Ailing Bank Asiatic, BDB shut down

Dadan Wijaksana, The Jakarta Post, Jakarta

The central bank closed on Thursday two small-sized commercial banks, Bank Dagang Bali (BDB) and Bank Asiatic, due to worsening financial conditions caused by illegal transactions involving Rp 1.2 trillion (US$ 139 million) in loans.

Bank Indonesia senior deputy governor Anwar Nasution said the banks, owned by two families related by marriage, had been consistently mismanaged and were in violation of existing regulations, which had caused unrescuable liquidity problems.

"The banks had been receiving guidance and assistance from Bank Indonesia for about six months but they failed to make any progress," Anwar said.

Despite the closures, the central bank called on the banking sector and the public not to panic, as all deposits and funds in the banking system were guaranteed by the government under the blanket guarantee program.

Anwar said the problems came after BDB placed funds at Asiatic in the form of interbank loans and Negotiable Certificates of Deposit (NCD).

These were later used as loan collateral by the son of a BDB owner, who is married to a daughter of an Bank Asiatic owner.

When the loans turned sour, the banks were forced to provide a huge amount of previsionary funds -- a move which severely deteriorated their financial balances.

"The amount of loans (provided to the son of BDB's owner) exceeded the legal lending limit (LLL) allowed by the banking law," Anwar, adding that the troubled loans in BDB were worth Rp 1.2 trillion, or 70 percent of the bank's Rp 1.7 trillion worth of assets.

Under existing banking regulations, a bank is allowed to lend a maximum of 10 percent of its lending exposure to an affiliated company.

The central bank said in a press release it had notified the National Police about the issue and asked them to issue a travel ban on the related parties -- including the owners of the two banks and their families.

Efforts to seize personal assets of the owners were also underway, it said. BDB is owned by I Gusti Made Oka, while Tong Muk Keung owns the Asiatic.

The closure of the banks was intended to create a sound and healthy banking system, the statement said.

Still, the cost is likely to be high as it could mean the government covers up to Rp 2.39 trillion worth of deposits in the two banks, under the blanket guarantee program.

BDB is a Denpasar, Bali-based lender which has 31 branches and is staffed by 632 employees. Asiatic employs around 150 staff and has 16 branches.