Possibility of abuse of new bank ruling<\/p>\n
JAKARTA (JP): Experts warned Bank Indonesia (BI) of the
\npossible manipulation of the newly loosened legal lending limit
\nby cash-strapped business groups seeking to obtain money to
\nrecapitalize their banking operations.<\/p>\n
Senior banker I Nyoman Moena said the central bank's plan to
\nease the legal lending limit from 20 percent to 30 percent could
\nbe abused by bank owners facing cash flow problems. They warned
\nthat bank owners could channel the public's money into their
\nvarious businesses before injecting the money into their troubled
\nbanks.<\/p>\n
\"This kind of misuse is a potential because the legal lending
\nlimit is being loosened at a time when conglomerates are trying
\nhard to secure cash to recapitalize their banks,\" he told The
\nJakarta Post.<\/p>\n
\"BI has to be vigilant,\" he warned, adding that the central
\nbank's intention to stimulate economic growth by easing the legal
\nlending limit might not be achieved if the new rule was abused.<\/p>\n
BI director Subarjo Joyosumarto said on Friday evening that
\nthe central bank planned to increase the limit commercial banks
\nare allowed to lend to any single party from 20 percent of equity
\nto 30 percent.<\/p>\n
\"The loosening of the legal lending limit is intended to
\naccelerate the economy's recovery process,\" he said during a
\nbreaking of the fast gathering with executives of the National
\nPrivate Banks Association.<\/p>\n
The new ruling will be issued by the central bank later this
\nweek and will take effect on April 1, he added.<\/p>\n
The government has required that all of the country's
\ncommercial banks have a minimum capital adequacy ratio (CAR) of 4
\npercent by the end of March 1999, and 8 percent by the end of the
\nyear.<\/p>\n
At least 61 of the country's more than 200 commercial banks
\nhave CAR levels of between minus 25 percent and less than 4
\npercent, and another 43 banks have CAR levels of less than minus
\n25 percent.<\/p>\n
Pande Raja Silalahi, an economist at the Center for Strategic
\nand International Studies, also warned of possible abuse of the
\nnew rule.<\/p>\n
\"It (the new rule) must not create new problems, especially as
\nwe approach the general election,\" he said, pointing out that any
\nabuse of the ruling would increase the public's resistance to the
\ngovernment's bank restructuring program.<\/p>\n
\"BI has to be transparent and improve its control mechanisms,\"
\nhe said, adding that the bank recapitalization program, which
\nwould require Rp 18 trillion from the state budget, had so far
\nnot been implemented with any transparency.<\/p>\n
Moena expected that the new ruling would only be a temporary
\nmeasure to stimulate growth in the crisis-battered economy
\nbecause it was against state guidelines which state that an even
\ndistribution of the economy was the top priority, while growth
\nwas second.<\/p>\n
The government projected that the economy would start to show
\npositive growth in the second half of the 1999\/2000 fiscal year.
\nThe economy shrunk by 13.68 percent in 1998.<\/p>\n
\"It (the new ruling) is ironic, particularly at a time when
\nthe government is claiming to boost the welfare of the people,\"
\nMoena said, pointing out that the new ruling would provide more
\ncredit for big businesses instead of small companies.<\/p>\n
Subarjo also said that the move was being taken because the
\npresent legal lending limit was seen as too restrictive under the
\npresent economic conditions, resulting in frequent violations of
\nthe regulation.<\/p>\n
The increasing number of nonperforming loans has forced many
\nbanks to make a greater allowance for bad debts, a stance which
\nhas eaten into their equity bases. Their position has been
\nfurther undermined by a weakening of the rupiah, which has
\ntripled the cost of U.S. dollar denominated loans.<\/p>\n
The decreasing equity base and the weak rupiah have made it
\ndifficult for most banks to abide by the existing 20 percent
\nlegal lending limit.<\/p>\n
Under the present regulations, a bank can only extend credit
\nof up to 20 percent of its equity to any single party. Also, a
\nbank cannot lend more than 10 percent of its equity to companies
\nwithin its own business group.<\/p>\n
Subarjo acknowledged that some banks had willfully violated
\nthe legal lending limit, while others had been caught by the
\nplunge in the value of the rupiah.<\/p>\n
\"The different types of offenders will face different
\nsanctions. If violations were committed knowingly, we will
\nconsider that to be an offense,\" he said.<\/p>\n
Under the 1993 Banking Law, violating the legal lending limit
\nis a criminal offense punishable by a maximum of six years
\nimprisonment and a Rp 6 billion fine.<\/p>\n
The rating of offending bank's will also be downgraded.
\n(02\/rei)<\/p>",
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