The huge loan scam

The huge loan scam

The dragging dispute between the government (finance ministry)
and Bank Indonesia (central bank) over the extension of Rp 144.5
trillion (US$15.88 billion) in emergency liquidity credits to
distressed banks during the peak of the financial crisis between
late 1997 and January, 1999, could become a new major obstacle to
the development of a stable financial system.

As long as the dispute remains unresolved, Bank Indonesia will
never get a clean bill of health from its auditors, the Supreme
Audit Agency, and it may eventually be disqualified by the Basle,
Switzerland-based Bank for International Settlement from its
membership. Such disqualification will devastate Bank Indonesia's
credit rating, prompting foreign banks to refuse its guarantee of
letters of credit opened by national banks. Worst of all, the
government's steadfast refusal to reimburse the huge emergency
support loans to the central bank would drive the bedrock of the
country's monetary system into technical bankruptcy.

It has now been almost one year since the Supreme Audit Agency
gave a disclaimer to Bank Indonesia's financial reports, upon
discovering through an investigative audit, that about Rp 138.4
trillion of the total loans had been extended in violation of
prudential rules with regards to the central bank's role as the
lender of last resort.

The central bank's lender-of-last-resort role requires it to
provide promptly temporary support to illiquid banks to prevent
panics and massive runs that can lead sound institutions to
financial distress and precipitate their insolvency. This was
theoretically what the central bank did when many banks were hit
by massive runs between late 1997, after the closure of 16
insolvent banks, and early 1999 when the financial fiasco
worsened into a political and social crisis.

However, what the Supreme Audit Agency discovered was a
massive and blatant misuse of the liquidity support by both
commercial banks and the central bank. First of all, the central
bank violated the basic rule which stipulates that liquidity
support can only be given to illiquid and not to insolvent banks,
and loans should be backed by adequate collaterals.

But as the investigative audit later found out, the bulk of
the emergency loans had been misused by the recipient banks for
currency speculation and financing affiliated businesses.
Moreover, many of the loans were not backed by adequate
collaterals and, in many cases, the amount of credits way
exceeded the total assets of the recipient banks. The Supreme
Audit Agency accused Bank Indonesia of being the main culprit in
the loan scam.

The central bank denies any wrongdoing, arguing that as part
of the Cabinet under the authoritarian rule of former president
Soeharto it could not do anything else but submit to the
instruction from the then president not to close banks, notably
those owned by Soeharto's cronies, even though their account
balance with the central bank had been negative.

The central bank did admit that the quality of its bank
supervision was so poor that it remained in the dark about the
real condition of most of the banks that had asked for emergency
liquidity loans. But the central bank also brought up as an
excuse the panicky situation during the crisis period that made
it rather impossible for it to verify each of the thousands of
clearing transactions conducted daily with banks.

Yet one finds it difficult to accept that the various forms of
so massive misuse of the liquidity support, as found by the
auditors, could have been possible without collusion with central
bank officials. The panic injection of funds smacked more of a
collusive act, rather than an honest mistake caused by technical
incompetence. Moreover, since most of the loans were extended
after the establishment of the government blanket guarantee on
bank depositors and creditors in late January, 1998, one may also
question the real urgency to bail out insolvent banks.

However, the government cannot simply refuse to reimburse the
central bank's credits because the wrongdoings discovered by the
auditors have yet to be proven in court. In fact, none of the
bankers and central bank officials implicated in the loan scam
have been brought to court. Several central bank directors were
questioned by the state police as early as December, 1998 but no
charges were officially made.

It is therefore most imperative that the Attorney General
speed up criminal investigations on the central bank officials in
charge of the liquidity support and bankers who allegedly misused
the loans to resolve the dispute once and for all.