Bad loans a threat to economy : Suharto

PRESIDENT Suharto yesterday warned Indonesia’s banking system that national interests would be put at risk if local banks failed to cut down on bad loans, which now stood at more than 10 billion rupiah (S$6 million).

Opening a meeting of the Indonesian National Private Banks Association here, he voiced concern that such loans were fuelling rising costs in the country.

“I ask you for your attention to these loans,” he told bankers and businessmen. “Bad loans and other costs are causing a high-cost economy. In the long run this will be bad for banks and society as a whole.”

He said that local banks should follow strict procedures and make a careful and objective assessment before releasing loans.

“Credit evaluation should not be relaxed just because the project is submitted by the bank’s group or owner,” he said, adding that it would affect people’s trust in the bank that was holding their money.

Said Mr Suharto: “It could have social and economic repercussions. It does not involve just one person but the whole nation’s interests.”

He noted that the banking sector, in particular, could face problems if nothing was done about it: “Efforts to reduce such loans as much as possible is the best way to improve the efficiency of the country’s banks.”

Despite this problem, he noted that the banking sector had made big strides in the past decade. The number of banks, for example, had increased from 111 in 1988 to 239 this year.

Mr Suharto’s comments came after concerns expressed by the central bank over such loans. Bank Indonesia Governor Soedradjad Djiwandono, said earlier this month that non-performing loans here amounted to 10,233 billion rupiah.

In his opening remarks yesterday, Mr Djiwandono said that efforts were being made to improve the country’s banking industry to prepare for regional and international commitments.

This could involve giving local banks more autonomy with less directives from the central bank.

Commenting on the recent concerns over a currency devaluation, Mr Djiwandono told reporters that the condition of the Indonesian rupiah was “getting firmer and will hopefully stay that way”.

He called on the business and banking sectors to remain “vigilant” to ensure the rupiah’s stability. “We have to be continuously cautious. We cannot be careless,” he said.

“When the situation has calmed down and there is a new equilibrium, we must make sure that the system we have already built will not be shaken.”

The rupiah plunged to a record low last week when it dropped 5.5 per cent to 2,642 rupiah to the dollar, breaking the previous record low of 2,503 rupiah.

Bank Indonesia intervened by selling dollars this week to calm the markets as the rupiah weakened sharply in foreign exchange trading.

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