Indonesia sees banking best practices in place by 2010
JAKARTA - Indonesia can look forward to a banking system that by end-2010 will be fully capable of applying best practices in general and most importantly, the Basel II capital rules for improving bank safety, the country's central bank governor said in January.
But it's clear Indonesia faces an array of daunting tasks in achieving this aim, Bank Indonesia governor Burhanuddin Abdullah told an annual bankers' dinner in Jakarta.
Preparations encompass effective risk management practice, competent human resources, adequate information technology and other supporting infrastructure such as accounting standards based on the new International Financial Reporting Standards and credible rating agencies, Burhanuddin said. It will require intensive work over the next three years by the central bank, the banking industry and other stakeholders.
Bank Indonesia envisages applying the Basel II framework as a medium-term programme over three to five years, with all commercial banks adopting the rules in 2008. The regime will be phased in, beginning with the simplest Basel II approaches to measuring banking risks, Burhanuddin said.
The policy is based on the view that the Indonesian banking system, especially in respect of its big banks, has become part of the international banking community and that therefore the application of Basel II "can no longer be regarded as merely an option," he added.
The Basel Committee on Banking Supervision, the body of senior banking supervisors from the leading economies that designed Basel II, is recommending a staggered end-2006/end-2007 introduction of the regime for banks in its 13 member countries.
India goes for earliest accord application date
MUMBAI - All Indian banks must apply the new Basel accord's simplest approaches to credit and operational risk measurement from March 31, 2007, the Reserve Bank of India (RBI) announced in mid-February, in draft guidelines that spell out how the internationally-agreed capital rules will be applied in the Asian giant.
The unexpected decision to implement the new capital accord - Basel II - from the first possible date contrasts with China's decision not to apply these capital adequacy rules for some years.
Banks in many developed countries will start implementing the simplest and intermediate risk measurement approaches from the beginning of 2007. The financial year of many Indian banks runs from April 1.
"At a minimum," all Indian banks will adopt the Standardised approach to calculating credit risk and the Basic Indicator approach for operational risk - the simplest of the three options proposed under Basel II for each kind of risk, the RBI announced. In a statement, it said: "after adequate skills are developed, both in banks and at supervisory levels, some banks may be allowed to migrate to [an internal ratings based] approach, after obtaining the specific approval of the Reserve Bank."
At best, only a couple of India's 27 public banks and roughly 30 private banks, are thought to have the capacity to move to an internal ratings based approach to credit risk measurement in the next few years. (Apart from these local commercial banks, and around 40 foreign banks, there are also hundreds of small, local, regional and specialised banks in India that do not appear to be covered by the new rules). The draft implementation guidelines have been drawn up in consultation with a representative sample of 14 public, private and foreign banks. The banking community has three weeks to comment on the guidelines, from February 15, when they were issued.
Banks applying Basel II will be required to keep a minimum 9% ratio of capital to risk-weighted assets. This is a little above the 8% minimum specified under both Basel I and Basel II, but in line with the ratio that the RBI has required for some years. Most commercial banks maintain ratios comfortably above the 9% minimum, but bank analysts in India have suggested that capital levels will drop once the new rules are applied.
This seems to be confirmed by a wave of capital markets issues by banks.
Reuters news agency reported in February that state-run Allahabad Bank has filed for a public issue of shares that would raise the equivalent of an estimated $171 million. This announcement came hard on the heels of an issue from Dena Bank, another state-run institution. Investment banks were said to be expecting equity issues from no less than 11 banks, including Oriental Bank of Commerce, the eighth largest public sector bank. In addition, several banks are raising subordinated debt, which counts as Tier 2 capital for banks, and is included in their ratios. According to India's Business Times, a host of public sector banks, including Bank of India, Andhra Bank, State Bank of Travancore, Indian Bank and Indian Overseas Bank "are readying to raise resources through Tier 2 bonds."
