Bank Bali scandal

Bank Bali scandal

The government should act quickly to clarify the issues in a
scandal allegedly involving millions of dollars at Bank Bali
because it puts at stake the integrity of the Indonesian Bank
Restructuring Agency (IBRA), which directly or indirectly
controls over Rp 600 trillion (US$88 billion) in government
assets.

The issues that surfaced only one week after the surprise and
questionable takeover of the publicly listed bank by the central
bank on July 23 could damage the public's confidence in the
viability of the whole Rp 550 trillion bank recapitalization
program.

As reported in the mass media over the last three days, Bank
Bali owners, pressured to meet the deadline for putting up their
portion of the bank's recapitalization fund, were forced to use
the "good offices" of influential government lobbyists reportedly
of the ruling Golkar Party to obtain reimbursement from IBRA for
about Rp 3 trillion in interbank credits it had in several banks
closed recently as part of the massive banking reform.

Bank Bali, as the reports said, succeeded in getting back in
early June Rp 900 billion of the interbank credits from IBRA, but
in return had to pay the lobbyists a Rp 550 billion "brokerage
fee". The story turned another twist when a great portion of the
fee was allegedly transferred to the Golkar coffers and another
powerful political leader. The reports went on to disclose that
Bank International Indonesia, another publicly listed bank in the
government-sponsored recapitalization program, had earlier been
similarly squeezed by lobbyists. This bank allegedly paid Rp 400
billion in a brokerage fee to have its interbank credits
reimbursed by IBRA.

The takeover of Bank Bali by the central bank actually raised
puzzling questions as to why it was done quietly without clear
explanation. Bank Indonesia only said it had to transfer the bank
to IBRA because the owners failed to come up with their share of
the recapitalization fund. But two days later IBRA signed an
investment agreement with Standard Chartered Bank whereby the UK
bank acquired 20 percent of the bank and took over its
management.

These deals were really perplexing and lent credence to
suspicions that a multimillion dollar offense did hit Bank Bali.
The puzzling question is why Bank Bali was not automatically
reimbursed by IBRA for its interbank credits because these claims
are covered by the government blanket guarantee on bank deposits
and claims.

When Bank Bali was pronounced qualified for joining the
recapitalization program in April, its capital adequacy ratio
(CAR), as determined by international accountancy firms assigned
by IBRA and the International Monetary Fund, was a negative 8.2
percent, and its recapitalization requirement was set at Rp 2.8
trillion. But IBRA announced early last week that the bank's
capital standard, as reassessed under a due diligence by Standard
Chartered, had deteriorated sharply to a negative 32 percent,
thereby catapulting its recapitalization requirement to Rp 4.3
trillion.

Bank Bali has always been known for its conservative lending
strategy and its CAR, though negative, was the highest among
other publicly listed banks selected for the recapitalization
program. Some rumors had it that the majority owners robbed the
bank of its best assets. But how could this have happened when
Standard Chartered had signed a letter of intent for acquiring 20
percent of the bank as early as April and had put $56 million in
an escrow account to back up its commitment? Moreover, since
assessment deemed the bank entitled to almost $34 million in
government equity funds for its recapitalization, its operations
should have been put under stringent supervision by the central
bank.

It is most imperative for the government to quickly straighten
out the issues because the alleged scandal could subvert the
whole economic reform program. Given the universal power and the
huge assets IBRA now controls, estimated at almost twice as much
as Indonesia's gross domestic product, even the slightest
suspicion of corruption and collusion within the agency would
damage the public's confidence in the whole banking industry.
Without confidence from the general public as well domestic and
foreign investors, the banking industry will remain crippled and
the economy will stay moribund as it is now because banks act as
the brain of the economy, determining the most efficient
allocation of resources.

The issues also make it most urgent and imperative now for the
government to require IBRA to publish an audited quarterly
financial report to enhance its accountability and transparency.