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.