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.