Local banks lack legal knowledge: BCA chief

JAKARTA (JP): Bad debts in the country's banking sector were partly because of banks' poor knowledge of corporate law, Bank Central Asia's president, Abdullah Ali, said yesterday.

"The legal aspects which are hardly ever touched on in credit allocations, for instance, have resulted in huge numbers of bad loans," he said at the opening of a one-day seminar on the enforcement of Law No. 1, 1995 on Limited Liability Companies.

Abdullah said in the past two decades, many borrowers refused to pay their debts because they knew the banks would have no strong legal base to take them to court.

"They understood well that the disbursement of the credits were not bound by strong, legal clauses," Abdullah said.

He said the weakness of the banking sector's legal aspects also caused bad bonds to flourish at one point.

Such practices led the government to establish a Law on Bad Bonds.

"This new law had helped to reduce drastically the number of bad bonds, but then the law was misused for blackmail. So the law was revoked," he said.

In recent years the number of bad loans increased again, putting banks in an unsound position.

"It is clear that the legal aspects of a bank's operations play an important role. Bankers who understand law often face problems, let alone those who don't understand it," Abdullah said.

Lawyer Erman Rajagukguk, a professor at the University of Indonesia's law school, said at the seminar that several aspects had to be clarified in Law No. 1, 1995 on limited liability companies.

These included the lack of details on shareholder meetings and on the possibility of establishing partnership programs.

Credits

In response to questions on credit allocation for small and medium enterprises, Abdullah said the government should understand that many banks were in no condition to disburse 20 percent of their credit to small and medium businesses as required by the government.

Small business credit is defined as credit to small or medium businesses of up to Rp 250 million (US$103,468). The loans are for productive business activities.

The government recently announced it would penalize banks that failed to disburse these small business loans but has not set the fine yet.

Joint venture banks and foreign banks also have to disburse such loans.

Abdullah said yesterday that despite the failure of many banks to allocate their credits for small and medium businesses "all banks actually have the genuine intention allocating credit to such businesses".

"But it must be understood that not all of us (banks) are in a position to easily set aside 20 percent of our credit for small businesses," he said.

"But since it is already the central bank's decision, we have no choice but to follow the rules, while adjustments can come later. Rules are bound to make some people happier than others," he said. (pwn)