Bank scandals may destabilize economy

Bank scandals may destabilize economy

The Jakarta Post, Jakarta

Loan fraud at state-owned banks could further shatter public
confidence in the country's banking sector and put the overall
economy at risk if such cases were not immediately curbed,
Minister of Finance Boediono warned on Thursday.

"The fraud may have an impact on the country's economic
stability if it cannot be contained immediately," he told
reporters.

He explained that there were three factors needed by banks to
help prevent such fraud from reoccurring in the future, which
included improvement in banks' internal control, removal of
corrupt officials and better implementation of the "know your
customer" principle.

"This is the time for us to remove corrupt officials who could
harm public confidence in our banking sector," he said.

He was commenting on the revelation on Wednesday of a Rp 294
billion (US$34.5 million) lending fraud at the giant state-owned
Bank Rakyat Indonesia (BRI), the second case to hit a state-owned
bank in just less than two months. In October, banking
authorities uncovered that Bank Negara Indonesia (BNI) was
involved in a Rp 1.7 trillion lending scam allegedly masterminded
by top officials of a branch of the bank and a number of
businesspeople. Certain top politicians were also reportedly
involved in the BNI scandal.

The BRI scandal is similar to that of the BNI case. It centers
on the channeling of loans by three bank branches to local
companies supported by cash collateral deposits that they falsely
claimed as theirs.

The BRI and BNI cases underscore the weak supervision in the
country's banking sector, which has just started to recover from
the late 1990s financial crisis. It also highlights the fact that
the old habit of corruption die hard. The financial crisis, which
had forced the government to spend around Rp 450 trillion in tax
payers money to bailout ailing banks, was mainly due to poor
lending practices and violations of banking regulations.

The fraud cases occur at a time when the government is trying
hard to sell state-owned companies and to win the confidence of
investors and foreign donors to help fix the country's economic
woes.

"This scandal is further proof that the supervision of the
banking sector especially in state banks is still weak," said
economist Rizal Ramli, who is also a former finance minister.

Vice President Hamzah Haz also voiced similar concerns, saying
there was an urgent need for banks and the central bank to
improve their supervisory system which had been proven to be
spineless.

He also said there must be strong legal measures taken against
those involved in the scandal to prevent similar cases from
occurring in the future.

State Minister of State Enterprises Laksamana Sukardi
concurred. "We must be resolute against those violating banking
regulations. Otherwise they'll continue to commit such crimes."

As of now the Attorney General's Office has detained three
officials of BRI, but businessmen Yudi Kartolo, whose company
obtained part of the loan is still free. Yudi was also allegedly
involved in a Rp 1.1 trillion fraud at BNI in 2001, a Bank
Indonesia senior official has said.

BRI internal supervisory officials uncovered the fraud in
September, two months before the bank's IPO in November. The BRI
management has claimed that it had informed investors about the
loan problem prior to the IPO, and had allocated sufficient funds
to cover the potential losses.

Indeed, the case for the time being seems not to have had a
negative impact on BRI shares in the stock market. The shares
ended higher at Rp 1,050 on Thursday, after falling by Rp 25 at
Rp 1,025 on Wednesday.

Investment director of state-owned PT Jamsostek Samuel Tobing
said that BRI shares remained strong because investors were
neither surprised nor worried about the fraud as they had already
been informed of it in BRI's IPO circular, and that the bank had
set aside Rp 294 billion as a provision.

"Investors have already calculated the risk, and that it will
not impact BRI profit," said Samuel, who manages around Rp 24
trillion of Jamsostek's investment portfolios, and had invested
some money in the BRI shares.

President of the Jakarta Stock Exchange Erry Firmansyah said
that the bourse would not suspend trading in BRI shares because
investors had already been informed of the fraud.