Battered banking sector struggles to survive after crisis
Battered banking sector struggles to survive after crisis
By Reiner S.
JAKARTA (JP): Indonesia's once glamorous banking sector has
been badly beaten by the 17-month old economic crisis.
A total of 26 privately owned banks have been closed down
since November 1997. Four private banks, including two of the
country's largest, had to be taken over by the government.
And shockingly, six of the seven state banks were recently
revealed to have a capital adequacy ratio (CAR) of less than
minus 25 percent, which means that it may take over half of the
massive recapitalization funding to be provided by the government
to boost the CAR level of these undercapitalized banks to a
minimum 4 percent by end of this year.
A large portion of the country's over 200 banks may face
imminent closure due to their inability to meet this year' CAR
requirement of 4 percent, and the 8 percent minimum CAR
requirement by the end of 1999.
Capital adequacy ratio is the ratio between equity capital and
weighted-average assets.
The once proud bank owners, who are among the who's who of
Indonesian business society, have often been exposed on the
covers of the local press for their sins. Their main sin was
using their banks as the treasury department for their business
groups by channeling public money exceeding the 20 percent legal
lending limit into their businesses, and absorbing a massive
amount of Bank Indonesia liquidity support.
These bank owners who have been exposed include the former
controlling shareholders of the two largest private banks which
have been taken over by the government: the Salim Group, which
owned Bank Central Asia, and Usman Admadjaja, who owned Bank
Danamon.
Other notorious bankers include tycoon Mohamad "Bob" Hasan, a
longtime golfing partner of former president Soeharto,
Sudwikatmono, the brother in-law of Soeharto, and businessman
Sjamsul Nursalim of the Gadjah Tunggal Group.
In order to repay their loans to the government, the five
tycoons had to surrender many of their business interests, a move
which analysts described as the beginning of a realignment of
business power which had been previously concentrated in the
hands of the former first family and its closest friends.
Bankers and analysts describe the present situation as the
most difficult time the banking sector has faced, especially
after the boom period of the late 1980s and early 1990s.
They point toward the massive nonperforming loans and negative
spread interest rates as the two major problems the industry
faced this year. These problems caused even the healthier banks
problems in performing their intermediary role of channeling
public funds into the real sector.
The scale of the problem is so huge that it will still exist
throughout 1999, and very little lending should be expected,
analysts say.
"The year 1999 will be a consolidation period," says chairman
of the Indonesian Private Banks Association (Perbanas) Gunarni
Soeworo.
She explains that a slight recovery may happen in the year
2000, assuming the country's tense political situation subsides
and the regional economy manages to lift itself out of its
present crisis.
"It's impossible to force a person who has just come from the
ICU (intensive care unit) to run. So a recovery in the banking
sector may take at least two years," says a banker at a state
bank.
Year of losses
Rijanto Sastroatmodjo who runs Rijanto Banking Consultant
summarized the banking industry's plight in 1998 as follows:
The sharp fall in the value of the rupiah against the U.S.
dollar coupled with the closing down of 16 banks by the
government in November 1997 eroded confidence in the banking
sector and triggered a massive run by panicked depositors.
The government, which launched its deposit guarantee scheme in
January, had to provide up to Rp 136 trillion (US$18 billion) in
liquidity support to help banks meet the massive deposit
withdrawals and prevent a complete collapse of the banking
sector.
In an attempt to strengthen and stabilize the rupiah and curb
inflation, the monetary authority employed a tight monetary
policy by boosting the one-month Bank Indonesia promissory note
(SBI) rate as high as 70 percent, causing banks to suffer between
a 3-6 month period of negative spread which depleted the banks'
capital.
This negative spread problem arises when deposit rates paid by
banks are higher than the lending rates the banks charge to
debtors.
Although there were times when banks enjoyed higher SBI rates
than the time deposit rates, this only benefited a few liquid
banks and many times the SBI rates were lower than the time
deposit rates.
The negative spread problem is one reason for the need for
such massive financing to recapitalize the country's commercial
banks.
Another is the sheer size of the industry's nonperforming
loans, which are caused by the sharp depreciation of the rupiah
and the country's economic downturn.
