Govt asked to sit with BI over 'misused' loans

JAKARTA (JP): The central bank and the government should sit together to reach an agreement on how to share the burden in the mishandling of past massive emergency liquidity loans for troubled banks, according to Bank Indonesia deputy governor Burhanuddin Abdullah.

Burhanuddin said on Friday it was crucial to reach the same understanding on the "criteria" used to channel the liquidity support loans in the past.

"Bank Indonesia and the Ministry of Finance should sit together to reach agreement on the criteria," Burhanuddin told reporters following Friday prayers at the central bank headquarters.

"A clear criteria will decide who will cover what and how much.

"I'm optimistic that this can be settled, so that the economy will move again. I believe that the sun will shine again tomorrow," he added.

The emergency liquidity support has turned into controversy, creating tension between the independent central bank and the government.

The government via Bank Indonesia channeled more than Rp 144 trillion in emergency loans to 48 commercial banks between late 1997 and early 1999 to bail out banks facing massive ruin when confidence in the industry plunged to its lowest point.

The closure of 16 insolvent banks in November 1997, as recommended by the International Monetary Fund, triggered the deterioration in confidence, while the social and political crisis the following year further worsened the condition.

The government launched the policy at the time to prevent a systemic and complete collapse of the country's banking sector. The central bank, part of the government at the time, channeled the loans as the lender of last resort.

Bank Indonesia became an independent central bank in May last year.

But a recent audit by the Supreme Audit Agency (BPK) revealed that some Rp 138.4 trillion of the Rp 144.5 trillion emergency loans had been misused by the banks, putting the state at risk of huge losses.

While the loans were only meant for returning depositors money, the banks used them for other purposes, including for derivatives transactions for dollar speculation and lending to affiliated parties, BPK said.

The audit agency blamed the weak supervision of Bank Indonesia for the massive misuse of the loans.

There has also been accusations of collusion between central bank officials and bank owners, particularly as many of the banks received the loans in excess of the size of their assets. The loans were also not backed up with collateral.

The government was supposed to issue bonds to finance the emergency loans. But it said it would only issue the bonds to the central bank until the controversy had been settled because the interest rate cost of the bonds would be financed by taxpayers.

Having Bank Indonesia pay the potential loss of the state as revealed by BPK would send the central bank either into bankruptcy or see it undergoing a recapitalization program.

Bank Indonesia sent a letter earlier this week to the government and BPK, seemingly to dispute the BPK findings.

But Burhanuddin said the letter was merely to explain the cost to the government if the emergency loans were not provided.

He added that the cost to the state was not as huge as revealed by BPK because the former bank owners had surrendered some assets now under the management of the Indonesian Bank Restructuring Agency (IBRA).

"It must be calculated again," he said.

"I don't think we should talk of numbers right now because there are already too many numbers circling around which only add to the confusion," Burhanuddin said when asked the amount of loss that must be covered by the government.

"The important thing is that we all must sit together to discuss the criteria ... and to seek a political solution," he said.(rei)