TRANSFORMING DIC: INDONESIA EXPERIENCE

10th DICJ Round Table March 13-15, 2018

Kyoto, Japan

FAUZI ICHSAN Chief Executive Officer

Indonesia Deposit Insurance Corporation

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• IDIC’s staff of 253 – given 115 commercial banks and 1,780 rural banks

• Bureaucracy needs to be cut, business process needs simplification

• Organization needs new structure, IT system needs to be overhauled

• New Law on Prevention and Resolution of Financial Crisis – April 2016:

• IDIC’s new resolution powers: P&A and bridge banks

• Activation of Bank Restructuring Program under IDIC during economic crisis

• Central Bank no longer becomes “lender of the last resort”

• Manpower issues:

• Millennial staff: average age of 36, mostly without crisis experience

• Need to upgrade resolution and leadership skills – and managing business partners

• IDIC’s “lean business model” requires operating efficiency:

WHY TRANSFORM IDIC: “THE NEED TO MEET FUTURE CHALLENGES”

        

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3.56 3.56 4.02 4.38

5.42

6.53 7.53

 ‐1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00

2012 2013 2014 2015 2016 2017 2018F

IDIC balance sheet & revenue, USD bn

Asset Revenue

• AAA rating by Fitch, almost zero debt, Ministry of Finance to automatically recapitalize IDIC if capital is depleted below IDR4tn, access to borrowing from MoF and the ability to issue bonds

• IDIC assets about 0.65% of GDP – in the Asian financial crisis, the cost to recapitalize Indonesian banking sector exceeded 60% of GDP

IDIC FINANCIALS AT A GLANCE: “HEALTHY BUT NOT CRISIS-RESISTANT”

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THE BIG PICTURE: “IDIC MUST PROGRESS WITH GLOBAL FINANCIAL SECTOR”

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THE BIG PICTURE: “COMPARING INDONESIA’S FINANCIAL SECTOR TO ITS PEERS”

• Diagnostic phase (Mar-2016) – identified gaps in:

DESIGNING STRATEGY FOR TRANSFORMATION: “TRANSFORMATION MUST BE WELL-PLANNED AND COMPREHENSIVE”

• Existing organizational & HR practices based on: IDIC vision & mission, strategy & scope of activities, industry trends and benchmarks with leading DIC practices

• Organization design phase (Apr-2016) – designed new model, including:

• Organizational structure

• Business processes & KPIs

• Workload allocations for Executive Directors and Group Directors

• Implementation phase (Aug-2016) – developed implementation roadmap:

• Set-up Change Management Office to drive transformation

• Detailed blueprints for organizational structure at lowest level, HR and IT systems

• Transformation kick-off for implementation in Jan-2017

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1.

THE CORPORATE DIAGNOSTICS: “BEFORE TRANSFORMING, GAPS MUST BE IDENTIFIED”

Vision & mission – Need to be more global

2. Capabilities – Benchmark vs. other DICs in: research, early intervention, financial & legal

due-diligence, crisis management, bank restructuring, communication with stakeholders, etc.

3. Organizational structure – The need for asset management unit, for IT under CEO, etc.

4. Right-sizing of units – To handle simultaneous failure of 1 SIB, 1 non-SIB, 5 rural banks

5. Governance – Refine crisis management protocol, MOUs with BI & FSA, committees, etc.

6. HR & management – Measurable KPI, HR blueprint, defining generalist & specialist roles

7. Key processes – Need to improve early warning signal, determination of resolution method,

bank resolution, liquidation and claim payment, project prioritization and monitoring

8. IT systems – The need for “forward-looking” IT blueprint (possible linkage with FSA & BI), IT

application for core functions, financial dashboard, integrated database, robust IT security, etc.

