Fri, 03 Nov 2000

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.