Thu, 04 Dec 2003

Loan fraud hits state-owned Bank Rakyat Indonesia

Rendi A. Witular, The Jakarta Post, Jakarta

After wrapping up a successful initial public offering (IPO) a month ago, state-owned Bank Rakyat Indonesia (BRI) has now put at risk its credibility after the disclosure of a loan fraud worth Rp 294 billion (US$34.5 million) at three of its branches.

The fraud underscores how fragile the internal control in state-owned banks is as it is the second case reported in the last two months, following the revelation of a massive Rp 1.7 trillion lending scam at Bank Negara Indonesia (BNI) in October.

BRI president Rudjito said that the bank had uncovered the fraud in September, two months before the IPO, and had found the alleged involvement of branch managers in Senen and Tanah Abang (in Jakarta), and the Surya Kencana branch in Bogor.

"We uncovered the fraud in September and three of our branch managers are now under detention at the Attorney General's Office for further investigation," said Rudjito in a press briefing on Wednesday.

The bank had reported the case to Bank Indonesia, the Capital Market Supervisory Board and the prosecutors in October, he said.

The fraud centers on the channeling of loans by the three branches to local companies backed by fictitious cash collateral deposits.

The suspects colluded with bank officials to falsify deposit accounts belonging to a number of customers, including Bank Pembangunan Daerah Kalimantan, to be used as collateral for the loans.

Director for Banking Supervision at Bank Indonesia Aris Anwar said that based on the central bank's investigation, one of the suspects was believed to be Yudi Kartolo, who is also known for his alleged involvement in the Rp 1.1 trillion fraud at BNI in 2001.

"The suspects are 'old players.' They are all members of Yudi Kartolo's syndicate. Every banker must be aware of his name," said Aris, adding that the "external" suspects were still at large.

He warned that there was a possibility that such frauds could reoccur in the future and that BI would not be able to prevent them if banks ignored compliance rules and internal officials were involved in the frauds.

Rudjito said that thus far the bank had managed to recover around Rp 31 billion by freezing the bank accounts of the suspects, and had set aside Rp 294 billion as a provision to cover potential losses from the fraud.

He explained that BRI did not deliberately cover up the fraud ahead of the IPO as the bank had explained the case in its final circular before offering its shares to the public, meaning that investors were already aware of the risk.

BRI, which mainly channels loans to farmers and small businesses, raised Rp 4.17 trillion in cash after selling a 40.5 percent stake to the public in November, making it one of the largest bank IPOs in Asia.

BRI shares ended down by 2.4 percent, or Rp 25, at Rp 1,025 on the Jakarta Stock Exchange on Wednesday on news of the fraud.

Elsewhere, BI Governor Burhanuddin Abdullah said that he regretted the fraud at BRI and ordered the bank's management to resolve the problem.

"I have been informed of the case and have asked the BRI management to settle it," said Burhanuddin after a hearing with the House of Representatives' banking commission on Wednesday.

Meanwhile, banking analyst Pradjoto said that the government should revise the internal control procedures at state-owned banks, which allow a branch manager to grant loans without requiring the approval of the boards of directors and commissioners.

He explained that state-owned banks should adopt the system applied by private banks, in which loans could not be channeled without the consent of the boards of directors and commissioners.

He also urged the authorities to immediately track the flow of the loans and freeze the accounts used to stash the money in order to prevent the suspects using the money to bribe law enforcement officials.