Condition of Indonesian banks 'scares' IBRA

Condition of Indonesian banks 'scares' IBRA

The Jakarta Post, Jakarta

Indonesian Bank Restructuring Agency (IBRA) chairman
Syafruddin Temenggung says the condition of local banks "scares"
him.

Syafruddin, appointed IBRA chief in April this year, said
Thursday that banks were vulnerable to another financial crisis
as too little had been done to improve corporate governance.

Despite five years of restructuring in the banking industry,
the lax corporate governance that wreaked havoc during the 1997
crisis, had not been dealt with, he said.

"The biggest challenge is how to build institutional
arrangements that can sustain our economic development; up until
now nothing has been done," he told participants of a seminar by
the Indonesian Council on World Affairs (ICWA) and the Jakarta
Financial Club on Thursday.

"It's scary because the institutional building isn't there,"
Syafruddin said. "I am afraid another crisis from outside will
still have a severe impact on the Indonesian economy."

He was referring to the 1997 financial crisis that began in
Thailand and spilled over to the Philippines and Indonesia.

Poor corporate governance among almost every large Indonesian
bank dragged the banking sector into the crisis from which it has
yet to emerge. Loans tied to politically connected debtors or
channeled to affiliated companies were common.

Risk management took a backseat in most decisions to extend
loans. When the rupiah collapsed during the crisis, companies
that took up dollar denominated debts followed, and as they fell,
sparked a wave of bad loans across the banking sector.

Syafruddin said little had improved after five years.

One example was Bank Internasional Indonesia (BII). The bank
channeled more than half of its loans to firms it was affiliated
with under the Sinar Mas Group.

This violates the legal lending limit ruling which restricts
loans to affiliated companies to 20 percent of a bank's credit
portfolio.

Although Sinar Mas weathered the 1997 crisis, BII neglected to
diversify its portfolio to reduce the risk of a default by the
group.

Last year a unit of Sinar Mas, representing almost 90 percent
of BII's loans to the group, defaulted on its debt and forced the
bank to seek IBRA's aid.

IBRA was established in 1998 to nurture sick banks back to
health, however Syafruddin said the agency had its limitations.

"We deal more with the technical aspects of banks," he said,
pointing to IBRA programs such as loan restructurings.

Syafruddin criticized the absence of institutions enforcing
good corporate governance among banks.

He said the government only recently moved to set up the
Financial Services Authority and the Deposit Insurance
Corporation.

The former will take over Bank Indonesia's supervisory role
of the banking sector in a move to better detect trouble in
banks.

With the Deposit Insurance Corporation, public funds in banks
will be guaranteed under an insurance scheme funded by the banks.

Few believe a second banking crisis is imminent even though a
recovery in the global economy is not in sight. Analysts however
agreed that another external shock could spell disaster for
Indonesian banks, many of whom rely on export related credits.

Also, despite IBRA's limitations, they have faulted the agency
for its slow work in restructuring the banks.

IBRA, which has seen seven chairmen in the four years since
its existence, is said to be having corporate governance problems
of its own.

Controlling assets of banks worth dozens of billions of U.S.
dollars, IBRA is seen as being hampered by too much internal
politicking and outside interference.