Urip Hudiono, Jakarta – Having learned the hard way from the financial crisis about the importance of managing lending risks, Indonesia's banking sector has now improved significantly, and is well capable of weathering potential shocks, according to the central bank governor.

However, he warned the industry to avoid complacency, and to continue improving competitiveness and risk management in all areas related to operations.

Governor Burhanuddin Abdullah said that if another crisis were to occur like the currency upheaval that precipitated the 1997-1998 financial meltdown, it would be unlikely to cause as much damage to the banking industry and the economy as before.

"I think only two or three small-sized banks would face problems today," Burhanuddin said Monday during a workshop on good governance in the banking sector. "The rest will be resilient enough to keep going as usual."

BI is basing its optimism on the fact that Indonesia's banks have greatly improved governance and risk management in recent years, and have been displaying resilience under the various "stress tests" that the central bank has been applying to the industry.

Indonesia's economy is also stronger now, Burhanuddin said, as shown by stable inflation, an improving balance of payments picture on growing forex reserves, a solid budget and better deficit management.

The financial crisis, triggered by a fall in regional currencies, exposed the dangers of intergroup and risky foreign exchange dealings, which eventually exhausted Indonesia's finances and resulted in the near collapse of the economy.

The government had to shell out some Rp 650 trillion (US$72.2 billion) in public funds to bail out the ailing banks.

From the ashes of the crisis, the central bank has since been requiring the country's banks to practice prudent lending, and to comply with the Basel II risk management international best practices by 2010. Basel II not only deals with managing lending risks, but also deals more comprehensively with asset management aspects.

BI has also required all of the country's banks to have capitalizations of at least Rp 80 billion ($8.8 million) by the end of this year, and Rp 100 billion by 2010. New banks must have a minimum capitalization of Rp 3 trillion.

All this is expected to encourage mergers and acquisitions in the sector so as to produce a smaller but leaner and stronger banking industry.

Regarding the non-lending aspects of risk management, one area that Burhanuddin expressed concern about during the event was the growing trend among banks to outsource some of their operations.

While outsourcing could help improve efficiency, it could also have adverse effects on the sustainability of a bank's operations, Burhanuddin said. "We expect the banks to invest more in their own human resources, and consider these issues before going for outsourcing," he said.

Indonesian Banks Association (Perbanas) chairman Sigit Pramono admitted that many banks had outsourced low-end functions to reduce costs, but said that this was mostly confined to non-lending operations, such as delivery services and IT functions.