Loan abuse may cost government $16b

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)