In Indonesia A Banking Rescue Or Bungle?

Critics say Habibie's reforms are unlikely to restore stability

Phillip Widjaja wasn't worried that his Bank Mashill would be closed by the latest Indonesian government banking cleanup: After all, 38% of Mashill's loans are duds in a country where 90% of loans are nonperforming. But Widjaja's big customers weren't so sanguine: They moved millions in deposits to Citibank. "There's so much mistrust, not only in the banking system but in the government," laments Widjaja.

As President B.J. Habibie's government prepared to announce a $30 billion bank-rescue plan at the end of February, Widjaja was not the only one worrying. To qualify for the International Monetary Fund's $43 billion bailout, the government has to clean up its rotten banking sector. Reform is critical to restoring Indonesia's stability and getting credit flowing again to businesses. But local bankers fear the measures, coming more than a year after the IMF's first intervention, will not restore confidence. There's even the fear that as many banks are closed, thousands of depositors will panic.

"NO CHOICE." Under the plan to be announced on Feb. 27, the central Bank Indonesia plans to shutter about 60 banks and recapitalize dozens more. The government will take over all bad bank loans and issue new funds to the recapitalized banks in the form of bonds. The authorities will switch depositors' accounts at the shuttered banks to state-owned firms. Sounds good in theory. But no one knows if the government is strong enough to pull this off, and even the regulators concede that the measures are coming very late. "We have no choice," says Bank Indonesia Governor Syahril Sabirin. "It would have been good if we had done this a year ago, but I'm still confident we can enhance stability."

Critics, however, see the timing as being driven by President Habibie's political needs. With a general election coming up in June, they charge, Habibie is trying to help his associates. Bank Lippo, owned by ethnic Chinese tycoon James Riady, for example, is earmarked to receive $500 million in new funds from the government. Riady is Habibie's "business ambassador," an appointment designed to reassure the Chinese community following racially motivated riots last year.

Initially, bankers welcomed recapitalization. But they became less enthusiastic when they learned what they would have to do to get government funds. For one thing, by the end of April they will have to stomp up new capital equal to 20% of their recapitalization cost. The government puts up 80%. Bankers claim that in order to raise the money, they will have to call in their few active loans, squeezing the economy further. They will also have to call in outstanding loans made to their own shareholders or to bank subsidiaries and turn over the proceeds to the central bank. Collecting these loans to privileged insiders will be mighty difficult.

CLOSURE CALL. Many bankers also fear that the money being pumped into the rescued banks won't be enough to restore them to health. "This is a waste because next year you'll need another recapitalization," says Okkie A.T. Monterie, senior adviser to Bank International Indonesia, which has qualified for government help.

Some bankers would even prefer liquidation to raising more funds in a slow economy. "It would be better to nationalize the whole banking system, calm people down, and cut the outflow of money," says Widjaja. "Then you can restructure and eliminate banks." But with an election coming up, Habibie wants to avoid more closures than are necessary. After the votes are counted, though, the banks could be in for another round of bloodletting.

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