Government's bank restructuring measures

Mon, 24 Aug 1998, 00:00 WIB | Source: JP

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.

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