BI pushes banks to meet Basel II accord targets    
Industry News
Urip Hudiono, The Jakarta Post, Jakarta

The 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.

The 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 minimum requirement.

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.

Muliaman 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.

Muliaman 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," he said.

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 interest rate.

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 previous month.
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