JAKARTA — When they first became public, the scandals that have affected Citigroup in Indonesia seemed perfectly calibrated to stir fascination and anger in a country that had for years been a particularly bright spot in the rapidly growing banking sector in emerging economies in Asia.

First came the tabloid-ready allegations in March that a glamorous wealth manager at Citibank, Inong Malinda, had for years been fleecing her rich clients of millions of dollars to fund an opulent lifestyle. Ms. Malinda, who is in police detention awaiting trial, denies any wrongdoing, said Batara Simbolon, her lawyer.

Then, just days later, a politician, Irzen Octa, died in suspicious circumstances after a visit to a Citibank branch. In the room with him just before he died were outsourced debt collectors, from an industry with a reputation in Indonesia for intimidating tactics and occasional violence. Five people, including two Citigroup employees, have been charged with offenses including torture and false imprisonment in relation to Mr. Irzen’s death.

On one level, Citigroup’s twin scandals — both of which are wending their way through the legal system — serve as a cautionary tale. Castigated by politicians, punished by the central bank and flayed in the news media, Citigroup has become an ugly example for banks seeking to expand aggressively in a country where strong economic growth has taken place against a backdrop of weak regulations and ineffective institutions.

But on another level, analysts say, it is a lesson that may go largely unheeded. The reason? There is just too much money to be made.

“I don’t think this is going to affect anyone’s interest in entering Indonesian banking,” said Hendri Saparini, the managing director of Econit, an Indonesian economics consulting firm. “If you ask me, hopes about this huge market are far bigger than any concern about weak regulations — especially if this weakness can be taken advantage of.”

In a country with economic growth of about 6 percent a year and a burgeoning middle class, the Indonesian banking sector has thrived, while deregulation has allowed foreign banks to flourish alongside local firms.

Total loans in Indonesia grew by an average of 20 percent a year between 2005 and 2010, with consumer banking accounting for the largest increase, according to Bain Co., a global consulting firm. In the emerging field of Islamic financial products that comply with Shariah law, growth has been even stronger.

Bankers within the country are also in fierce competition to persuade wealthy Indonesians to break their longstanding habit of moving their money — and the fees they pay — to Singapore, a regional hub for private banking.

“If you looked at the number of people in 2005 in Indonesia with a bank account, that was 25 percent of the population,” said Ed Lin, one of the global heads of Bain’s financial services practice. “If you look at that in 2010, that 25 becomes 40 percent. In our estimates, that will go to about 70 percent in 2015.”

In Citigroup’s case, problems apparently arose in two parts of the fast-growing world of Indonesian consumer banking: private wealth management and credit cards.

As a result of the scandals, the central bank, Bank Indonesia, has banned Citigroup from taking on new credit card customers for two years and has barred it from opening new branches or recruiting new priority banking customers for one year. A local bank, Bank Mega, has also received sanctions for a case of internal employee fraud.

The accusations against Citigroup are not rare in Indonesia, said Ms. Saparini, the economist. Rather, the two scandals — a “volley of nonstop problems,” in her words — have trained attention on an environment in which many banks have aggressively chased customers, with little oversight from Bank Indonesia. Citigroup simply got stung publicly for its apparent lack of internal oversight, she said.

The government is working to control the banking sector more closely, but it has encountered obstacles. An effort to establish a new regulator, the Financial Services Authority, has run into a tussle over its independence between President Susilo Bambang Yudhoyono and members of the Indonesian Parliament, who want two of the body’s nine commissioner positions to be filled by people chosen by lawmakers.

As politicians wrangle, ordinary Indonesians feel frustrated.

Sudaryatmo, the head of the Indonesian Consumers Organization, who goes by one name, said banking was the third most complained about industry in Indonesia, after telecommunications and housing. Of particular concern was the widespread experience of consumers who say they were drawn into unsustainable debt by major banks and then haunted by often thuggish third-party debt collectors.

Article source: http://www.nytimes.com/2011/07/18/business/global/warning-signs-in-citibank-scandals-in-indonesia.html?partner=rss&emc=rss