Furor over bank funding

Furor over bank funding

The government, already widely criticized for its botched
handling of the banking crisis, has unnecessarily created doubts
and worsened the climate of public suspicion about the sorely
needed recapitalization of crippled banks. There could not have
been such a needlessly created furor than the issuance of such an
important regulation regarding so crucial, yet sensitive, a
matter of the use of public funds to bail out conglomerates on
the eve of the long Idul Fitri holiday.

The almost 10-day lag between the signing of government
regulation No.4/1999 by President B.J. Habibie on Jan. 18 and the
public's knowledge of the ruling raised many questions and even
strong suspicions that some sort of shady deal had taken place.

We are completely at a loss to understand why the government,
after facing an endless series of allegations of nepotism and
corruption over the handling of the banking fiasco, acted so
insensibly in appropriating Rp 4.3 trillion (US$477 million) in
state funds to recapitalize two private banks and 10 regional
development banks, on top of the more than Rp 115 trillion
already injected into the banking industry in emergency liquidity
support last year. The fact that Rp 3.75 trillion of the Rp 4.3
trillion in recapitalization funds was allocated to a single
bank, Bank Lippo, which is controlled by the Riady family, caused
the rumor mill to turn at full speed.

The questionable manner in which the recapitalization of the
first batch of banks was decided will no doubt make it much more
difficult for the government to gain the House of
Representatives' approval for the appropriation of Rp 18 trillion
in budget funds to finance the costs of the recapitalization.
Deciding on the appropriation of recapitalization funds while the
1999/2000 state budget draft is still under debate in the House
surely makes the legislators feel slighted and even deceived,
which could push them into a completely adversarial position.

This is unfortunate because more than 60 other banks will have
to be recapitalized before the end of next month as a vital
element in the effort to lead the country out of its present
economic crisis.

It is hard to avoid the impression that the central bank's
governor, Sjahril Sabirin, who, along with Minister of Finance
Bambang Subianto, forms the steering committee of the bank
recapitalization program, has not been fully involved in the
decision making process. Sjahril said in reply to reporters'
questions last week that the amount of recapitalization funds for
each of the 12 banks as stipulated in the government regulation
was not the final figure, but simply a ceiling figure. However,
nowhere in the regulation is there any mention of ceiling
figures.

Sjahril and Bambang could be entirely correct in their claims
that the first batch of 12 banks designated for the
recapitalization funds were indeed the first banks to fulfill all
of the requirements for recapitalization established by the
government. Yet these claims ring hollow because the public was
kept in the dark about exactly what conditions were met by the
banks.

The government's first step of establishing clear-cut
requirements for banks to qualify for the government's
recapitalization funds was correct. However, a complete lack of
transparency in the recapitalization of the 12 banks has negated
this positive first step and set off a wild furor.

The ruling would not have come under such strong criticism had
the decree been supplemented with detailed explanations about the
banks' business plans, their settlements of their related party
loans (legal lending limits), their repayments of government
liquidity support, their programs to recover their bad loans and
their plans to achieve a capital adequacy ratio of 8 percent by
2001 as required by the central bank.

The government, particularly the central bank and the finance
ministry, should have realized how low their reputation and
integrity has fallen in the eyes of the public. Given the
environment of public suspicion and distrust, full transparency
is the only effective way of selling to the public such an
important policy measure as recapitalizing banks with taxpayers'
money.