Bank cleanup in doubt

Whatever the reason or objective in delaying the bank cleanup, and however strongly the move was endorsed by the World Bank and the International Monetary Fund (IMF), the decision does not bode well for the credibility of bank restructuring measures now being finalized. Without credibility, the program will be unable to restore public trust in domestic banks, which is, in the first place, the ultimate goal of the costly scheme.

Coordinating Minister for Economy, Finance and Industry Ginandjar Kartasasmita is correct to argue that in view of the massive state funds at stake, the recapitalization program should be fair, transparent and accountable. Key reasons for the postponement -- allowing more time for evaluation teams to complete their assessment and for banks to revise business plans and raise funds to replenish their capital --, however, make little sense. After all, the program is already one month behind schedule as specified in the reform package defined in conjunction with the IMF.

A valid and viable business plan was announced as early as last September as one of the requirements for banks to take part in the government-sponsored recapitalization program. If the bankers were acting in good faith and were strongly committed to improving their banks, why did they submit their plans so close to the Feb. 15 deadline?

Even more puzzling was the rationale that due to the large number of banks requiring assessment, evaluation teams were strapped for time to finish their job. This explanation indicated that the central bank was evaluating banks of which they had no prior knowledge. It is hard to believe that the central bank, which often boasts of its intensive on-site and off-site bank examinations, does not already have the results of such audits on file.

Moreover, international auditors have completed a comprehensive due diligence of most domestic banks seven months ago. Though the banks' condition was changing quickly, due to the rapid economic deterioration, the evaluation process should not have started from zero.

One therefore cannot help but suspect that technical grounds are not the main reason behind the postponement. It would appear that several bankers succeeded in going over the head of the ministerial team, taking their plight directly to key political players.

If this was the case, the bank restructuring program -- billed as the most comprehensive ever and considered a crucial element to jump-start economic recovery -- was obviously suspect even before it was launched.

If the forthcoming measures are unable to restore public trust in the banking industry, no amount of capital will enable banks to conduct business in a sound manner. Trust is the anchor of a bank.

Observing the flip-flop manner in which the government has so far handled the bank restructuring plan, we have increasing misgivings about the program to which the government has pledged more than Rp 300 trillion (US$35 billion) in state funds. The hefty sum almost equals 50 percent of the gross domestic product. In addition, the government faces payments of several billion dollars to reimburse depositors of the insolvent banks and redundancy payments to bank employees affected by the closures.

Despite the current fiasco, bank restructuring must go on. But the government must go all out to prove to the public that the additional two weeks required is necessary. This could be achieved if the long-awaited announcement, rescheduled for the middle of this month, was complicated enough to justify the additional time for the work. Additionally, the program must be transparent and accountable to avoid even the slightest doubt or question about its performance.

The damage could also be offset if the upcoming announcement fully discloses all important aspects concerning the banks to be recapitalized and closed. Such details must include: the amounts of their bad loans, the names of, at least, their 10 largest borrowers, their debts to the central bank, the names of their managements and shareholders, their capital standards before recapitalization and other basic, pertinent facts.

Two factors of importance also need to be addressed. First, it should be disclosed which banks violated the legal lending limits (connected lendings), and are therefore liable to prosecution. Second, the government should pursue all bad debtors, specifically ones from the state banks, which will take up more than Rp 100 trillion in recapitalization funds.

Any announcement short of these details would disprove the government's claim on the technical basis for the two week delay and cast great doubt on the viability of the total bank cleanup project.