BI claims not at fault in bank closure

BI claims not at fault in bank closure

Dadan Wijaksana, The Jakarta Post, Jakarta

The central bank said on Tuesday the closure of Bank Dagang Bali
(BDB) and Bank Asiatic was a result of fraudulent practices from
the bank's insiders, rather than from its weak supervisory
mechanism as suggested by some analysts.

Bank Indonesia senior deputy governor Anwar Nasution said
fraudulent practices conducted by irresponsible parties could
happen in any supervisory system, no matter how good the system
was.

"BI has done whatever it can through regulation to save the
banks, including drawing up list of must-do actions to salvage
the banks, but it was they (management and owners) who failed to
comply with them," Anwar said.

Anwar was replying to criticisms from several banking experts,
who blamed the central bank for its failure to create a sound
control mechanism, which they said should have detected and
prevented any questionable transactions in the two banks early
on.

Even with the best control scheme in place, unscrupulous
bankers would still try to find holes they could exploit for
personal gain, Anwar said.

"In BDB's case, it became a victim of uncontrollable passions
inflicted by the owner's family."

The banks are owned by two families related by marriage. The
son of I Gusti Made Oka, who owns the majority stake in BDB, is
married to a daughter of Asiatic's majority stake owner Tong Muk
Keung.

The central bank last week shut down the two banks due to
their worsening financial status. This was caused by alleged
irregularities, including transfers of funds between the banks,
which led to Rp 1.2 trillion (US$ 139 million) in loans turning
sour. The irregularities centered on lending frauds and breaches
of legal lending limits involving affiliated companies, some of
which have proved to be fictitious.

Economists Revrisond Baswir and Aviliani were the latest to
join the criticism of the central bank, saying the liquidations
showed once again that costly efforts to restructure the banking
sector since 1998 had yet to bear fruit.

Despite a cost of more than Rp 600 trillion in state funds to
restructure the sector, evidence showed frauds by greedy bankers
continued to occur, they said.

The restructuring process, started in 1998, was aimed at
cleansing the system of bad practices common in the pre-crisis
period, including extending massive loans to affiliated
companies, weak internal and external controls and poor risk
management.

In defense of the system, Anwar said that had the banks
followed the rules, none of the irregularities would have
occurred.

Before the decision to close the banks had been taken, Bank
Indonesia had closely supervised the two banks to try and fix
their severe liquidity problems, he said.

Key bank board of directors were replaced, while capital
injections from the owners were also sought.

These measures were to no avail, Anwar said, leaving Bank
Indonesia with little option but to close the banks down.