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THE INTERNAL PICTURE: “IDIC MUST IDENTIFY CRITICAL GAPS”

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THE INTERNAL PICTURE: “NEED TO DETERMINE OPTIMAL STAFF LEVEL GIVEN IDIC MANDATES”

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Effective Insurance & Resolution

Service Excellence

Strong IT Capabilities

Competence based organization

Strong institutional culture

▪ Expert on deposit insurance; ▪ Expert in bank restructuring, resolution and crisis management;

▪ Reimbursing depositor claims meet target set by IADI;

▪ Actively involved in supporting and preserving stability of financial system;

▪ Have the best and most complete data center for depositors in Indonesia;

▪ IT plays role as value creator;

▪ Automatization of business processes and integration with digital culture; ▪ Reliable IT security;

▪ To be the best place to work’s organization; ▪ Performance management system to promote excellence performance;

▪ Competent and high skills human resource;

▪ Strong culture on research and innovation;

▪ Strong culture on prmoting creativity and collaboration.

▪ Strong culture on knowledge management;

▪ Best learning center on deposit insurance and bank resolution at regional level;

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THE END-TARGETS: “BE REALISTICALLY AMBITIOUS”

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THE PHASES OF TRANSFORMATION: “THE DEVIL IS IN THE DETAILS”

No. Theme of Transformation

Phase of transformation

Phase I: Foundation (2017‐2018)

Phase II: Development (2019‐2020)

Phase III: End State (2021)

1. Effective Insurance & Resolution

Develop infrastructures to build IDIC as the expert in deposit insurance, resolution, bank restructuring and initiation of learning center.

Review, develop, and implement new policies to enhance effectiveness of deposit insurance, bank restructuring and resolution. Start to develop the learning center.

• Expert on deposit insurance; • Expert in bank restructuring, resolution and crisis management;

• Best learning center on deposit insurance and bank resolution at regional level;

2. Service Excellence

Develop infrastructures to develop data centers, accurate banking surveillance, and to promote quicker reimbursement for depositors’ claim.

Review, develop and implement new policies to promote quicker reimbursement for depositors’ claims, more accurate bank surveillance, and start developing data centre.

• Reimbursing depositors’ claim meet target set by IADI;

• Actively involved in supporting and preserving stability of financial system;

• Have the best and most complete data center for depositors in Indonesia

3. Strong IT Capabilities

Develop IT infrastructures as basis for value creation of other activites; system automatization, and reliable IT security.

Review, develop, and implement new policies in implementing automatization and digital bussiness process, as well as reliable IT security.

• IT plays role as value creator • Automatization of business process and integration with digital culture

• Reliable IT security

4. Competence based organization

Develop infrastructures to promote implementation of performance management, talent management, and competency based organzation.

Review, develop new policies and implement performance management system, talent management, and other initiatives to achieve competency based organization.

• To be the best place to work’s organization • Performance management system promote excellence performance

• Competence and high skills human resource

5. Strong institutional culture

Develop new vision and mission, road map, for development of new cultures including those related to research, innovation, and knowledge management.

Review, develop new policies and implement new cultures, including those related to research, innovation, and knowledge management.

• Strong culture on knowledge management • Strong culture on research and innovation • Strong culture on promoting creativity and collaboration

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2017

2018

‐ Update Vision and Mission - Develop organizational culture - Changing organizational structure - Develop HR & IT Blue Prints - Develop Performance Management System - Undertake study on Bank Restructuring Program - Set up new policies

‐ Development of HR requirements - Implementation of new committies’ format - Enhancement of MOUs - Enhancement of bussiness process - Implementation of IT Blue Print - Set up new policies

2019

‐ Development of HR requirements - Implementation of new committies format - Enhancement of MOUs - Implementation talent management program - Implementation of IT Blue Print - Set up new policies

‐ Development of HR Requirements - Implementation of organizational cultures

2020

THE PATH TO TRANSFORMATION: “THE LONG AND WINDING ROAD – THAT LEADS TO YOUR DOOR”

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• Cultural differences: 79% of IDIC staff came from the industry, but the top management -who came from MoF/BI- are more used to a formal structure/hierarchy

• The millennial generation’s character: Average age of staff is 36, with little to none crisis experience but IT-savvy

• Incentives and disincentives in regulatory body:

• “Forced ranking” of staff performance identifies bottom 10% of staff – What to do with them?

