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.