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INDONESIAN BANKING: INDONESIAN BANKING: Performance and ProspectPerformance and Prospect

Shanghai, PRC

May 24-26, 2005

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BANKING RESTRUCTURING PROGRAM

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Major Progress

– Banks achieve substantial improvement in asset quality and capital adequacy.

– Sustainability of positive performance drivers going forward is apparent.

– BI has enhanced Banking Supervision complying with international standards including 25 Basle Core Principles.

– Banks have enhanced risk management capabilities, though some gaps remain.

– The Indonesian banking industry is widely open to foreign

players including in privatization of leading domestic banks.

PROGRESS

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Financial Highlights

Banking sector highlights 1998 Dec.01 Dec.02 Dec.03 Dec.04 Mar.05

Total assets (trillion Rp) 895.5 1099.7 1112.2 1196.2 1272.3 1280.6

Deposits (trillion Rp) 625.3 797.4 835.8 888.6 963.1 959.3

Loans (trillion Rp) 545.5 358.6 410.3 477.2 595.1 617.8

LDR (%) 72.4 33.0 38.2 43.2 50.0 51.3

NPLs (gross) 48.8 12.1 8.1 8.2 5.75 5.6

NPLs (nett) 34.7 3.6 2.1 3.0 1.72 1.9

CAR -15.7 20.5 22.5 19.4 19.4 21.7

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The Challenges Ahead

• Low capacity for growth in bank lending

• Structural weakness in banking system

• Unsustainable Bank Profitability and Operational Efficiency

• Bank supervision in need of various improvements

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Indonesian Banking Architecture

The ArchitectureThe Architecture represents a framework for the Indonesian banking system which sets forth the direction, outline, and working structures for the banking industry over the next five to ten years

The VisionTo build a sound, strong, and efficient banking system to create financial system stability for the promotion of national economic growth

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The Six Pillars

Healthy banking structure

Effective regulatory system

Effective and

independent

supervisory system

Strong banking industry

Adequate infra-

structure

Robust customer protection

Pillar 1

Pillar 2

Pillar 3

Pillar 4

Pillar 5 Pillar 6

To build a sound, strong, and efficient banking system to create financial system

stability for the promotion of national economic

growth

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Program Implementation

Program for reinforcing the banking system structure

No Activity (Pillar I) Implementationperiod

1 Strengthening of bank capitala. Increase minimum capital requirement for commercial banks

(including regional development banks) to Rp100 billion b. Retain Rp3 trillion capital requirement for establishment of

new banks through January 1, 2011

2004 – 2010

2004 – 2010

2 Increase competitiveness of rural banksa. Strengthen linkage programs between commercial banks and

rural banksb. Simplify processes for opening of rural bank branch officesc. Facilitate establishment of joint services facilities for rural

banks

2004

20042004 - 2005

3 Improve access to credit a. Facilitate establishment of credit guarantee schemeb. Promote lending to specific business sectors

2004 - 20062004 - 2006

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No Activity (Pillar II) Implementation periode

1 Formalize syndication process in formulation of banking policya. Involve third party in each formulation of banking policyb. Establish panel of banking expertsc. Facilitate establishment of banking research institutions at

regional and central level

20042004

2004-2005

2 Phased implementation of 25 Basel Core Principles for Effective Banking Supervision

2004-2013

Program for improvement of banking regulation quality

Program Implementation

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Program Implementation Program for improvement of the supervisory function

No Activity (Pillar III) Implementation period

1 Enhance coordination among supervisory agenciesa. Institute regular coordination and cooperation 2004

2 Consolidate the banking sector at Bank Indonesia a. Consolidate the supervision and examination functionsb. Reorganize the banking sector at Bank Indonesiac. Establish enforcement teamd. Establish a specialist examination team

2004-20052004-20052004-20052004-2005

3 Improve competency of bank examinersa. Introduce certification of bank examiners b. Conduct examiners attachment programs at international

supervisory agencies

2004-20052004-2005

Activities 4 & 5

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Program Implementation

No Activity (Pilar III) Implementationperiod

4 Develop system for risk-based supervisiona. Design risk-based model for supervision 2004 – 2005

5 Improve effectiveness of enforcementa. Strengthen investigation process for banking crimesb. Improve transparency of supervision and enforcementc. Establish internal ombudsman for supervisory problemsd. Improve legal protection for bank supervisors

2004-20052004-20052004-2005

2004

Program for improvement of the supervisory function

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Program for improvements in bank management and operations quality

No Activities (Pillar IV) Implementation period

1 Strengthen Good Corporate Governancea. Establish minimum standards for Good Corporate

Governanceb. Encourage banks to go public

2004–2005

2004-2005

2 Improve quality of bank risk managementa. Introduce compulsory certification of risk managers 2005

3 Improving bank operating capabilitiesa. Encourage banks to develop shared use of operating

facilities to reduce costsb. Facilitate provision of education needed for improvement of

banking operations

2004-2005

2004-2005

Program Implementation

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Program for development of banking infrastructure

No Activities (Pilar V) Implementation periode

1 Development of a Credit Bureaua. Initiate establishment of credit bureau 2004-2005

2 Optimize use of credit rating agenciesa. Institute compulsory rating for bonds issued by banks 2004-2005

Program Implementation

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Program Implementation

Program for improvement of customer protection

No Activities (Pilar VI) Implementation period

1 Prepare standards for customer complaint mechanisma. Establish minimum requirements for consumer complaints

mechanism 2004-2005

2 Establish independent mediation agencya. Facilitate establishment of banking mediation agency 2004-2005

3 Design transparency of product informationa. Facilitate preparation of minimum standards of

transparency in bank product information 2004-2005

4 Promote consumer educationa. Encourage banks to educate consumers on financial

products 2004

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FSS Strategies

BI’s Financial System Stability Framework

BI’s Mission

Achieving and maintaining the stability of Rupiah value by maintaining monetary stability and promoting financial system

stability for sustainable national development.

Instruments

Intensifying Research &

Surveillance

Early Warning Systems

• Macro-prudential Indicators

• Micro- prudential Indicators

Implementing Regulation & Standards

• Regulation & Standards e.g. Basle Principles, IAS

• Market Discipline

Improving Coordination

&Surveillance

FSS Objective

An active involvement in creating and maintaining a sound and stable national financial system.

• Internal Coordination

• External Coordination & Cooperation

Establishing Financial Safety Nets & Crises

Resolution

• Lender of last resort

- Normal Times- Systemic

Crisis

• Crisis Resolution

- Safety nets

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Thank You