• IDIC is developing “exit policy” for non-performers

• The use of headhunters for accelerated but competitive recruiting of new staff is necessary but may create concerns among existing staff

• Separating functional staff from structural staff may create career concerns

• Managing lean organization and the need to build leadership qualities:

• The need to upgrade planning and managerial skills to manage business partners

• Managing organization with diverse staff backgrounds:

BIG CHALLENGE 1: HUMAN RESOURCES “GOOD SYSTEM WITH BAD HR IS LIKELY TO FAIL”

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2011 2012 2013 2014 2015 2016

“Asian DICs are hiring more full-time staff”

FDIC KDIC PDIC DICJ IDIC MDIC

HUMAN RESOURCES: “IN ASIA DICS ARE COMPETING WITH INDUSTRY FOR TALENTS”

• With more complex financial institutions, many DICs must recruit from financial industry

• The increased use of business partners (accounting firms, law firms, appraisers) is unavoidable

• The need to integrate “IT pockets” among different directorates:

BIG CHALLENGE 2: INFORMATION TECHNOLOGY “WEAK IT LIMITS DIC CAPABILITIES”

• Different directorates must eventually use the same IT system for compatibility and integration

• Manual reconciliation and verification of deposits must be replaced with automation

• Manual internal data transfers must be gradually reduced

• Commercial banks have good IT but most rural banks remain manually operated

• Data preservation of large failing banks is crucial – especially in crisis or multiple failures

• Shared banking database with FSA and BI is crucial:

• Shared IT database on banks between IDIC, FSA and BI could enhance early warning and consolidate reports from banks through a single window instead of different regulators

• IDIC’s online access to BI data on banks’ liquidity positions will enhance early warning 15

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IDIC IT TRANSFORMATION: “WILL DETERMINE IDIC’S CAPABILITY IN NEXT 10 YEARS”

Finance Minister Sri Mulyani and director generals, IDIC 2/10/17

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BIG CHALLENGE 3: “HOW DO WE DO IN A REAL CRISIS?” “REGULAR STRESS-TEST SIMULATIONS CRUCIAL”

BI Governor Agus Martowardojo and deputy governors, IDIC 2/10/17

FSA Chairman Wimboh Santoso & commissioners, IDIC 2/10/17 IDIC Chairman Halim Alamsyah & CEO, IDIC 2/10/17

• In Oct-2017, IDIC hosted 3rd annual crisis simulation with MoF, BI and FSA • External observers included IMF and World Bank • Simulation tested: laws and regulations, internal SOPs, inter-agency MoUs, funding and resource constraints

BIG CHALLENGE 3: “HOW DO WE DO IN A REAL CRISIS?” “SOME SIMULATION LESSONS – HOW TRANSFORMATION CAN HELP”

• In a banking crisis IDIC needs up-to-date information on conditions of banks:

• Shared database between IDIC, BI and FSA will form basis for due-diligence by IDIC

• Online access to BI data on banks’ liquidity positions can be better indicators than banks’ financial statements – liquidity shortage, not lack of capital, typically triggers bank failure

• Detailed MOU between FSA and IDIC ensures early-intervention by IDIC on troubled banks

• Strong IT capabilities can help by:

• Improving due-diligence results – and estimates of bank’s capital needs or its P&A cost

• Accelerating validation of deposits – and prompt claim payments to bank customers

• In a lean organization, strong managerial skills are crucial for:

• Effectively managing business partners (accounting firms, investment banks, etc)

• Identifying emergency issues that cannot be met by in-house resources

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CONCLUSION: “TRANSFORMATION A MUST, GIVEN GLOBAL AND LOCAL DEVELOPMENTS”

• Transforming institution must decide what it wants to be in 5-10 years time – and “works backward” to design an action plan that will take them there.

• Restructuring must be well-planned and comprehensive, based on global benchmarks and feedback from experts and staff (future leaders of the organization)

• Transformation designs must be tailored to specific conditions and culture – no “one size fits all”

• Ownership by both management and staff is crucial – it cannot be entirely top-down

• It must involve investment in people and IT, process simplification without sacrificing governance

• Always bear in mind: “the further we are from the last banking crisis, the closer we are to the next – transformation must be implemented to better prepare us for the next crisis”

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THANK YOU