Banker slams central bank's policy on lending limits

JAKARTA (JP): Bank Indonesia's (the central bank) policy requiring commercial banks to observe legal lending limits is unrealistic, Bank Central Asia's president said yesterday.

Abdullah Ali said many banks were having trouble spreading credits to more debtors.

"The number of credible, banking corporate clients cannot increase in a split second. Therefore, we must find a proper way to solve this problem," Abdullah told a seminar.

If legal lending limits were implemented rigidly, he said, banks would have to extend credit to less credit worthy companies.

He said banks would lose good customers to other banks, most probably foreign banks or creditors, because the legal lending limits stopped them meeting all their financial needs.

"We need to prevent the exodus of reliable companies to the foreign debt market because it would force local banks to finance second-level customers," Abdullah said.

Other critics have suggested the central bank be realistic in imposing its lending limits, given that not all bank credits to affiliated companies were dubious.

They said the central bank should be more selective in enforcing lending limits.

The central bank issued a ruling in May 1993 limiting a bank's loans to a non-affiliated group of companies to 20 percent of its capital. Lending to affiliated companies or firms within the same business group was limited to 10 percent of a bank's capital.

Banks were given five years to adjust the composition of their loans extended before the ruling.

Loans to a group of non-affiliated companies before May 1993, for example, should be reduced to 35 percent of capital by March 1997 and to 20 percent by the end of 1997.

Loans to affiliated companies or firms within the same group which were provided before May 1993 should drop to 20 percent by March 1997 and 10 percent by the end of 1997.

Responding to criticism, Bank Indonesia Governor J. Soedradjad Djiwandono said the central bank had given banks sufficient time to comply with lending limits.

"I hope banks will not bargain again as we have given them a sufficient adjustment period," Soedradjad said.

He said legal lending limits were introduced to force banks to manage public funds prudently.

"They argued there was nothing wrong about extending their money to their own groups. But don't forget the banks' money is not their's but the public's," Soedradjad contended.

He said commercial banks must observe the rulings because they were set to reduce risks and distribute financial resources to as many people as possible.

"I understand their problems in spreading their credits to small and medium firms. However, we are ready to help them to observe the legal lending limits," the governor said.

By April 1996, 41 banks had not complied with legal lending limits, an improvement on the 70 banks in December 1995, according to the central bank. (rid)