Eight New Regulatory Initiatives in Banking
As usual in the beginning of each year, Governor of Bank Indonesia, Burhanuddin Abdullah, chaired the Banking Annual Meeting of 2007, to convey several views of the economic, monetary and banking condition of 2006, and the direction of the policies in 2007. At the meeting this time, the Governor of Bank Indonesia expressed his views using the theme of “Working Hard to Make Use of the Stability”. The meeting was attended by the leaders of the national banks and the representatives of the Government, Parliament, and Academics. Coinciding with the 10th year economic crisis that hit this country, Burhanuddin Abdullah also conveyed several notes on various economic problems during this period of 10 years.
Reflection on Indonesia’s Economic Dynamics of 2006
The year 2006 was a year marked with several successes, particularly the success in putting back the economic machine on its right "track". Economic growth, inflation pressure, exchange rate, balance of payment, and foreign exchange reserve indicated the signs of hope.
Quantitatively, several indicators of the financial and banking industrial operating performance have increased significantly. The banks' capital also can survive at a very adequate level, with the bank capital adequacy ratio (CAR) that can continue to survive at a fairly high level of 20%. Meanwhile, the NPL decreased quite significantly.
“However, behind the success record, we also realize the inherited heavy burden that we have shouldered for a long time, namely the structural rigidity in our economy that resulted in inefficiency, spending our time and resources in vain in the form of liquidity excess and unemployment, and worsening poverty’, Burhanuddin said in his speech.
Currently, the condition of the real sector, which is the backbone of the nation’s life, in fact, is being confronted by a paradoxical phenomenon (paradox of growth), in which the economic growth is not accompanied by reduction of poverty and unemployment. Development and expansion of the production capacity during the last few years tend to move towards the capital-intensive sectors. Consequently, the rates of unemployment and poverty tend to be on the rise.
Viewed from a different side, the micro risk and distortion that hamper investment are also reflected in the ever-wide (decoupling) relationship between the financial sector and the real sector. The banks are reluctant to distribute credits. The banks and the capitalists tend to put their money in the low-risk financial instruments, for instance in SBI and SUN. Funding of the banks for the real sector extremely decreases. We, then, face the liquidity overhang in the form of outstanding SBI, which has currently reached over Rp. 200 trillion. Our economy does not grow in balance. The real sector tends to move slowly because the structural micro risk hampers distribution of the banks’ funds, while the financial sector has continued to grow bigger as the funds continue to enter it. Such a condition, if it continues to occur, will certainly be extremely unhealthy for the endurance of the financial system of our economy.
Direction of Economic Policies in 2007
From the reflection above, it is apparent that in 2007, we actually have the possibility to achieve growth better than estimated, with the maintained stability and absorption of fairly significant manpower, if we can correct the high-cost economy, distortion, and investment climate. “By contrast, if all the problems persist, they will make the monetary policy stance to tend to be extra-careful, and thus reducing the economic spirit and dynamics”, added Burhanuddin.
Therefore, Bank Indonesia is of the opinion that:
From the side of monetary policy, implementation of the Inflation Targeting Framework will be sharpened, so that the market belief and the financial system stability can be maintained. We will put the various dilemmas relating to the capital flow, exchange rate, and interest rate in the free foreign exchange regime policy environment and floating exchange rate in the context of policy that provides incentives for the long-term capital flows than the policy that punishes the short-term capital flows. In addition, in order to support the financial market development and improve the monetary policy effectiveness, we also see the necessity to perfect the monetary policy operating framework.
From the side of the financial sector policy in general: Bank Indonesia sees the necessity to strengthen the financial system capacity in silencing the economic upheavals. To anticipate the various potentials of upheavals, numerous policy steps to develop and deepen the national financial sector in the future should be taken together with Bank Indonesia, the government, banks and non-bank financial institutions.
From the side of the government: Bank Indonesia expects that implementation of more sharpened government policies in order to accelerate betterment of the distortional condition and the micro risk in the real sector by improving the investment climate as a whole should be prioritized, including acceleration of infrastructure improvement and provision of a more guaranteed energy supply. “I think, for the government, the year 2007 may also be a good year for developing the sectoral focus in the strategy and implementation of the long-term national development”, added Burhanuddin.
Direction of the Banking Policy in 2007
“The effort to strengthen the banking institutions that we have made thus far will lose its meaning in the life of the nation in a broader sense if the national banks are not optimal and not directed in performing their main activities” said Burhanuddin. Currently, the industrial world in the real sector is awaiting the role of the banks as the largest intermediation institutions in this country. Therefore, the effort to improve the largest intermediation function to encourage the formal sector, including UMKM, to a higher level of growth amid the micro-structural risk is the main challenge for the banks in 2007.
"In 2007, the bankers are required to work harder, more innovatively and more creatively to fix the credit packages and shoulder the credit risks together", said Burhanuddin.
