Possibility of abuse of new bank ruling

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)