Aditya Suharmoko, Jakarta – The central bank – which has just been equipped with a legal basis to facilitate reactions, including injecting liquidity, in the event of a potential financial crisis – pledged Friday there would not be a repetition of the misuse of funds that occurred in the 1990s crisis.
"Our supervisors will be in the banks that receive such facilities (liquidity supports). Our supervision will be more intensive than that in 1997," Bank Indonesia (BI) governor Boediono said.
When the country was hit by the regional financial crisis in 1997-1998, the central bank extended bail-out funds amounting to more than Rp 600 trillion to help rescue the banking sector, but without a clear legal framework to cover its actions.
Ten years on, the experience still leaves a bad taste in the mouth. Not only that the government, meaning the taxpayer, is still paying for these costly measures, but that it has been proven in the courts that abuses took place during and after the bail-out.
Boediono said there would not be a repeat of these practices, brushing aside concerns that the recently issued regulation allowing it to inject funds into banks could lead to another round of abuses, thereby causing state losses.
Under the regulation in lieu of law on the financial system safety net issued on Thursday, BI is now allowed to take over the control of bank shareholders' meetings if the bank is in receipt of liquidity support.
BI can also change the bank's officials.
Boediono added that the central bank would soon issue a regulation which will set tight and prudent criteria to determine the eligibility of banks to qualify to receive liquidity support.
In 1997, he said, banks were able to provide many kinds of assets, including personal guarantees, to help them obtain financing support.
"The source (of assets) did not actually make sense, but the problems were urgent at that time. We will now be tighter (in channeling support)."
The new regulation complements two earlier regulations in lieu of laws, covering activities of the deposit insurance agency (LPS) and the central bank. The government issued these regulations to help instill confidence in the market and to help shield the economy from current global financial shocks.
Included in the package of the three regulations is an extension of the guarantee on bank deposits, from Rp 100 million previously to Rp 2 billion now – a measure in line with a worldwide policy trend aimed at restoring market confidence in the banking system.
Many analysts believe that Indonesia's economy has learned the lessons of the last crisis and is now strong enough to weather the global financial storm, although this could lead to an even bigger recession than is now emerging in the world's top economies.
To start with, Indonesia's banking sector is now far sturdier than it was in 1997. According to BI, the capital adequacy ratio of the banks stood as of August at 16 percent, far above the international standard of 8 percent, indicating that Indonesian banks have more than enough capital reserves.
The rate of non-performing loans (NPLs), meanwhile, stood at 3.95 percent, below the central bank's required compliance target of 5 percent, indicating fairly healthy lending portfolios.