Due diligence audit on 56 banks completed: BI

JAKARTA (JP): A due diligence audit of the financial status of 56 commercial banks has been completed, part of the central bank's target to examine all of the country's more than 200 institutions by the end of October.

Bank Indonesia director Soebardjo Djojosoemarto said on Friday the financial authority believed the October deadline could be met even though only a quarter of the banks had been audited.

"We're confident that the auditing process on all of the bank population can be completed as scheduled," he told the media on the sidelines of a House of Representatives (DPR) debate on the government-proposed bill on revision of the banking law.

Sixteen foreign exchange banks were audited by six of the world's major accounting firms, he said, and 40 banks were audited by Bank Indonesia.

Contract

He added that a new contract had just been assigned to the six accounting firms to audit 40 foreign exchange banks, with the central bank to complete due diligence on the remaining 60 banks.

The audit started in May and includes the scrutiny of asset quality, capital, management and networking. Providing a complete profile of each bank, it will be used as a basis for formulating the country's bank restructurization plan, including measures for institutions which may not be able to meet the minimum 4 percent capital adequacy ratio (CAR) required by year's end, Soebardjo explained.

He said the authority would not automatically close banks unable to fulfill the CAR requirement, but would seek recapitalization measures, particularly through inviting foreign investors.

"Closing down banks is not an easy task," he said, citing the panic which followed the liquidation of 16 banks last November.

Foreign investors

He said many overseas investors had listed their names with the central bank with the intention to purchase local banks. He identified GE Finance, a unit of U.S.-based giant General Electric, as among the most serious.

Negotiations with prospective foreign investors will start when the bank restructurization plan has been formulated, he said, adding that the revised banking law would eliminate foreign ownership restrictions for local institutions.

Use of foreign auditors, as recommended by the International Monetary Fund, had raised concerns among local bankers because the international auditing criteria significantly lowered the evaluation of asset quality.

The government defended the choice by contending that the international criteria were a requirement to attract foreign investors into the banks.

The international accounting firms include Price Waterhouse, Arthur & Andersen, KP&G and Ernst & Young.

Financing for the foreign auditors' services is derived from a US$2.2 million loan from the Asian Development Bank to finance preparations for the bank restructuring plan, including in designing the new banking legislation.

Now into its second year, the economic crisis has sent the country's banking sector into a severe tailspin, including the closure of 26 banks. It has also forced several tycoons to relinquish many of their assets to the government to repay their banks' debts to the central bank, which channeled more than Rp 140 trillion (US$12.7 billion) in liquidity support to troubled institutions.

The Salim Group, for instance, has reportedly surrendered assets of about 100 companies -- including publicly listed PT Indofood Sukses Makmur and PT Indocement Tunggal Prakarsa and nonlisted units PT Bogasari Flour Mills and automaker PT Indomobil -- to repay the Rp 48 trillion emergency loan provided to its banking arm, Bank Central Asia (BCA). (rei)