Jakarta – The liquidation of Bank Dagang Bali (BDB) and Bank Asiatic, caused in part by a number of lending irregularities, point to the fact that the painful and costly efforts to restructure the banking sector have yet to bear fruit.

Having been in charge of the banking restructuring process over the past six years, the central bank remains unable to set up a sound supervisory mechanism and is unable to detect and prevent banking fraud, analyst Aviliani said on Monday.

"What happened to the two banks exposes once again the central bank's poor control mechanism. More banks will follow unless the current supervisory scheme is tightened," said Aviliani, an analyst from the Institute for Development, Economics and Finance (Indef).

She was responding to a move by Bank Indonesia last week to close the two small-sized commercial banks due to their worsening financial condition resulting from a number of alleged illegal transactions, causing some Rp 1.2 trillion (US$ 139 million) worth of loans to turn sour.

According to the central bank, the alleged irregularities – the first one took place about two years ago – centered on a number of lending frauds and legal lending limit violations, involving affiliated companies which turned out later to be fictitious.

The two banks are owned by two families connected by marriage, which saw the son of I Gusti Made Oka, who owns the majority stake in BDB, married to a daughter of Asiatic's majority stake owner Tong Muk Keung. BDB is a Bali-based lender which has 31 branches and is staffed by 632 employees. Asiatic employs around 150 staff.

Despite Bank Indonesia's claims that all efforts had been made to salvage the banks, the fact that such a practice could go undetected in the first place is a worry for the fragile banking industry and puts at risk hard-won public confidence in the sector.

"It was exactly such practices that had plunged the country into a deep banking crisis in the late 1990s. Bank Indonesia should also be held responsible for failing to prevent them again this time around," Gadjah Mada University economist Revrisond Baswir said earlier.

Indonesia embarked on a massive bank restructuring process in 1998 with the hope of preventing common bad banking practices in the precrisis period – such as excessive loan exposures to affiliated firms, weak internal and external control, poor credit risk managements and others – from reoccurring.

However, despite a cost of more than Rp 600 trillion in state funds, evidence shows that fraud by greedy bankers remained.

Aside from what happened in BDB and Asiatic, similar practices have also occurred in other banks.

Still fresh in people's mind are the lending scandals involving two of the country's banking giants Bank Negara Indonesia (BNI) and Bank Rakyat Indonesia (BRI).

"Unless Bank Indonesia's supervisory mechanism is improved, we may well be facing the second phase of the banking crisis," said Aviliani.