Local banks lack legal knowledge: BCA chief

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was revoked," he said.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)