Loan abuse may cost government $16b

JAKARTA (JP): The Supreme Audit Agency (BPK) disclosed on Friday the government risks losing Rp 138.4 trillion (US$16 billion) due to the misuse of emergency liquidity loans extended by the central bank to commercial banks between late 1997 and January, 1999.

BPK's chief Satrio Billy Joedono said in a report to the House of Representatives that of the Rp 144.5 trillion in liquidity support given by the central bank to 48 commercial banks, Rp 138.4 trillion had either been misused or extended in violation of banking regulations.

Billy submitted the audit report on 48 commercial banks that received emergency liquidity loans and on Bank Indonesia to House Speaker Akbar Tandjung and Attorney General Marzuki Darusman on Friday.

The investigative audit was ordered by the House due to alleged malfeasance in the extension of liquidity support by the central bank during the peak of the country's financial crisis. The crisis led most banks into financial distress and set off massive runs on banks.

"We found that Rp 84.84 trillion of the credits were misused by banks and many other credits were extended far in excess of the assets of the bank recipients," head of the BPK audit team Bambang Wahyu said.

Bambang added that banks, which were supposed to use the loans only to reimburse depositors during massive runs, turned out to have misused most of them for other purposes, in violation of banking rules.

The BPK report shows that many of the loans were used for foreign exchange speculation through derivatives transactions, for new lending to affiliated businesses and for repaying subordinate loans.

"Many banks also spent the loans on funding branch expansions, acquiring fixed assets and even for lending through the interbank market," the report said.

A significant portion of the credits was also not adequately backed by collaterals, as required by banking laws, BPK said.

Around Rp 100 trillion of the liquidity support went to five banks, including the nationalized Bank Central Asia (BCA), Bank Danamon, the now defunct Bank BDNI, and Bank Umum Nasional (BUN), whose owners were closely linked to former president Soeharto.

Thus far, Bambang added, none of the recipient banks have returned the loans.

"This amount (Rp 144.5 trillion) has now become the government's debt to the central bank with an annual interest of 3 percent," the report said.

BPK laid the blamed for the misuse of the huge liquidity credits squarely on the extremely poor quality of the central bank's supervision.

The report said that the central bank depended too much on off-site supervision (assessing written reports), whereas many commercial banks had manipulated their financial reports for years.

As a result, the report added, the central bank continued to give liquidity support to banks that were actually insolvent.

The auditors also discovered that many banks received liquidity loans far in excess of the value of their assets.

BPK added that the central bank was unable to detect whether the liquidity support was indeed used to handle the massive runs because it used its clearing mechanism to transfer the funds.

"If the liquidity support had been channeled under the government guarantee on bank deposits that required thorough verification of claims, such blatant misuse and overlending could have been prevented," the report said.

Bankers, the auditors found, were tempted to misuse the liquidity funds because of the ease with which banks could obtain the funds through BI's clearing mechanism.

"The clearing mechanism was easier, faster and required no verification and registration," the report said.

Bambang said that based on its findings, BPK had concluded that the irregularities and misuse of the credits indicated acts of crime against the state.

"We fully accept the responsibility to investigate the 48 banks," Attorney General Marzuki said after receiving a copy of the audit report.

"We need to study BPK's report first and, if necessary, will immediately issue a travel ban on the bankers implicated in the loan scandal," Marzuki added.

Acting BI governor Anwar Nasution pledged full cooperation with the investigation by the Attorney General's Office.

"We will fully cooperative because we are greatly concerned with our own image and credibility," Anwar said.

Anwar said that, if necessary, senior central bank officials implicated in the investigation would be temporary relieved from their duties. (bkm)