Banking industry needs strong medicine: BI

The Jakarta Post, Jakarta

Complying with the Basel II international best banking practices on minimum capital requirements and risk management is the strong medicine the industry needs to take if the system is to gain soundness, the central bank says.

Bank Indonesia said compliance would mean lenders might notice a short-term decline in capital adequacy ratios (CAR) and their ability to provide more loans. However, banks could manage the situation and in the long-term would become more prudent in their channeling of loans, the bank said.

"Banks whose credit portfolios mostly consist of corporate loans, and who have 'low-quality' loans, may experience a drop in their CAR," Bank Indonesia (BI) analyst Wimboh Santoso said last week after explaining the central bank's latest plan to implement the Basel II accord.

Lenders with portfolios comprising retail, consumer and business loans, and home mortgages -- all of which carry lesser risk -- would likely remain unaffected in terms of their CAR, Wimboh said.

A bank's CAR is the ratio between its capital and risk-weighted assets, including loans -- the higher the CAR, the better the bank's ability to cover risks without affecting its financial soundness.

BI currently sets a minimum 8 percent CAR for all lenders, in line with the accord.

BI director for banking regulations Muliaman D. Hadad earlier claimed that implementing the Basel II accord would pose no difficulties for lenders as the industry's average CAR currently stood at 21.5 percent -- far above the 8 percent minimum requirement.

However, Wimboh did not say to what extent the implementation of the accord would affect the CAR of lenders in the country.

He said banks would likely benefit from the accord because it encouraged banks to limit credit risks by requesting more collateral for loans.

The central bank is requiring all lenders to comply with the Basel II accord by 2008 and has recently established a monitoring committee to oversee the compliance.

The Basel II accord is part of BI's Indonesian Banking Architecture (API), a blueprint to consolidate and strengthen the industry by 2010. The central bank is expected to announce a package of banking policies soon, including relaxing the legal lending limit currently applied on the industry.

The 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.

The 2004 update of the original 1988 version, or Basel I, incorporates the related principles of banking transparency, credit management, and operational and market risks.

It is supposed to be implemented in 2008 by the around 100 countries that have already implemented Basel I, including European Union nations. The U.S., meanwhile, will give a three-year grace period to smaller lenders.
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