Possibility of abuse of new bank ruling

JAKARTA (JP): Experts warned Bank Indonesia (BI) of the possible manipulation of the newly loosened legal lending limit by cash-strapped business groups seeking to obtain money to recapitalize their banking operations.

Senior banker I Nyoman Moena said the central bank's plan to ease the legal lending limit from 20 percent to 30 percent could be abused by bank owners facing cash flow problems. They warned that bank owners could channel the public's money into their various businesses before injecting the money into their troubled banks.

"This kind of misuse is a potential because the legal lending limit is being loosened at a time when conglomerates are trying hard to secure cash to recapitalize their banks," he told The Jakarta Post.

"BI has to be vigilant," he warned, adding that the central bank's intention to stimulate economic growth by easing the legal lending limit might not be achieved if the new rule was abused.

BI director Subarjo Joyosumarto said on Friday evening that the central bank planned to increase the limit commercial banks are allowed to lend to any single party from 20 percent of equity to 30 percent.

"The loosening of the legal lending limit is intended to accelerate the economy's recovery process," he said during a breaking of the fast gathering with executives of the National Private Banks Association.

The new ruling will be issued by the central bank later this week and will take effect on April 1, he added.

The government has required that all of the country's commercial banks have a minimum capital adequacy ratio (CAR) of 4 percent by the end of March 1999, and 8 percent by the end of the year.

At least 61 of the country's more than 200 commercial banks have CAR levels of between minus 25 percent and less than 4 percent, and another 43 banks have CAR levels of less than minus 25 percent.

Pande Raja Silalahi, an economist at the Center for Strategic and International Studies, also warned of possible abuse of the new rule.

"It (the new rule) must not create new problems, especially as we approach the general election," he said, pointing out that any abuse of the ruling would increase the public's resistance to the government's bank restructuring program.

"BI has to be transparent and improve its control mechanisms," he said, adding that the bank recapitalization program, which would require Rp 18 trillion from the state budget, had so far not been implemented with any transparency.

Moena expected that the new ruling would only be a temporary measure to stimulate growth in the crisis-battered economy because it was against state guidelines which state that an even distribution of the economy was the top priority, while growth was second.

The government projected that the economy would start to show positive growth in the second half of the 1999/2000 fiscal year. The economy shrunk by 13.68 percent in 1998.

"It (the new ruling) is ironic, particularly at a time when the government is claiming to boost the welfare of the people," Moena said, pointing out that the new ruling would provide more credit for big businesses instead of small companies.

Subarjo also said that the move was being taken because the present legal lending limit was seen as too restrictive under the present economic conditions, resulting in frequent violations of the regulation.

The increasing number of nonperforming loans has forced many banks to make a greater allowance for bad debts, a stance which has eaten into their equity bases. Their position has been further undermined by a weakening of the rupiah, which has tripled the cost of U.S. dollar denominated loans.

The decreasing equity base and the weak rupiah have made it difficult for most banks to abide by the existing 20 percent legal lending limit.

Under the present regulations, a bank can only extend credit of up to 20 percent of its equity to any single party. Also, a bank cannot lend more than 10 percent of its equity to companies within its own business group.

Subarjo acknowledged that some banks had willfully violated the legal lending limit, while others had been caught by the plunge in the value of the rupiah.

"The different types of offenders will face different sanctions. If violations were committed knowingly, we will consider that to be an offense," he said.

Under the 1993 Banking Law, violating the legal lending limit is a criminal offense punishable by a maximum of six years imprisonment and a Rp 6 billion fine.

The rating of offending bank's will also be downgraded. (02/rei)