Comparison between IBRA and Danaharta

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

JAKARTA (JP): Danaharta's approach throws some light on why the Malaysian homespun model works. At its inception, Danaharta never took the approach that it would inject liquidity into the banking sector by blindly throwing good money after bad merely so that banks "looked" healthy.

Instead, it opted to "buy" these nonperforming loans (NPLs) at a commercially negotiated market value (obviously NPLs were bought at a discount) from the banks.

The purchase of the NPLs was done at arm's length and all buy- sell decisions were voluntary and driven by market forces. Negotiations were carried out on a commercial basis.

Malaysian banks had the choice between keeping the assets on their own books (and consequently diverting their precious liquidity for meeting the capital adequacy ratio or CAR requirements) or to sell these NPLs at a discount.

Selling the NPLs brought with it liquidity relief and less CAR pressure. The books of the bank looked better overnight and banks could now refocus their energies on that part of the portfolio that was still healthy.

The disposal of the NPLs from the banks' books obviously resulted in a shrinkage in the equity (i.e. the bank owners took the hit directly). At the end of this part of the transaction Danaharta was sitting on top of a large pile of NPLs and it now rolled up its sleeves to take charge of maximizing recovery of the assets.

Since Danaharta bought the NPLs at market prices, the pressure of funding the initial NPL purchase was minimal and made their asset portfolio more believable for investors.

Efforts to maximize the recovery of the assets were again driven by commercial considerations. Danaharta knew the benchmark it had to achieve on a case-by-case basis (because they knew the price they had paid to buy the NPLs in the first place), and any deal or negotiation that they did with debtors from the real sector had to bring in a substantial profit for Danaharta.

For the officers in charge, this makes negotiations simple because as long as they meet the profit criterion and as long as they were within the framework of their guidelines, as well as the Danaharta Act 1998, they have nothing to worry about.

For those cases where the debtors had no hopes of survival or where the debtors were not cooperative, the Danaharta Act '98 gave the institution enough teeth to "push forcefully" if the need arose.

Danaharta enjoyed the full backing of the government as well as the judiciary. Today, almost two years down the road since its inception, Danaharta has begun packaging the resuscitated NPLs (that are performing loans by now) for sales back to banks.

It is a good strategy because it would actually show a drastic improvement in credit growth for the banking sector in a short time frame while at the same time reducing the administrative burden of determining the credit health of these recovered loans.

In addition, Danaharta would rake in a sizable profit by selling these repackaged loans; because the loans are performing now, their market value has improved and banks (whose liquidity position has improved because these very same NPLs were sold to Danaharta in the first place) have the funds to buy these loans back.

The Indonesian Bank Restructuring Agency (IBRA) should apply the same market-driven approach and it would soon realize that investors would then make a beeline to its doors simply because valuation of the assets was done on a commercial basis.

It is not too late for IBRA to redefine its strategy to adopt a more commercial approach. The faster IBRA realizes that the assets under its control are overvalued and not collectible at 100 percent of the face value, the quicker will be the implementation of its recovery plan.

Between the buying and selling of NPLs, Danaharta still needed the funds to engage in these transactions. The responsibility of raising the funds necessary for Danaharta's operations was entrusted to another institution, such as Danamodal.

While Danaharta is governed by the Ministry of Finance (and the Danaharta Oversight Committee), Danamodal is governed by Bank Negara Malaysia, the central bank.

Danaharta and Danamodal are two separate entities with a completely different charter of responsibilities, organization structure and authority.

This structural differentiation removes the possibility of any conflicts that might arise out of thrusting the responsibility of funding the recovery on the very same institution that is meant to execute the recovery plan.

This clear-cut differentiation of roles laid down by the Malaysian Ministry of Finance implies that neither of the two functions (i.e. execution of the recovery plan and the sourcing of investor-led funding for the recovery) influences the approach of the other.

