Weeding out bad bankers
Weeding out bad bankers
The four regulations announced by Bank Indonesia on Monday are
obviously designed to further improve the disclosure practices of
banks. That in turn should make all aspects of the banks'
operations, management and supervisory boards more transparent to
the central bank, which acts as the guardian of the banking
industry.
We don't see the new regulations on working plans, reporting
systems and inter-bank exchanges of information, nor the
definitions of the character and behavior of persons barred from
the banking industry, as inconsistent with the massive banking
deregulation of October, 1988.
In fact, the new rulings are badly needed to cope with the
excesses of the industry's dramatic developments over the past
seven years. Cases in point are: the US$420 million foreign-
exchange scandal at Bank Duta in 1990; the bankruptcy of Bank
Summa, with over $800 million in liabilities in 1992; the $430
million loan scandal at state Bank Bapindo, which exploded in
late 1993, and the accumulation of an estimated $12 billion
problem loans at state and private banks.
The requirement that banks, including rural banks, must
submit annual working plans detailing lending programs, business
areas for credit allocations and deposit mobilization, as well as
identifying their 25 largest borrowers, should enable Bank
Indonesia's supervisors to detect potential problems early on.
The assessment of working plans is only the first phase of
supervision. The central bank will also be examining banks'
operations through their quarterly, semester and annual reports.
The central bank should be able to detect, for example,
whether loans are being extended on the basis of sound commercial
decisions, or due to political lobbying, or the vested interests
of particular business groups. It also will be easier for the
supervisors to assess whether banks fully conform with the legal
lending limits.
The quality and viability of the working plans will also show
the level of competence and capability of the management and
supervisory boards of banks. It is encouraging to note that the
regulations also hold the supervisory board of a bank accountable
for the bank's annual report. For example, we have observed that
Bapindo's board of supervisors was not even questioned, nor
brought into court to testify, in the trials of the bank's former
directors.
Cosmetic management and window-dressing practices will be
minimized by the requirement for banks to have their books
audited only by public accountants already registered at the
central bank. Obviously, the central bank will not accept
accounting firms with questionable reputations. On the other
hand, public accountants will have to stay on their toes, or be
blacklisted by the central bank.
The tough requirements on disclosures are indeed essential in
view of the fiduciary responsibility of banks and their crucial
role as financial intermediaries in fueling economic activities.
A supervision mechanism that facilitates early detection of
potential problems is crucial as well. The characteristics of
bank operations are such that the central bank, for example,
cannot warn the general public of any problem banks because that
would wipe out any chance of saving the banks in distress.
The ruling on inter-bank exchanges of information on borrowers
within the limits of banking secrecy will improve the network of
credit information. That will serve to deter borrowers from
trying to cheat banks because news of their sins will surely
circulate rapidly through the entire the banking industry.
The clear-cut definitions of the character and behavior of
persons who should be prohibited from working in the banking
industry will help protect the industry from crooks.
Hence, all the new regulations amount to the development of a
more effective supervision mechanism to enable the central bank
to weed out bad bankers. Now is indeed high time, after seven
years of rapid expansion in the banking industry, to emphasize
quality rather than quantity.