Rijanto says that state and private banks are in critical
condition this year.
State banks are estimated to have suffered a Rp 7.2 trillion
plunge in equity capital due to losses from nonperforming loans
and the negative spread problems. Nonperforming state bank loans
are estimated to amount to Rp 150 trillion, or 55 to 60 percent
of outstanding credit.
State banks will continue to suffer a negative spread of
between 15 and 20 percent at the end of 1998.
Domestic private commercial banks are expected to have an
equity capital loss of Rp 10.7 trillion due to similar problems.
Nonperforming loans are estimated to reach Rp 175 trillion, or 80
percent of outstanding loans, and a negative spread of 10 to 12
percent is estimated at these banks.
Rijanto points out that the condition of joint venture banks
and foreign banks are relatively much better.
Recapitalization?
Rijanto expresses doubt over the government's bank
recapitalization plans, as negative spread and nonperforming
loans will remain throughout next year.
"These problems will continue to deplete banks' capital," he
points out, adding that not many bank owners are willing or can
afford to provide 20 percent of the required recapitalization
financing.
Under the government's bank recapitalization program, 80
percent of the required financing will be provided by the
government via the issuance of bonds in which banks will receive
fresh money from the coupon, while the remaining 20 percent of
the funding will be provided in cash by the bank owners.
The government announced recently that it would recapitalize
70 banks at a cost of Rp 257.5 trillion. These banks will include
six state banks, 49 private banks and 15 provincial development
banks.
The recapitalization cost, which is already huge when compared
to 1997 gross domestic product of Rp 377 trillion, may even get
larger as other banks currently not eligible to join the
government recapitalization scheme are given 30 days to inject
fresh money in order to reach a qualifying CAR level of between
minus 25 percent and 4 percent.
This recapitalization program will increase the banks CAR
level to the 4 percent minimum requirement that must be reached
before the fiscal year ends in March 1999.
Out of 166 national commercial banks already audited, 54 banks
already have a CAR above 4 percent and 42 have a CAR of less than
minus 25 percent. Audits of the remaining 16 banks have not yet
been completed.
Out of the 70 banks to be recapitalized, six state banks
actually have CARs of less than minus 25 percent. These six banks
will absorb some Rp 136 trillion of the recapitalization funds.
The government has to bailout these banks because of their
extensive networks and significant roles in the economy.
The six state banks are Bank Pembangunan Indonesia, Bank
Ekspor Impor Indonesia, Bank Dagang Negara, Bank Bumi Daya, Bank
Rakyat Indonesia and the publicly listed Bank Negara Indonesia.
An audit of Bank Tabungan Negara has yet to be completed, but
experts say that the results would not be much different from the
other banks.
The government has started the process of merging the first
four banks, which is expected to be fully completed by the year
2000. The resulting bank will be privatized in 2001, Finance
Minister Bambang Subianto said in a recent press conference.
The government expects foreign investors to play a significant
role in the recapitalization program, because foreigners can now
have 100 percent ownership in local banks.
Arwin Rasyid, a director at Bank Niaga, doubted that foreign
investment could be expected to work.
He said that the price of the bonds' coupon rates have to be
high enough to cover the high risk of investing in the country
because of the unstable political situation, which the state
budget may not be able to carry.
Perbanas' Gunarni also doubted whether foreigners would enter
the country unless local bankers do so first.
She also said that the recapitalization program will be
useless if the corporate debt restructuring program does not
work, a key factor in solving the problems of negative spread and
nonperforming loans, as a healthier real sector can pay interest
rates and repay loans.
The government said that the private sector owed some Rp 691.7
trillion to domestic banks.
The government-sponsored Indonesian Bank Restructuring Agency
(IBRA) plans to absorb part of the nonperforming loans, repackage
them and sell them to investors.
"We expect the banking sector to move into a better situation.
But there's no quick fix. The only way is hard work," IBRA
chairman Glenn S. Yusuf said.
World Bank country director Dennis de Tray voiced a similar
opinion.
"The bank recapitalization and restructuring program can only
work if it is handled by professionals like IBRA," he said.
He suggested that other interest groups in the transitional
administration of President B.J. Habibie not interfere in the
process.