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.