BI under pressure to punish defiant banks
BI under pressure to punish defiant banks
JAKARTA (JP): Bank Indonesia, the central bank, has been under pressure to take firm action against banks violating the legal lending limit regulation.
Analysts have said firm action is needed to punish those who do not abide by the legal lending limit. Otherwise, they will continue to play cat and mouse with the monetary authority.
The central bank unveiled recently that the number of banks not complying with the legal lending limit regulation nearly doubled to 70 last year from only 44 in 1994.
The violation of the legal lending limit requirement by the 70 banks has received much attention. It has not only been debated in the media but also became a dominant topic in a recent hearing between Bank Indonesia and the House of Representatives.
The central bank has summoned executives of the defiant banks, asking them to immediately solve their problems. But many analysts doubt if the central bank's appeal would be effective enough.
"Shock therapy is needed. Otherwise, banks will continue to play cat and mouse with the central bank," said a noted banking analyst, Laksamana Sukardi.
Other analysts consider legal action would be too harsh, that punishing the defiant banks through legal procedures would be counterproductive.
Legal action would be even worse for the banking industry because such a move could undermine public confidence in the banking system, they said.
The controversy continues, but most analysts want the central bank to take a persuasive approach before taking any legal action.
Capital adequacy
In addition to the legal lending limit violation by the 70 banks, 21 other banks have failed to meet the central bank's minimum capital adequacy ratio requirement of 8 percent, and 18 other banks have broken the ruling on the maximum loan to deposit ratio.
The failure of the banks to abide by the prudential regulations indicate weaknesses in the series of government deregulations in the banking sector issued since 1988.
In 1988, the monetary authority issued a package of deregulation measures, liberalizing the previously closed banking industry. The banking reform was initially hailed as appropriate action in revitalizing the country's economic activities. But it was later labeled a destructive factor in the infant banking industry because the measure was introduced at a time when the industry still needed the government's protection. Taiwan and South Korea, for example, still protect their banks even tough their economies are much more developed than Indonesia's.
The reform not only attracted foreign bankers to establish operational networks in the country, but also lured local businesspeople who needed more secure and cheaper sources of funds to back up their business activities.
It became clear that to raise public funds to finance a conglomerate's business activities became the main motive for such a business to establish a bank in the post-reform era. Now almost all business groups in the country have their own banks.
The number of commercial banks, which was only 112 in 1987, grew to 171 only in two years after the reform. The number of banks reached 240 as of June last year, with around 5,100 branch offices stretching across the archipelago.
The number of secondary banks, which are at present allowed only to operate outside provincial capitals, also increased steadily to 8,955 as of last June from 5,780 as of 1987.
It is, therefore, quite understandable if almost all banks in the country concentrate their lendings to their own business activities or certain business groups.
Private banks mostly act as the funding agents of their affiliated firms, while state-owned banks provide most of their funds to those who have special connections either with their executives or with government officials.
The banking law, which was introduced in 1992, clearly stipulates the legal lending limit, which was then tightened in May 1993 through the third of a series of deregulation measures. The measure, which was introduced following the collapse of Bank Summa, was, however, considered as being too late.
Bank Summa was dissolved in 1992 after being unable to pay its financial obligations. The bank was reported to have concentrated most of its loans to its own affiliated firms, which were mostly later unable to repay the debts.
According to the May deregulation package, banks are allowed to provide a maximum loan of 20 percent of their capital to a non-affiliated business group and 10 percent to affiliated firms.
The lendings provided to affiliated companies before the introduction of the regulation should not exceed 12.5 percent of the capital by December 1995 and 10 percent by March 1997. And yet, the number of banks not complying with the legal lending limit almost doubled within just a year.
The 70 defiant banks consist of two state-owned banks, 56 private banks, three provincial-administration-owned banks, and nine wholly owned foreign banks and foreign joint venture banks.
Most of them broke the ceiling for their lendings to affiliated companies.
The increase in the number of banks not complying with the legal lending limit was caused by many factors. The banks, for example, intentionally raised their lending portfolio when their affiliates could no longer find other financial sources to support their business activities. This may have resulted from their inability to trade over-limit loans to other banks.
The abolishment of the central bank's policy allowing banks to exclude insured loans from the legal lending limit requirement was also considered an important factor, which caused the increase in the violations of the lending limit.
Roosiana Solikin, an executive of Panin Bank, said that covering loans with insurance used to be widely used to reduce over-limit credits.
"But such a practice is no longer allowed, so that the only alternative left in dealing with over-limit credits is to trade part of them with other banks," she told The Jakarta Post.
She, however, said that taking such action is not easy, given the fact that loans given to affiliated firms often break standard procedures.
"No banks will buy other banks' loans if they are not covered by adequate legal documentation or collaterals," she said.
Laksamana acknowledged that it is not easy to adjust the lending portfolio overnight to the existing legal lending limit. "That's why the central bank has provided a significant adjustment period," he said.
But the problem is that many banks have broken the legal lending limit regulation not only on their old loans but also those provided after the introduction of the lending regulation.
"How can such a practice be tolerated? In this case, the central bank should take firm action. Otherwise, it would lose its credibility," Laksamana said.
In an annual banking meeting last month, Bank Indonesia Governor J. Soedradjad Djiwandono said that the increasing number of banks not complying with the legal lending limit regulation is alarming.
He said complying with the legal lending limit regulation is important due to the fact that most problem loans in the banking industry are related to the violation of that regulation.
In this regard, Soedradjad said, the central bank will continue to closely monitor developments related to the violations and that it will not hesitate to take legal action against violators.
The central bank recently held a special meeting with executives of the 70 banks which violated the legal lending limit regulation to seek solutions. (hen)