fraud will not only minimize the risk
of other major bank failures but will strengthen the efficiency
and competitiveness of the banking industry in supporting
national economic development.