central bank will require all lenders in the country to comply with the
Basel II international best practices on minimum capital requirements
and risk management by 2008. To this end, a monitoring committee has
been established to assist each bank in taking the necessary steps.
policy will not adversely affect the performance of the banking sector,
Bank Indonesia banking regulation director Muliaman D. Hadad said, as
the industry's average capital adequacy ratio (CAR) level was already
above the Basel II requirements. In fact, he said, improved risk
management under the accord would actually strengthen the lending
capabilities of banks.
"We cannot delay
implementing the Basel II accord as it has been in the works for some
time and sets standards that have been adopted worldwide," Muliaman
told reporters Thursday on the sidelines of a banking seminar jointly
organized with the University of Indonesia. "It is necessary in order
to improve our banking sector and support its full integration into the
global banking system."
The Basel II accord sets
out international guidelines formulated by the Swiss-based Basel
Committee on Banking Supervision, a grouping of 13 central banks of
major industrial countries, for assessing the capital adequacy of a
bank. It is a 2004 update of the original 1988 version, which did not
incorporate the related principles of banking transparency, credit
management, and operational and market risks. The accord is
supposed to be implemented in 2008 by the some 100 countries that have
already implemented the Basel I accord. The European Union plans to
fully implement it by that time, while the U.S. will give a three year
grace period to smaller lenders.
BI Governor Burhanuddin
Abdullah said in speech delivered by Muliaman that Indonesia would
likely adopt a gradual approach, as the U.S had. Muliaman explained
that implementing the Basel II accord would actually pose no
difficulties for banks in Indonesia as the industry's average CAR
currently stood at 21.5 percent -- far above the accord's 8 percent
BI currently sets a minimum 8
percent CAR for all lenders. A bank's CAR is the ratio between its
capital and risk-weighted assets -- the higher the CAR, the better the
bank's ability to cover risks without affecting its financial soundness.
acknowledged, however, that some smaller lenders could face problems
considering their lack of suitably trained staff and technological
infrastructure. It was this that had prompted BI to establish
monitoring teams in each bank to help them put the policy into effect.
"There are many ways in which CAR can be measured. The smaller banks
may only be able to apply the simplest method. We will evaluate all of
this along the way," he said.
Some of the smaller
banks might fail to meet BI's targets of a CAR of Rp 80 billion (US$8.6
million) by 2007 and Rp 100 billion by 2010, in line with the
Indonesian Banking Architecture blueprint for the consolidation of the
country's banking sector. BI has urged the banks to increase their
capital or consider the mergers or acquisitions alternative.
further said that the implementation of the accord would not affect the
lending capacity of banks. Rather, he predicted that it would actually
improve it. "With banks being able to better manage risks through
implementing the accord, they can disburse more loans to the real
sector -- plantation and manufacturing firms, for example -- rather
than concentrating solely on the less risky consumer finance market,"
Indonesia has seen a slowdown in both
economic growth and credit expansion due to persistently high inflation
of more than 15 percent, and the central bank's 12.5 percent key
Latest figures from BI, however,
show that lending by the banking industry increased by Rp 10.7 trillion
in April, up from Rp 7 trillion in March, while non-performing loans
decreased to a gross level of 9.2 percent, from 9.4 percent the