Massive loan scandals rock Indonesian finance sector

INDONESIA'S banking industry is shuddering after at least two loan scandals at a large state bank, the impact of which is being felt as far away as Hong Kong and is being compared by foreign investors to the Tiananmen Square massacre.

To some Western diplomats and economists, the ordeal is starting to look like the tail end of a gradual house-cleaning process in a developing country where state banks have traditionally followed the orders of senior government officials, where and private banks have served to finance family businesses.

They cited the central bank's liquidation of Bank Suma in 1992 after it was wrecked by bad loans - despite its ownership by PT Astra International, a Toyota assembly plant and one of Indonesia's most powerful conglomerates. Bank Duta, another private bank, narrowly escaped collapse after US$420 million vanished from its coffers in 1990.

But the diplomats trace the cleanup as far back as the restructuring of Indonesia's financial institutions in the late '60s, when state banks were assigned to cover major economic sectors with privileges in relation to private banks. Two decades later, in October 1988, the banking sector was thrown open to foreign banks.

Over the years, state banks have allowed themselves to accumulate huge amounts of non-performing loans which, while perhaps not surprising, have implications for doing business in Indonesia that the diplomats and economists say cannot be ignored.

The country's seven state banks have been saddled with about 50 bad and questionable loans, according to Indonesian officials.

Estimates of the total value of the non-performing debt that have been made public in Jakarta range from $2.9 billion to $12.67 billion, and range from 3.5 per cent of outstanding loans to 21 per cent of the state banks' earning assets.