1 INDONESIAN BANKING: Performance and Prospect INDONESIAN BANKING: Performance and Prospect Shanghai, PRC May 24-26, 2005

2 BANKING RESTRUCTURING PROGRAM

3 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

4 Financial Highlights Banking sector highlights1998Dec.01Dec.02Dec.03Dec.04Mar.05 Total assets (trillion Rp) Deposits (trillion Rp) Loans (trillion Rp) LDR (%) NPLs (gross) NPLs (nett) CAR

5 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

6 Indonesian Banking Architecture The Architecture The 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 Vision To build a sound, strong, and efficient banking system to create financial system stability for the promotion of national economic growth

7 The Six Pillars Healthy banking structure Effective regulatory system Effective and independent supervisory system Strong banking industry Adequate infra- structure Robust customer protection Pillar 1Pillar 2Pillar 3Pillar 4Pillar 5Pillar 6 To build a sound, strong, and efficient banking system to create financial system stability for the promotion of national economic growth

8 Program Implementation Program for reinforcing the banking system structure NoActivity (Pillar I) Implementation period 1Strengthening of bank capital a.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, – Increase competitiveness of rural banks a.Strengthen linkage programs between commercial banks and rural banks b.Simplify processes for opening of rural bank branch offices c.Facilitate establishment of joint services facilities for rural banks Improve access to credit a.Facilitate establishment of credit guarantee scheme b.Promote lending to specific business sectors

9 NoActivity (Pillar II)Implementation periode 1Formalize syndication process in formulation of banking policy a.Involve third party in each formulation of banking policy b.Establish panel of banking experts c.Facilitate establishment of banking research institutions at regional and central level Phased implementation of 25 Basel Core Principles for Effective Banking Supervision Program for improvement of banking regulation quality Program Implementation

10 Program Implementation Program for improvement of the supervisory function NoActivity (Pillar III)Implementation period 1Enhance coordination among supervisory agencies a. Institute regular coordination and cooperation Consolidate the banking sector at Bank Indonesia a.Consolidate the supervision and examination functions b.Reorganize the banking sector at Bank Indonesia c.Establish enforcement team d.Establish a specialist examination team Improve competency of bank examiners a.Introduce certification of bank examiners b.Conduct examiners attachment programs at international supervisory agencies Activities 4 & 5

11 Program Implementation NoActivity (Pilar III)Implementation period 4Develop system for risk-based supervision a. Design risk-based model for supervision 2004 – Improve effectiveness of enforcement a.Strengthen investigation process for banking crimes b.Improve transparency of supervision and enforcement c.Establish internal ombudsman for supervisory problems d.Improve legal protection for bank supervisors Program for improvement of the supervisory function

12 Program for improvements in bank management and operations quality NoActivities (Pillar IV)Implementation period 1Strengthen Good Corporate Governance a.Establish minimum standards for Good Corporate Governance b.Encourage banks to go public 2004 – Improve quality of bank risk management a. Introduce compulsory certification of risk managers2005 3Improving bank operating capabilities a.Encourage banks to develop shared use of operating facilities to reduce costs b.Facilitate provision of education needed for improvement of banking operations Program Implementation

13 Program for development of banking infrastructure NoActivities (Pilar V)Implementation periode 1Development of a Credit Bureau a.Initiate establishment of credit bureau Optimize use of credit rating agencies a.Institute compulsory rating for bonds issued by banks Program Implementation

14 Program Implementation Program for improvement of customer protection NoActivities (Pilar VI)Implementation period 1Prepare standards for customer complaint mechanism a.Establish minimum requirements for consumer complaints mechanism Establish independent mediation agency a.Facilitate establishment of banking mediation agency Design transparency of product information a.Facilitate preparation of minimum standards of transparency in bank product information Promote consumer education a.Encourage banks to educate consumers on financial products 2004

15 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

16 Thank You