Four banks under IBRA insolvent

Four banks under IBRA insolvent

JAKARTA (JP): Four of six troubled private banks taken over by
the Indonesian Bank Restructuring Agency (IBRA) in April have
been declared insolvent, according to a letter to the
International Monetary Fund (IMF) outlining the latest progress
on reforms.

The letter said the overall strategy for banking sector reform
remained unchanged and that the government would move
expeditiously to complete the restructuring of the six banks in
the next few weeks.

Negotiations are currently underway with buyers interested in
acquiring some of the banks and deals could be concluded after
non-performing loans are transferred to IBRA's asset management
unit, according to the letter drafted by the office of the
Coordinating Minister for Economy, Finance and Trade.

It said one bank would be sold by August 21.

It was not clear if a previous threat to liquidate the
insolvent banks if shareholders failed to recapitalize them would
be carried out.

The six banks under IBRA management are Bank Danamon, Bank
Umum Nasional, Bank Tiara, Bank PDFCI, Bank BDNI and Bank Modern.

The banks were taken under IBRA control because they used Bank
Indonesia liquidity support in excess of 500 percent of their
total equity.

IBRA announced early last month that the assets of the four
banks now declared insolvent were much smaller than reported by
their respective managements and that large sums of money were
needed if they were to meet the required year-end capital
adequacy ratio of 4 percent.

Bank Danamon is short of Rp 28.3 trillion, Bank Umum Nasional
requires Rp 10.47 trillion, Bank PDFCI needs Rp 3.2 trillion, and
Bank Tiara needs Rp 2.89 trillion. Results of audits on the other
two banks have not been made public.

Indonesia's banking sector has been badly hit by the sharp
depreciation of the rupiah, the year-long economic crisis, and
dwindling confidence in the sector.

The government has injected Rp 140 trillion into the sector to
help ailing banks.

The four insolvent banks may face bankruptcy petitions from
their creditors after the new bankruptcy law becomes effective on
August 20 unless the banks' owners or new investors inject huge
amounts of fresh money.

The update letter also said that Bank Bumi Daya and Bank
Bapindo, both of which are state owned, would be merged by August
21. Non-performing loans in the banks' portfolios will be
transferred to IBRA's asset management unit before the merger
goes ahead.

The update also said that portfolio reviews of all seven state
banks were underway and revealed that a major international bank
has been enlisted to design and assist in implementing
comprehensive operational reforms and restructuring of all state
banks.

The letter to the IMF said the country's economy would shrink
15 percent in this fiscal year, much higher than the government's
previous estimate of 12 percent.

It said that Indonesia's current account deficit in this
fiscal year was unsustainable over the longer term and would be
halved in the next fiscal year. The deficit is expected to be 8.5
percent of gross domestic product in the fiscal year ending in
March 1999.

The letter went on to say that the budget would be balanced
again in three years time.

The external current account is expected to record a surplus
equivalent to 2 percent of GDP in 1998/1999 and to remain in
surplus until a recovery is fully underway.

The balance of payments position has been strengthened by
additional international financing and the prospect of official
debt rescheduling. The letter said gross external reserves are
projected to rise to US$24 billion by the end of next March
compared to $19.54 at the end of July.

International donor institutions recently agreed to provide
the country with an additional $14 billion in aid. The new funds
will be used to finance the yawning gap in the budget which has
resulted from the government's commitment to subsidize certain
important commodities to help the poor survive the economic
crisis.

"While the medium-term outlook remains uncertain given the
severity of the crisis, our objective is to restore sustainable
economic growth with low inflation as quickly as possible," the
letter said.

The letter also said the government was working toward
achieving single digit inflation within no more than two years.

Year-end inflation is forecast to reach 80 percent. Inflation
of almost 60 percent was recorded between January and July of
this year.

The letter said the decline in output was expected to bottom
out in early 1999 and significant positive growth would resume no
latter than 2000. (rei)