Comparison between IBRA and Danaharta

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.