Government's bank restructuring measures

From: The Jakarta Post

JAKARTA (JP): The following is an edited text of the government's statement on banking restructuring measures which was announced Friday.

To revitalize national economic activity, and to regain public confidence in the country's banking industry, the Indonesian government today, Aug. 21, 1998, is taking substantial measures to support the existing bank restructuring policy. The measures include policies to rebuild the wrecked banking system through (a) recapitalization; (b) improvement of banking regulations and laws; and (c) improvement and enforcement of prudential regulations.

Bank Recapitalization Program

The recapitalization program will be conducted through stages of restructuring activities:

1. All banks will be audited by Bank Indonesia (BI) and international auditors. Audits have been conducted on six banks under the Indonesian Bank Restructuring Agency (IBRA) and 16 banks under BI supervision. This auditing program is scheduled to be completed by the end of October 1998.

2. Based on the results of the audits, BI will determine, by November, which banks need to be recapitalized.

3. Banks which need recapitalization will be asked to submit a recapitalization plan, which should include the determination of the owner to inject fresh funds or arrange local and/or foreign investors.

4. Banks whose recapitalization plan is considered feasible, can obtain capital investment from the government with the following requirements:

(a) The owners should initially absorb the losses arisen from loans extended to affiliated parties;

(b) Government capital participation will be made available only if the owners are committed to injecting fresh money into the banks;

(d) All bank obligations to BI will be transferred to IBRA, which will then convert these obligations into equity or subordinated loans.

Improvement of Rules and Regulations

On Aug. 4, 1998, the government submitted a draft amendment to Banking Act No. 7 of 1992 to the House of Representatives. The draft comprises the following major changes:

1. Bank licensing, previously vested with the finance minister, shall be transferred to BI;

2. Foreign investors shall be given greater opportunities to acquire local bank shares;

3. Commercial banks shall only be established by Indonesian citizens and/or Indonesian legal entities or by Indonesian citizens and/or Indonesian legal entities together with foreign citizens and/or foreign legal entities;

4. Bank secrecy, which currently covers all asset and liability information, shall be changed to merely cover information related to depositors and their deposits;

5. It provides legal basis for IBRA's operations.

Improvement of Prudential Regulation

1. As part of the refinement of banking regulations, several improvements have been done, particularly on: (a) extension of the leverage of earning assets quality and required loan loss provisions; and (b) guidance on problem loan restructuring.

The refinement of such regulations is intended to achieve more realistic banking performance and also give opportunities and flexibility to banks and debtors to survive the crisis.

2. Banks are obliged to fulfill the Capital Adequacy Ratio of 4 percent, 8 percent and 10 percent by the end of 1998, 1999 and 2000 respectively, as announced by the government in June 1998.

3. In order to enhance the coordination between the technical department related to the restructuring program, the Financial Sector Action Committee has been brought into existence, whose members comprise the coordinating minister for economy, finance and industry, the governor of Bank Indonesia, the minister of finance, the minister of industry and trade, the IBRA chairman and the chairman of the National Development Planning Board.

4. To take stricter legal action against bank owners and managements who are proven guilty of violating existing regulations.

Follow-up Actions on Banking Restructuring

Within the framework of banking restructuring, there are several points to be announced:

1. Policies on state banks:

(a) Bank Ekspor Impor Indonesia (Exim), Bank Pembangunan Indonesia (Bapindo), Bank Bumi Daya (BBD), Bank Dagang Negara (BDN) and the corporate business of Bank Rakyat Indonesia (BRI) are to be merged into one bank. To support the operation of the merged bank, the government will be assisted by an international bank through the provision of management consultant services. Currently, the government is in discussions with an international bank to ensure that management consultant services could be stated in a management contract.

(b) BRI will be retained to only handle small credits and retail banking business, to sustain the development of small enterprises and cooperatives.

(d) Nonperforming loans of BBD, BDN and Bapindo, and nonperforming corporate loans of BRI will be transferred to the Asset Management Unit (AMU) of IBRA.

(e) The government will inject new capital into the merged bank.

(f) The government has assigned Deutsche Bank to act as advisor or consultant to assist the implementation of the restructuring of unlisted problem banks.

2. Policies on Suspended Banks:

Since April 4, 1998, seven banks have been suspended, namely Bank Surya, Bank Subentra, Bank Kredit, Bank Pelita, Hokindo Bank, Deka Bank and Centris International Bank. Further action shall be undertaken against these banks, as follows:

(a) The assets of these banks will be transferred to the AMU of IBRA. Such assets include claims to debtors (about Rp 5.7 trillion), public funds (about Rp 24 billion), fixed assets (book value about Rp 160 billion) and bank subsidiaries.

(b) The liquidation process of these banks will be carried out soon after all the assets are transferred to the AMU of IBRA.

3. Follow-ups toward Taken Over Banks:

The banks that have been taken over by IBRA include Bank Danamon, Bank Modern, Bank Umum Nasional (BUN), Bank Dagang Nasional Indonesia (BDNI), Bank PDFCI, Bank Tiara and Bank Central Asia (BCA). There are several actions that will be taken by the government toward these banks. They are:

(a) To suspend the operations of BDNI, BUN, and Bank Modern. In this case, these banks' operations shall be frozen.

(b) To hold the ownership of BCA, Bank Danamon, Bank PDFCI and Bank Tiara in relation with the capital restructuring implemented of these banks.

(c) In line with the restructuring program, the government has received statements from the owners/founders of BCA, Bank Danamon, BDNI and BUN on their willingness to provide certain amounts of funds and assets. The government requires that the total amount of funds and assets provided by owners/founders should cover all the credits extended to their groups/affiliated parties and BI liquidity support.

The deadline for submission of these funds is Sept. 21, 1998.

4. In association with the decisions toward the seven banks, public assistance and support is expected. In line with that, there are several points to be highlighted:

(a) To all savers and depositors of BDNI, BUN and Bank Modern, your deposits and savings are guaranteed by the government. Previous experience has proved that in the process of bank suspension, depositors' and savers' interests are fully guaranteed. It is required that people follow a number of further announcements, namely:

- Savings and deposits of BDNI will be transferred to BNI and BDN;

- Savings and deposits of Bank Modern will be transferred to BDN;

- Savings and deposits of BUN will be transferred to BRI.

(b) To creditors of BDNI, BUN and Bank Modern, it is suggested they contact IBRA for settlement.

(c) To all employees of BDNI, BUN and Bank Modern, they shall keep working in furnishing the services needed in the settlement of the banks' obligations to depositors and savers. Employee rights shall be protected in accordance with existing labor regulations.

(d) All performing debtors of BDNI, BUN and Bank Modern will be contacted by IBRA to maintain their business activities.

(e) All nonperforming debtors will be transferred to IBRA for further resolution, to performing status (or write-off).

6. These restructuring efforts, accompanied by the refinement of banking rules, the enactment of the bankruptcy law and the establishment of the recapitalization program, are expected to create a sound banking system, enabling the banking sector to play a bigger roles in revitalizing the economy.

JP/Government's bank restructuring measures