The huge loan scam<\/p>\n
The dragging dispute between the government (finance ministry)
\nand Bank Indonesia (central bank) over the extension of Rp 144.5
\ntrillion (US$15.88 billion) in emergency liquidity credits to
\ndistressed banks during the peak of the financial crisis between
\nlate 1997 and January, 1999, could become a new major obstacle to
\nthe development of a stable financial system.<\/p>\n
As long as the dispute remains unresolved, Bank Indonesia will
\nnever get a clean bill of health from its auditors, the Supreme
\nAudit Agency, and it may eventually be disqualified by the Basle,
\nSwitzerland-based Bank for International Settlement from its
\nmembership. Such disqualification will devastate Bank Indonesia's
\ncredit rating, prompting foreign banks to refuse its guarantee of
\nletters of credit opened by national banks. Worst of all, the
\ngovernment's steadfast refusal to reimburse the huge emergency
\nsupport loans to the central bank would drive the bedrock of the
\ncountry's monetary system into technical bankruptcy.<\/p>\n
It has now been almost one year since the Supreme Audit Agency
\ngave a disclaimer to Bank Indonesia's financial reports, upon
\ndiscovering through an investigative audit, that about Rp 138.4
\ntrillion of the total loans had been extended in violation of
\nprudential rules with regards to the central bank's role as the
\nlender of last resort.<\/p>\n
The central bank's lender-of-last-resort role requires it to
\nprovide promptly temporary support to illiquid banks to prevent
\npanics and massive runs that can lead sound institutions to
\nfinancial distress and precipitate their insolvency. This was
\ntheoretically what the central bank did when many banks were hit
\nby massive runs between late 1997, after the closure of 16
\ninsolvent banks, and early 1999 when the financial fiasco
\nworsened into a political and social crisis.<\/p>\n
However, what the Supreme Audit Agency discovered was a
\nmassive and blatant misuse of the liquidity support by both
\ncommercial banks and the central bank. First of all, the central
\nbank violated the basic rule which stipulates that liquidity
\nsupport can only be given to illiquid and not to insolvent banks,
\nand loans should be backed by adequate collaterals.<\/p>\n
But as the investigative audit later found out, the bulk of
\nthe emergency loans had been misused by the recipient banks for
\ncurrency speculation and financing affiliated businesses.
\nMoreover, many of the loans were not backed by adequate
\ncollaterals and, in many cases, the amount of credits way
\nexceeded the total assets of the recipient banks. The Supreme
\nAudit Agency accused Bank Indonesia of being the main culprit in
\nthe loan scam.<\/p>\n
The central bank denies any wrongdoing, arguing that as part
\nof the Cabinet under the authoritarian rule of former president
\nSoeharto it could not do anything else but submit to the
\ninstruction from the then president not to close banks, notably
\nthose owned by Soeharto's cronies, even though their account
\nbalance with the central bank had been negative.<\/p>\n
The central bank did admit that the quality of its bank
\nsupervision was so poor that it remained in the dark about the
\nreal condition of most of the banks that had asked for emergency
\nliquidity loans. But the central bank also brought up as an
\nexcuse the panicky situation during the crisis period that made
\nit rather impossible for it to verify each of the thousands of
\nclearing transactions conducted daily with banks.<\/p>\n
Yet one finds it difficult to accept that the various forms of
\nso massive misuse of the liquidity support, as found by the
\nauditors, could have been possible without collusion with central
\nbank officials. The panic injection of funds smacked more of a
\ncollusive act, rather than an honest mistake caused by technical
\nincompetence. Moreover, since most of the loans were extended
\nafter the establishment of the government blanket guarantee on
\nbank depositors and creditors in late January, 1998, one may also
\nquestion the real urgency to bail out insolvent banks.<\/p>\n
However, the government cannot simply refuse to reimburse the
\ncentral bank's credits because the wrongdoings discovered by the
\nauditors have yet to be proven in court. In fact, none of the
\nbankers and central bank officials implicated in the loan scam
\nhave been brought to court. Several central bank directors were
\nquestioned by the state police as early as December, 1998 but no
\ncharges were officially made.<\/p>\n
It is therefore most imperative that the Attorney General
\nspeed up criminal investigations on the central bank officials in
\ncharge of the liquidity support and bankers who allegedly misused
\nthe loans to resolve the dispute once and for all.<\/p>",
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"sponsor": "Okusi Associates",
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