Bank closure exposes BI's weak control

Bank closure exposes BI's weak control

The Jakarta Post, Jakarta

The liquidation of Bank Dagang Bali (BDB) and Bank Asiatic,
caused in part by a number of lending irregularities, point to
the fact that the painful and costly efforts to restructure the
banking sector have yet to bear fruit.

Having been in charge of the banking restructuring process
over the past six years, the central bank remains unable to set
up a sound supervisory mechanism and is unable to detect and
prevent banking fraud, analyst Aviliani said on Monday.

"What happened to the two banks exposes once again the central
bank's poor control mechanism. More banks will follow unless the
current supervisory scheme is tightened," said Aviliani, an
analyst from the Institute for Development, Economics and Finance
(Indef).

She was responding to a move by Bank Indonesia last week to
close the two small-sized commercial banks due to their worsening
financial condition resulting from a number of alleged illegal
transactions, causing some Rp 1.2 trillion (US$ 139 million)
worth of loans to turn sour.

According to the central bank, the alleged irregularities --
the first one took place about two years ago -- centered on a
number of lending frauds and legal lending limit violations,
involving affiliated companies which turned out later to be
fictitious.

The two banks are owned by two families connected by marriage,
which saw the son of I Gusti Made Oka, who owns the majority
stake in BDB, married to a daughter of Asiatic's majority stake
owner Tong Muk Keung. BDB is a Bali-based lender which has 31
branches and is staffed by 632 employees. Asiatic employs around
150 staff.

Despite Bank Indonesia's claims that all efforts had been made
to salvage the banks, the fact that such a practice could go
undetected in the first place is a worry for the fragile banking
industry and puts at risk hard-won public confidence in the
sector.

"It was exactly such practices that had plunged the country
into a deep banking crisis in the late 1990s. Bank Indonesia
should also be held responsible for failing to prevent them again
this time around," Gadjah Mada University economist Revrisond
Baswir said earlier.

Indonesia embarked on a massive bank restructuring process in
1998 with the hope of preventing common bad banking practices in
the precrisis period -- such as excessive loan exposures to
affiliated firms, weak internal and external control, poor credit
risk managements and others -- from reoccurring.

However, despite a cost of more than Rp 600 trillion in state
funds, evidence shows that fraud by greedy bankers remained.

Aside from what happened in BDB and Asiatic, similar practices
have also occurred in other banks.

Still fresh in people's mind are the lending scandals
involving two of the country's banking giants Bank Negara
Indonesia (BNI) and Bank Rakyat Indonesia (BRI).

"Unless Bank Indonesia's supervisory mechanism is improved, we
may well be facing the second phase of the banking crisis," said
Aviliani.