Govt to allow foreign control of local banks

Govt to allow foreign control of local banks

JAKARTA (JP): The government plans to allow foreign investors
to hold controlling ownership of Indonesian banks either through
direct placement or the capital market, a senior official has
said.

Minister of Finance Bambang Subianto submitted proposed
amendments to the 1992 Banking Act to a plenary session of the
House of Representatives yesterday, saying the new rules were
part of a concerted effort to attract foreign investors to prop
up the ailing banking industry.

Current law caps foreign ownership in Indonesian banks at 49
percent.

"Hopefully, the entry of foreign investors into the banking
industry would become a catalyst to a new wave of capital inflow
to other sectors of our battered economy," Bambang said in a
statement explaining the main points of the proposed amendments.

The bill includes the easing of banking secrecy provisions to
force banks to disclose more of their credits and other aspects
of their operations.

"The banking secrecy stipulations will cover only bank
liabilities such as deposits. But bank assets, such as credits
and their recipients, will be fully transparent to the public,"
Bambang said.

Under the 1992 Banking Act, banks are allowed to keep all
information relating to their loans secret.

The bill also stipulates a legal basis for the existence of
the Indonesian Bank Restructuring Agency (IBRA), which was set up
in late January, and sets new limits for loans to affiliates and
the amount of shares owned by individuals in a bank.

It also includes a legal framework for a deposit insurance
scheme by requiring all commercial banks to insure deposits in
order to protect the interests of depositors.

The insurance is currently fully provided by the central bank
under a special ruling effective for two years from last
February.

Bambang said the authority to license new banks and to close
down banks would be transferred to Bank Indonesia, the central
bank, from the finance ministry. The central bank would then
serve as both the supervisory and regulatory body for the banking
industry.

The new banking legislation is part of the government's
overall bank restructuring program, a key component of the IMF-
sponsored reform package designed to lead the country out of its
worst economic crisis in three decades.

The draft legislation has come on the heels of a new package
of bank restructuring measures initiated last week. The measures
nationalized Bank Central Asia (BCA), the country's largest
private bank, Bank Danamon, Bank Tiara Asia and Bank PDFCI and
suspended Bank BDNI, Bank Umum Nasional (BUN) and Modern Bank.

The seven banks had received Bank Indonesia liquidity support
equivalent to more than 500 percent of their capital and had
violated the legal lending limits.

The central bank has never disclosed the amount of liquidity
support provided to the seven banks but official sources said
BCA, Danamon and BDNI were cumulatively obliged to repay the
government US$7 billion from the bailout.

IBRA announced in June that Bank Tiara had received Rp 2.44
trillion ($203.3 million, converted at Rp 12,000 per dollar) in
BI liquidity support, while PDFCI had taken Rp 2.5 trillion and
BUN had received Rp 6.6 trillion.

Foreign appetite

Allan I. Mendelowitz, executive vice president of U.S. Exim
Bank, commented here yesterday that the quickest way to resolve
the country's banking system problem was to woo foreign investors
into the sector.

"Foreign world class players will not only bring money but
also management and (sound) credit policy," he told reporters
yesterday at a luncheon gathering organized by the U.S.
Information Service (USIS).

He explained that the banking crisis was caused by unsound
lending practices based on political or family connections.

"In order to resume economic growth, there has to be a
transformation of the financial sector. When this is done, I
think the prospect for miraculous growth is unlimited," he said.

He admitted that foreign appetite to purchase domestic banks
may be low at the moment due to the economic crisis, but if the
government could deliver a credible reform program, foreign
investor confidence would soon return.

"The sooner the reform program is implemented and the more
credible it is, the faster confidence will return." (rei)