Bank restructuring policy to focus on four measures

JAKARTA (JP): The government has announced that the bank restructuring strategy in the coming months will focus on four measures -- recapitalization, liquidation of insolvent banks, merger of state banks and recovering liquidity support.

"The October 16 approval by the House of the amendments to the Banking Law of 1992 will facilitate the restructuring process by strengthening the legal powers of the Indonesian Bank Restructuring Agency (IBRA) and its Asset Management Unit (AMU)," the government said in the latest supplementary memorandum of economic and financial policies to the IMF.

It said banks deemed ineligible for recapitalization will be quickly either closed, merged or sold after transferring their non-performing assets to the AMU.

"We expect by the end of November to have transferred all assets of the 10 banks frozen in April and August to the AMU and to commence their liquidation shortly after," the memorandum added.

Audits on a further 26 private banks currently subject to IBRA control are expected to be completed soon and actions will be taken to resolve these banks later this year, it said.

The government said loan decisions and treasury management of the four state banks being merged would be placed under centralized control by end-December although the full integration of banking operations was expected to require about two years.

It added that IBRA had been engaged in discussions with the former owners of several private banks with a view to producing a financial settlement that yields repayment of liquidity support extended by Bank Indonesia.

"While negotiations are well advanced in three of these cases, issues remain to be resolved regarding some elements of the proposals, especially the arrangements for the realization of cash settlements. We expect satisfactory agreements on these issues will be reached soon and approved by the Financial Sector Action Committee by Oct.19," the government said.

It added that the central bank (Bank Indonesia), with technical assistance from the IMF, is continuing a comprehensive reform of its prudential regulations, and expects to issue by mid-November new regulations on loan classification and loss provisioning, including with respect to restructured loans.

"Moreover, further work is underway to amend regulations on connected lending, liquidity management, off-balance sheet activities. and foreign currency exposures, all of which will be issued shortly," the memorandum said.

The government also reiterated the bank recapitalization program, as announced on Sept. 29, for the potentially viable private banks.

The ruling states that in order to participate in the program, a bank must:

(1) Presently have a capital adequacy ratio, after full provisioning for all impaired loans (based on the findings of international auditors), of better than minus 25 percent but less than 4 percent of assets.

(2) Inject new capital with the government also injecting funds and taking a commensurate equity position.

(3) Make current all non-performing loans to related parties and reduce their level to within the new prudential requirements.

(4) Prepare an acceptable business plan showing how it can achieve medium-term viability and compliance with all Bank Indonesia prudential regulations.

"Banks, for which audit results are already available have been given one month to develop business plans acceptable to Bank Indonesia, with recapitalization expected to be completed by the end of the year," the memorandum said.

This is an ambitious but realistic time table. Other banks will be subjected to a similar time table, once audit results have been finalized, the government added. (rei/vin)