Between IBRA and Danaharta

This is the first of two articles by Sidhesh Kaul, a Jakarta- based regional commentator on economic and political issues, on bank restructuring efforts in Indonesia and Malaysia.

JAKARTA (JP): The Indonesian Bank Restructuring Agency (IBRA) seems to be taking one step forward and two steps backward. Progress is slow and it appears that politicization of the institution has transformed its scared denizens into reluctant and indecisive paper-pushers.

IBRA's preoccupation with transparency and cooperativeness is stymieing progress and distracting it from the onerous task of recovery.

A few thousand kilometers away, Danaharta, the Malaysian counterpart of IBRA, is throbbing with activity and making rapid progress in a quiet and efficient manner.

While comparisons tend to be unfair (IBRA's problems in terms of nonperforming loans or NPLs and assets for disposal is far bigger than Danaharta's) a critical overview of the two models is worth while so that some lessons for the future could be derived.

At the onset of the economic crisis in late 1997, Indonesia was besieged by a multitude of problems that though initially triggered by the collapse of the exchange rate led to other predicaments in the economic, social and political arenas.

The crisis left Indonesia's banking sector paralyzed, which naturally had a choking effect on the rest of the economy, including the real sector.

The onslaught on Malaysia was less devastating. The initial reaction of the two neighbors in the Association of Southeast Nations (ASEAN) to the economic crisis was a contrast in styles.

While Indonesia reacted by initially blowing up its diminishing reserves for defending the rupiah aggressively and, when that failed, made a beeline for the International Monetary Fund's door, Malaysia isolated itself (and the ringgit) and mustered its' resources to deal with the problem internally.

The one vital difference was the involvement of the IMF in the recovery process for Indonesia.

The IMF, right from the inception of the crisis in Indonesia, has stodgily maintained its position of not interfering in the business of corporate restructuring.

Instead, the IMF chose to impose harsh policies from its ivory tower and restricted the definition of "economic recovery" for Indonesia to tightening of the macroeconomic policies, the rehabilitation of banks and the imposition of guidelines for corporate restructuring and structural reforms.

The Indonesian government, under monetary and fiscal pressures, has had little choice but to swallow this bitter medicine in exchange for the much needed funding.

The "one-medicine-cures-all" kind of policies historically dished out by the IMF to debt-ridden countries has only ensured a string of half-baked recoveries.

Several recent self-congratulatory press releases on the purported Indonesian recovery ring hollow upon examination. The concern here is that despite the recognition of the fact that the bulk of Indonesia's debt problems lie in the corporate domain, the government, as well as the IMF, is once again adopting a uniform kind of approach as far as corporate recovery is concerned.

In fact, the approach adopted by the government cannot be labeled "corporate recovery" -- it is more of a debt-collection- cum-asset-disposal exercise with little or no regard for the impact a ham-handed approach would have on the overall economy.

IBRA has the onerous task of recovering the debts and they have essentially stepped in where the original lenders failed to collect.

IBRA has to take cognizance of the fact that its entry into the corporate restructuring process is more than two years late.

By this time most companies are either well down the road in their negotiations with their respective creditors or have sunk even further in the morass of overindebtedness.

Doubts are being raised now on whether IBRA is prepared to dovetail its efforts with other creditors who are on the verge of concluding their restructuring with corporations.

The concern here is that since IBRA is dealing with huge volumes of problem issues and has limited experienced resources at its disposal, it might fall prey to the temptations of using the "black box" or "template" approach.

This is precisely what is happening. IBRA, once it has put the debtor through the acid test of being "cooperative" or "noncooperative", irrespective of the case it is handling, has a common template for all obligers irrespective of their size, security, nature, viability, social impact and future prospects.

The concern here is that this template approach is being deployed under pressures of being "transparent". It is more than obvious now that the government is confusing templating for transparency.

A "one-medicine-cures-all" kind of approach, in this case, is going to be disastrous and is definitely a breeding ground for debating the legalities of the approach.

The government has passed the buck of its economic woes to the banks, the banks to IBRA and now IBRA will pass it on to the corporations.

In Malaysia, the buck clearly stops at Danaharta.

IBRA was founded in early 1998 as a direct consequence of the collapse in the banking system. The founding of IBRA was done through a presidential decree and IBRA was subsequently mandated under an amendment to the banking law and empowered as the agency with special powers to oversee the rehabilitation of the financial sector.

The focus, without doubt, is on resurrecting the banking sector with the underlying assumption that once the banking sector is up and running the rest of the economy will follow suite.

IBRA is authorized to take over and control troubled banks as well as to dispose off assets and collateral.

Organizationally, IBRA falls under the purview of the Ministry of Finance but has been endowed with a fair degree of autonomy.

IBRA enjoys far greater powers and stature when compared to Danaharta, but its performance appears lackadaisical when measured in terms of the number of ailing banks restored back to life as well as disposal of assets or simply in terms of "kick- starting" economic growth.

It is quite obvious that simply bestowing an arsenal of powers on an institution does not necessarily guarantee an efficient recovery operation (though the jockeying and the politicking for the top slots of this powerful and influential institution successfully helps in distracting from the task at hand).

The Malaysian banking system, in the meanwhile, despite the politicking and criticism, is slowly chugging back to health and there is a steady growth in lending activity.

Danaharta was established by the government to act as Malaysia's national asset management company to deal with the rising level of NPLs.

Danaharta was incorporated under the Companies Act 1965 on June 20, 1998 and is wholly owned by the government through the Ministry of Finance (Incorporated).

While IBRA's mission statement clearly focuses on reviving the banking sector, Danaharta's mission statement reads as follows: "Remove the distraction of managing nonperforming loans from financial institutions in Malaysia and to maximize the recovery value of acquired assets".

The difference in the mission statements underlines the emphasis on the respective approaches of the institutions. The objectives of Danaharta directly address the distractions facing the financial institutions in Malaysia today.

Danaharta will, by purchasing and managing NPLs, allow financial institutions to refocus their attention on lending activities. Bankers can direct their efforts to normal commercial banking relationships, while Danaharta applies specialist skills to managing the NPL.

IBRA, on the other hand, has developed a strategy that is based upon the tacit and wrong assumption that the NPLs -- and their underlying securities -- are actually 100 percent collectible, be it through restructuring or asset disposal.

Unintentionally or otherwise, IBRA is actually letting bank owners and shareholders off the hook while passing the burden of the debt to the common man.