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.