Soeharto tells banks to reduce problem loans

JAKARTA (JP): President Soeharto has called on the country's banking industry to cut down problem loans, strengthen capital and minimize banking crimes.

Soeharto told the opening session of an Indonesian National Private Banks Association meeting here yesterday that failure to tackle bad loans could threaten the banking industry and national interests.

"Problem loans and other costs are making the economy inefficient. They also burden bank customers and the public," Soeharto said.

Bank Indonesia (the central bank) governor, J. Soedradjad Djiwandono, said earlier this month that problem loans totaled Rp 10.23 trillion (US$4.2 billion), 2.9 percent of total loans outstanding as of the end of April.

Soeharto said the high level of problem loans had resulted in the wide interest spread between borrowing and lending rates, which were wider than the international standard.

Indonesia's interest spread currently stands at 5 percent, compared to below 3 percent in advanced countries.

The President noted that the wide interest spread had burdened the business sector, which eventually made Indonesian products and services less competitive on the world market.

"We must try hard to narrow this wide interest spread," Soeharto said, adding that one way to narrow the spread was by reducing problem loans in the banking industry.

"I ask for your attention to these problem loans. Even though in general, there has been progress in dealing with this problem, efforts to minimize problem loans are the best way to enhance the efficiency and health of the nation's banks," said Soeharto.

Clear boundaries between the board of directors and the bank's owners should also be defined regarding their authority and responsibilities, he added.

"Credit evaluation should not be relaxed only because the project is sponsored by the (bank's) group or owner," Soeharto warned.

He warned that irresponsible management of public funds would erode people's trust in the banking industry.

"Bank owners and debtors should always remember that banks use people's money, which is entrusted to them," he noted.

He added that effective and objective evaluation, procedures and administration in the banking business should be upheld.

The President also called on local banks to strengthen their capital base to compete in a globalized financial market.

The government would continue to support any bank's efforts to raise public funds through the capital markets or merge with other banks to strengthen their capital structure.

He noted that small but healthy banks would still have room for business expansion, especially in Indonesia, whose economy was still growing rapidly.

"Our country, which is still developing, serves as a fertile land for either large or small banks," Soeharto said.

The President also called on the banking industry to pay special attention to bank-related crimes, which are becoming more and more sophisticated.

"We should realize from the outset that the rapid growth in network and banking business ultimately needs a reliable security system," Soeharto said.

Soedradjad reported yesterday that apart from the weaknesses caused by problem loans, Indonesia's banking industry had grown rapidly in terms of branch network, third party funds, credits and productive assets.

Indonesia's 237 commercial banks recorded total assets of Rp 526 trillion as of May 1997, from Rp 334 trillion in December 1994.

In the same period, third party funds raised by commercial banks increased to Rp 317 trillion from Rp 188 trillion. Credits rose to Rp 357 trillion from Rp 217 trillion.

The number of bank operational offices increased by 1,510 offices, to 7,536 offices. (rid)