Page 7 - Perpustakaan Lemhannas RI

• The regulations require banks to obtain Bl’s prior approval for investment in
the equity of financial entities and do not permit investment in the equity of
non-financial entities. However, the regulations do not apply either to equity
investments undertaken by the banks’ subsidiaries/group entities or to banks’
equity investments in entities via the debt resolution route.

3. Due diligence requirements and framework (principles 6 to 18).
• The framework is broadly in line with Basel I standards, but there are some
• weaknesses in the capital adequacy framework.
• Bl has yet to issue regulations on the management of interest rate risk in the
banking book (IRRBB) and country / transfer risk. There is also scope for
improvement in the area of liquidity risk and operational risk management.
• Indonesian banks tend not to use internal methodologies for assessing their
overall capital adequacy in relation to their risk profile and there is inadequate
focus on and perhaps capacity to validate internal models. As the Indonesian
banking system is commencing Basel II implementation soon, these aspects
gain greater importance.
• The asset classification and provisioning framework applied to delinquent
loans is broadly in line with international standards, but has some
weaknesses.
• Board oversight of NPL management needs to be stepped up.
• The definition of single borrower, borrower group and related party exposures
could be tightened, and the concept of ‘large exposures’ and ‘portfolio
concentrations’ are either not practiced or are not practiced adequately.
• Indonesian banks have a good framework of internal control and compliance
functions. While these are governed by comprehensive regulations, Bl does
not seem to undertake an on-site assessment of the whole internal control
function, which is generally assessed indirectly on a piecemeal basis. Bl
regulations do not explicitly require a risk based audit framework in banks.
• Bl is addressing a few gaps identified by the APG 2008 mutual evaluation
through revised regulations.

4. Bank supervision methods (principles 19 to 21).
• Bl’s supervisory system consists of both off-site and on-site supervision along
with regular contact with banks’ management. Bl has an efficient and
comprehensive offsite supervisory system that includes receipt and analysis
of periodical (daily, weekly,monthly, quarterly and annual) reports on both a
solo and consolidated basis. The integrity of supervisory reports is ensured
through on-site verification by supervisors as well as external auditors. While
the off-site reports are used well at the single institution level, they could be
better utilized to generate efficient system trends and useful peer group
analyses.
• Two key weaknesses are (i) the lack of formal and informal information
sharing arrangements with other financial sector supervisory authorities; and
(ii) the absence of effective legal protection, which dampens supervisors’
willingness to make decisions and deviate from accepted methods listed in the
manual.