Bank cleanup in doubt

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.