The direction and strategy of the policy in the field of banking that will be applied by Bank Indonesia in 2007 are summarized in Eight points of policy, namely:
First, Bank Indonesia will play the role more actively as a liaison medium (catalyst) in motivating the banking intermediation process. Bank Indonesia will position itself as one of the centers for information, studies and database of the economy/national, regional and sectoral industry that can be used for technical assistance for research, including its professional advice, by all parties, including banks, UMKM, regional governments, and central government. Therefore, BI will revitalize immediately the functions and roles of its offices in the regions.
Second, Bank Indonesia will endeavour to improve cooperation and coordination with the government in order to reshape the banking industry, particularly revitalizing the roles of the state-owned banks. Bank Indonesia strongly supports and welcomes the policy steps taken by the government to improve the performance of the state—owned banks at present.
Third, Bank Indonesia will endeavour to facilitate the merger process. Numerous incentives have been provided as regulated by Bank Indonesia Regulations in the past. Therefore, Bank Indonesia should be involved more decisively to encourage the banks potential to create instability to respond positively. Bank Indonesia will attempt to take the role in negotiations referring to the principles of honest brokering, neutral, fair, reasonable and optimal for the materialization of a more directed matchmaking process.
Fourth, Bank Indonesia will facilitate the smooth-running of the banking intermediation function. Some of the policies to be issued in the near future will change the contents of certain Bank Indonesia Regulations, and some will be in the form of letters affirming the interpretation of the regulations in the past, among others:
The Regulations on the Procedures of Evaluating the Credit Collectability. Thus far, the procedures of evaluating the quality of the productive assets with the values of over Rp. 500 million should be based on 3 (three) pillars of criteria, namely timely payment, business prospect and debtor’s financial condition. Some of the adjustments are:
Evaluation of the productive assets with the values up to Rp. 5 billion may be conducted by referring only to the timely payment criterion.
Exception to application of the 3 pillars of evaluation criteria is also provided for financing for the debtors/projects guaranteed by the government, which meet the requirements as regulated in Bank Indonesia Regulation Number 7/2/PBI/2005 on Evaluation of Quality of Commercial Banks.
Bank Indonesia will emphasize more on the capacity of the risk management of the banks in the process of credit provision and evaluation compared to the fulfilment of various requirements that are secondary qualification in nature.
Adjustment of several regulations in connection with the Banking Principle of Prudence, among others by:
The limit of the productive assets value in application of the uniform classification, which is currently Rp. 500 million, is increased to Rp. 5 billion and/or adequate for the 50 biggest debtors.
The types of collaterals that may be calculated as subtractor for Elimination of Assets (PPA) will be expanded, among others, by including the machines and receipts of the warehouses.
Reaffirmation of the regulation on Credit Provision Maximum Limit (BMPK) of 30% not only for the state-owned companies active in the field of infrastructure but also for other development sectors.
Reaffirmation and explanation of the meaning of the parties relating to BMPK for joint financing of several companies (including banks) for the same project. Basically, joint financing is not classified as a relevant party insofar as there is no controlling relationship.
Affirmation that it is still possible for the problematic debtors to receive credits insofar as the problem credits occurred for the reasons beyond the debtors’ capacity, taking into account the comprehensive analyses of their feasibility.
Fifth, Bank Indonesia will issue the guidelines that will guide foreign banks to play the role more optimally in the intermediation process and issues special policies on limiting the foreign manpower at the middle-management level and the obligation to carry out the transfer of knowledge. We will limit the foreign manpower until 2 (two) levels below the board of directors, except for the fields that cannot be filled by the domestic manpower. For the special fields, foreign banks will be given 3 (three) years to carry out the transfer of knowledge.
Sixth, Bank Indonesia will be proactive to take the role in developing the market and the financial instruments (financial market deepening). The limited financial products with diversified maturity and risks and the market (primary and secondary) that support its trades make concentration of the portfolio placement in the SBI, SUN and share. The current liquidity overhang requires broader outlets in order to motivate indirect intermediation. Bank Indonesia will among others encourage the SBI market with longer maturity and perfect the monetary policy operations to support this. In addition, BI will consider the steps to motivate universal banking that continues to take into account the consolidation process. The efforts above will be formulated further in the plan to amend the Law on Banking.
Seventh, BI will apply the Indonesian syariah banking acceleration program. The program will include 3 (three) matters, namely the more intensive program of socialization to the people, encouraging the enrichment of products and services and syariah financial service outlets so as to fulfil the people’s needs more broadly and assisting in the deepening of the national financial market, and supporting and playing the role more actively in the inflow of foreign investment funds through the syariah financial instruments.
Eighth, BI will restudy the arrangement of the BPR development in the framework of increasing and expanding its roles and contributions to the UMKM sector all over the country. The direction of the policy it will take is carrying out the linkage program in a more focused manner in order to empower the rural communities and support the settlement of various micro-distortions in the local-specific goods market due to the less-expanded economic participation at the grass-roots level.
Jakarta, 12 January 2007
Directorate of Strategic Planning
and Public Relations