Jakarta – Indonesia's Finance Minister Mar'ie Muhammad yesterday defended the closure of 16 banks, asserting the government had followed proper procedures before winding them up in a move to reform the banking sector. His statement, reaffirming the government's resolve to implement the decision, followed a legal challenge brought by a liquidated bank in which a son of President Suharto has a stake.

"Warnings and proposals for improvement issued by Bank Indonesia received less positive responses from the management of the prospective banks...," Mr Mar'ie told a plenary session of Parliament.

He said the government had followed "various stages and processes over a sufficient length of time before the business licenses were revoked".

The banks were ordered closed on Nov 1 after the International Monetary Fund announced a multibillion-dollar aid package to steady Indonesia's faltering economy.

Bank Andromeda, one of the liquidated banks in which President Suharto's son Bambang Trihatmodjo has a 25 per cent stake, sued Mr Mar'ie and Bank Indonesia central governor Sudrajad Jiwandono last Wednesday over its closure. The bank's lawyers said the officials had not followed proper procedures and failed to warn the bank in time.

The Finance Minister said the liquidation of the 16 banks constituted an important element in the government's programme to restore health to the banking sector.

"In order to uphold the rule of law and to maintain Indonesia's credibility in the international community and in the context of restoring health to the banking system, the government will implement its decision announced on Nov 1 and will take all consequences of that," he said.

Commenting on the lawsuit filed by Bank Andromeda, Mr Mar'ie said "any party feeling adversely affected by this decision can pursue the matter through the appropriate legal channels".

Yesterday, PT Bank Dagang Nasional Indonesia said 20 banks had been appointed by Bank Indonesia to help with the liquidation of the 16 banks.

Meanwhile, Minister of Transmigration Siswono Yudohusodo called on Bank Andromeda to withdraw its legal suit for the sake of the country's currency, the Bisnis Indonesia daily reported yesterday.

He said the rupiah would plunge if Bank Andromeda won the suit, and added that the stability of the currency outweighed the bank's right to lodge an appeal.

The rupiah has already lost over a third of its value against the US dollar since it came under speculative attack in July, prompting the government to engage in a tight monetary policy that has slowed the economy.

The minister said the withdrawal of the suit would not damage the credibility of Mr Bambang and might even draw public support.

He was also certain that the bank closure orders were legally correct and in the interest of the nation.

The closure was among the first reforms announced by the government after it received the IMF aid pledge.

Mr Mar'ie said an unhealthy financial sector could trigger a worsening of the economic situation, unless immediate steps were taken to rehabilitate the sector.

He also announced the criteria used to decide on the banks' closure which included insufficient assets to cover liabilities, year-to-year loses due to costs outstripping income amid substantial bad debt, and a weak ability to mobilise funds that led to high-interest money-market borrowings.