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)