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Indonesia's Banks Are Gasping For Air (Int'l Edition)

International -- Asian Business: INDONESIA


Many languish amid tight IMF policies and reform's slow pace

On June 25, four new branches of ABN Amro Bank of the Netherlands opened in the Indonesian cities of Semarang, Solo, Denpasar, and Manado. Each operates from a hastily renovated Dutch colonial-style house--not the usual site for a big global bank. But the Dutch are interested in reaching customers fast, not in fancy digs. Under new rules, foreign banks can open anywhere in Indonesia and offer deposit accounts to citizens eager to pull their money out of the country's tottering domestic banks. Borrowers, however, need not apply.

ABN Amro's move speaks volumes about the scary state of Indonesia's financial system. Indonesians are terrified that their deposits will evaporate in a general banking collapse. True, most of the 200 banks that operated before the crisis are technically still functioning. But by the time the economy recovers three to five years from now, Jakarta bankers say fewer than 20 may remain. The result will be a healthier system. The question is whether Indonesian authorities can manage this restructuring skillfully. That means merging or closing banks without triggering more depositor stampedes. And it means managing a tight-money policy to protect the currency while somehow restoring liquidity.

Pulling this off would challenge even the planet's most skillful regulators. Yet Indonesia's regulatory record is spotty at best: The current banking mess is worse than it should be, for example, because in the late 1980s the government allowed the creation of 100 new banks, unleashing a flood of high-risk lending. Now Bank Indonesia, the central bank, has set up the Indonesia Bank Restructuring Agency (IBRA), to take over troubled institutions. The central bank is also auditing bank balance sheets to gauge the extent of bad loans.

Yet to the bewilderment of many bankers, the resignation of former President Suharto has failed to speed up banking reform. "The government is sitting on its hands," says a foreign banker in Jakarta. "They think things will automatically get better now that Suharto is gone." Finance Minister Bambang Subianto complained in early July to one banker that more auditors were needed to examine banks' books.FEARFUL FOREIGNERS. One hope is that foreigners will provide new capital. Yet managers of foreign banks in Jakarta reject press reports that they are negotiating to take over troubled Indonesian banks. Instead they expect tensions to boil over as the economy shrinks by 12% to 20% this year and inflation soars to 100% or more. "I wouldn't invest," says one foreign banker. "I wish I could say yes, but I can't." Sofjan Wanandi, Gemala Group's chairman and Banque Indosuez Indonesia's local partner, says he found no interest on a visit to Paris, Zurich, Vienna, and Milan in late June.

But don't look for any easing in high rates, which Bank Indonesia has imposed to stop capital flight. The lure of three-month paper yielding almost 60% has persuaded some adventurous foreign investors to change their dollars into rupiah, say foreign bankers, and the rupiah has stabilized somewhat. The government defends the tight-money policy as the only tool it has. "We're stuck with it, and we're taking responsibility for it," says Coordinating Minister for Finance, Economy & Industry Ginandjar Kartasasmita.

Yet high rates offer no relief to borrowers or lenders. All 55 of the banks that have been under IBRA's management at some point this year could be defined as insolvent based on their nonperforming loans alone, says David Chang, director of research at Trimegah Securities in Jakarta. The government has shut down 23 private banks since November and merged four state-owned banks. Jakarta bankers say many small banks are barely operating, unable to pay salaries or utility bills.

Syahril Sabirin, chief of Bank Indonesia, estimates that overall problem loans are now 40% of all outstanding bank debt, though he admits that at some banks it's as high as 80%. Many corporate borrowers refuse to service their debt even if they have cash on hand because they fear the banks won't live out the year. An executive of an Indonesian bank says that's why 1 in 10 of his borrowers will not pay off loans. "They know they'll need money next month and that the bank is not positioned to make new loans," he says.

So desperate are Indonesian banks that many are charging borrowers little more than half the interbank rate of 60%. Bank Papan Sejahtera, which IBRA now manages, has kept interest on floating-rate mortgages at only 35%. If it hadn't, delinquencies would have doubled from 20% to 40%, says Al Njoo, who was until recently the bank's CEO, before becoming a commissioner at IBRA.A WAY OUT? Even well-managed banks could now be in danger. Bank Central Asia enjoys a reputation for sound management despite its links to the Suharto family, says independent economist Kwik Kian Gie. IBRA had to step in after a nationwide run by depositors who assumed that President Suharto's resignation in May would force the bank's closure.

Some local bankers still see a way out. James Riady, deputy chairman of Lippo Group and controlling shareholder of Lippo Bank, says he would volunteer for the grim task of purchasing and reselling problem loans if the price were right. "Give the stronger banks like Lippo the capital and recognition they need to become a platform for this burden," says Riady. Njoo wants to merge Bank Niaga, where he also served as chief, with three other banks IBRA has recapitalized: Bank Papan Sejahtera, Bank Tiara, and Bank Umum Nasional. He estimates the new bank would have assets of $1 billion.

None of these plans has yielded positive results yet. That leaves Indonesian bankers with little else to do but scream. Some fling wild accusations that officials are scheming to buy their loans at ridiculous discounts, then sell them at higher prices and pocket the difference. Others are not even screaming. They are just turning off the lights in empty offices, waiting for the end.By Michael Shari in JakartaReturn to top

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