However, in Indonesia IBRA has the additional responsibility of funding the rescue program. Response from investors has ranged from lukewarm to total disinterest; this response in turn is putting additional pressure on the IBRA management to put the squeeze on Indonesian corporations.

The responsibility for raising the requisite funds must be entrusted to another agency (still under the aegis of the Ministry of Finance) and IBRA should be left alone to maximize its asset portfolio.

Danaharta also has the benefit of being grounded in a solid legal framework. As an institution, Danaharta, like any other Malaysian entity, is a child of the Malaysian Companies Act 1965 and not of any presidential decree.

What this implies is that as an institution there is no confusion in anyone's mind about how Danaharta would function as a corporate entity or on reporting requirements or on issues like governance.

It has additional powers vested to it through other acts of law, the Danaharta Act 1998 that clearly outlines its special powers, duties and responsibilities, the duties and responsibilities of other agents that are aiding Danaharta (like Special Administrators etc.) and the framework for the recovery process.

In addition, Danaharta enjoys the provisions of the National Land Code (Amendment) Act 1998 (NLC (Amendment) Act), which came into force on Sept. 11, 1998.

There is also the Development Funds (Amendment) Act 1998 that provides a legal framework for the government to provide grants or loans, or to invest in Danaharta for the purpose of supporting or maintaining the continuous development of the Malaysian banking and financial system.

Meanwhile, IBRA is performing under the glaring disadvantage of not having a suitable legal framework. The presidential decree that gave birth to IBRA followed by the amendments to the banking act or even more recently the decree issued by the coordinating minister for the economy, finance and industry fall short of providing the necessary framework for IBRA to perform without fear or for the debtors to understand the mechanics of negotiation and resolution.

In the absence of clear and detailed guidelines (including guidelines for deviations), IBRA's journey of recovery is going to be fraught with many unnecessary stops and every decision by IBRA is going to be greeted with the usual cacophony of criticism.

Like any other company formed under the Malaysian Companies Act 1965, governance at Danaharta is the primary responsibility of the board of directors.

The board of directors is the focal point of Danaharta's governance structure and charged expressly with the responsibility of supervising all activities and maintaining control through executive and non-executive committees.

Although Danaharta reports directly, as an institution, to the Ministry of Finance, there is another entity that supervises the functioning of certain aspects of Danaharta and is called the Danaharta Oversight Committee (which in turn reports to the Ministry of Finance on an independent basis).

It comprises three members, one each from the Ministry of Finance, Securities Commission and the central bank, and performs the following tasks; to approve appointments of special administrators and independent advisers, to approve any extensions of moratorium periods and to approve the termination of the services of special administrators.

The Minister of Finance appoints the members of the Oversight Committee. IBRA does not work without controls. There are both supervisory and advisory bodies overseeing its work: The establishment of the Financial Sector Policy Committee (FSPC) has replaced the erstwhile Financial Sector Action Committee (FSAC) and has been founded under Presidential Decree No. 177/1999.

The FSPC's responsibilities are primarily laying down policies as well as supervising the implementation programs of IBRA. In addition to the FSPC is the existence of the Independent Review Committee (IRC).

The committee was formed in 1999 under Presidential Decree No. 90/1999. The IRC consists of five individuals, two of whom are appointed by the government while the remaining three are named by the World Bank, International Monetary Fund and the Asian Development Bank.

The responsibility of the IRC is to provide quarterly assessments and evaluations to the Ministry of Finance as well as advise IBRA on its implementation programs.

It would make a world of a difference to those critics who think that IBRA is an unfettered monster if these two committees were to release their reports in the public domain.

Yet there is no escaping from the fact that the ultimate monitor of progress for an asset management company is profit -- the rest is fodder for paper-pushers.

The responsibility of the nation's recovery rests heavily on IBRA's shoulders and the task is onerous and thankless. The time is ripe for an evaluation of the progress and of the feasibility of IBRA's existing strategy. Taking a fleeting look to try to understand what makes Danaharta tick and perform is going to do more good than otherwise.