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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

NOT A PRETTY PICTURE

Reformers are battling powerful special interests to revive the banks

By Jose Manuel Tesoro / Jakarta


Banks Reform's elusive suspects

AS THE CROWD MURMURS OVER EACH new painting that goes under the gavel, wealthy bidders push the prices higher. Close your eyes. It is easy to imagine that a more buoyant, outwardly prosperous era has returned to Indonesia. Suharto could still be president-for-life, the rupiah lashed securely to a rate of 2,500 to the dollar, and the captains of industry dipping into their swelling profit streams to treat themselves to an oil by Arie Smit or a canvas by Affandi. Breathe deeply. Can you taste the Chanel-tinted scent of shown-off riches?

Shutting your eyes is important. Otherwise you can't ignore the signs that say, "Indonesian Bank Restructuring Agency" - and the reality that this April auction is the product of massive failure. The bank restructuring agency, called IBRA, was established 15 months ago to rehabilitate Indonesia's banks. That task today includes disposing of art collected at 10 of the 66 banks shut by the government. From this sale, IBRA hopes to raise at least a quarter of a million dollars, which adds to the $2 million it has already earned from selling a fleet of motorcycles and Mercedes.

It is barely a beginning. Canvasses and cars are non-core assets. The few millions IBRA has recaptured so far is small change given that the Indonesian government will eventually need billions as it liquidates failed banks, evaluates and settles non-performing loans, and recapitalizes the entire financial system. No one at the agency underestimates the magnitude of the task - or its many ironies. "It is as if everybody had a party," says one young IBRA staffer glumly, "and we had to do the dishes." The chore is necessary - but daunting. The restructuring agency must deal with $22.7 billion in non-performing loans and $12.7 billion owed by bank owners to the government . Says an IBRA manager: "It's not a sprint. It's a marathon."

Adding to the difficulty is the fact that many of the people most directly responsible for the bad loans still wield enough political clout to make reform difficult. The public, whose confidence in the banking system has been badly shaken in the past year, is watching keenly for evidence of real change or continued corruption. And bank employees are fretting over losing jobs in the middle of a devastating recession.

All these forces make IBRA's battle to rebuild the banks as much a political task as a financial one. And how well the agency maneuvers among these interests - everything from powerful business lobbies to shady politicians to zealous reformers - will largely determine how quickly and effectively Indonesia's financial institutions come back. Yes, the upcoming national elections in June are critical, but restoring the financial system is barely less so.

In hindsight, carnage in the Indonesian banking industry was inevitable. When the Crisis began in Thailand in July 1997, Indonesia had 245 banks, the product of a 1988 policy that allowed nearly anyone with $4 million in capital to set one up. Those who opened banks after 1988, says banking lawyer Prajoto, were mostly ethnic Chinese tycoons. "They were traders, not bankers," he says - people more likely to take risks than hew to prudential banking standards. Since the crash, the government has shut down 66 institutions, taken over 12, and is footing 80% of the bill for the recapitalization of eight others. The cost of this is conservatively estimated by the government at $35 billion - it could be much higher. Of Indonesia's seven state banks, four will remain after Jakarta completes its Bank Mandiri merger. Within the private banks scrutinized by IBRA, which include most of the above, 70% of loans have not been serviced; that proportion jumps to 90% at state banks.

One of the eight to be recapitalized, Bank Bali, reached a deal with British-based Standard Chartered Bank last week to sell a controlling 20% stake in the bank in return for a $56 million capital injection. In Jakarta, banking experts said the purchase reflected the relative strength of Bank Bali's retail banking network rather than a return of confidence among foreign investors in Indonesia. (Standard Chartered said this week it plans to buy 69% of Nakornthon Bank in Thailand.)

The house of cards that was Indonesia's banking system started to shudder in late 1997. The collapse of the rupiah began ratcheting up local companies' obligations, and Jakarta ordered the closure of 16 banks, which touched off a full-scale crisis of confidence. To keep money flowing throughout the system, the central bank cranked up its printing presses and lent out about $16 billion in "liquidity credits." Bankers rushed like gold miners to grab a share of this twilight surge in government largess. Later, when state auditors reviewed the accounts of debtor banks, they found only 59% of the liquidity borrowing had been documented.

ALL ABOUT IBRA
The Indonesian Bank Restructuring Agency (IBRA) was formed by the Suharto government in early 1998 and given the task of salvaging what it could from Indonesia's 245 banks - helping the survivors recover and letting the rest fail
Current Chairman Glenn Yusof, well-regarded among both the local and international banking communities, was appointed by Jakarta to head the agency 10 months ago. He replaced a Suharto appointee.
Of the 245 private and state banks operating in Indonesia before the Crisis began in 1997, 66 have been closed, 12 taken over by the government, four merged into one and eight slated for recapitalization.
IBRA has two main responsibilities in managing the assets of both failed banks and institutions taken over by the government. Its credit unit assumes the non-performing loans of all of Indonesia's banks, both private and state, which are estimated to be $22.7 billion. The credit unit is also in charge of liquidating the 66 closed banks. The investment unit manages the 12 banks taken over by the state. It also oversees the disposal of assets pledged by bank owners to settle interbank lending and liquidity borrowings from the central bank, which are projected to be $12.7 billion.
Of the 245 private and state banks operating in Indonesia before the Crisis began in 1997, 66 have been closed, 12 taken over by the government, four merged into one and eight slated for recapitalization.
The investment unit also will inject 80% of the funds needed by the eight banks to be recapitalized. (The banks themselves must provide the remaining 20%.) IBRA's contribution will be in the form of bonds bearing about 27.5% interest per annum. The coupon payments on the bonds will provide a steady income stream to the banks. The cost of this recapitalization is budgeted to be $35 billion over the next decade but could be far higher.
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