Govt guarantees bank deposits

Govt guarantees bank deposits

JAKARTA (JP): The government announced massive banking reforms
yesterday to restore confidence in the system, guaranteeing the
embattled banking sector's deposits and debts and allowing
foreign ownership in local banks.

The government established a new government institution, the
Indonesian Bank Restructuring Agency (IBRA), to rehabilitate the
banking sector.

Coinciding with the banking reforms, the government-appointed
team to tackle corporate debt, headed by former minister Radius
Prawiro, said it would seek a voluntary, temporary freeze on the
servicing of the interest and principal of corporate debt.

The reform and pause on corporate debt servicing boosted the
rupiah to 11,000 against the U.S. dollar yesterday from Monday's
close of 12,250. But currency dealers said the strengthening
rupiah was also supported by intervention by Bank Indonesia, the
central bank.

Banking analysts have said that market reaction -- after
Chinese New Year and Moslem Idul Fitri holidays -- would be
critical.

When announcing the banking reforms, Minister of Finance
Mar'ie Muhammad said the wave of economic difficulties had been
taking a heavy toll on the health of the banking system.

Confidence in the country's banking sector had waned, Mar'ie
said. The public had been withdrawing deposits and foreign banks
had become increasingly reluctant to accept letters of credit
issued by Indonesian banks.

"This serious situation demands immediate and decisive
government action," Mar'ie said at a media conference at his
office.

"The government has decided that from today it will stand
behind the country's commercial banks and guarantee that
obligations to depositors and creditors will be met," he said.

Should any bank encounter difficulties in making payments,
Mar'ie said, the central bank -- acting on behalf of the
government -- would step in, pouring in money to make sure that
payments could be made.

The money used by the central bank to bail out depositors and
creditors will be credited to the government's annual budget in
tranches for five years.

The government would soon issue government bonds to raise
funds needed to bail out bank depositors and creditors and to
finance IBRA's initial operation, Mar'ie said.

"This means the public can now be rest assured that their bank
deposits are now completely safe and sound," Mar'ie said at the
media conference, chaired by Widjojo Nitisastro, economic advisor
to President Soeharto.

On hand at yesterday's conference were Bank Indonesia Governor
J. Soedradjad Djiwandono, Minister of Industry and Trade Tunky
Ariwibowo, Minister/State Secretary Moerdiono and representatives
of the International Monetary Fund (IMF).

Governor Soedradjad said the guarantee applied equally to
state banks, private banks and joint-venture banks, but not to
depositors and creditors of foreign bank branches.

The guarantee covers both rupiah and foreign currency claims.
But in case of foreign currency claims, payment of the claims
will be in rupiah at the market exchange rate.

He said the guarantee would remain in place for at least two
years and the government would give at least six months' notice
of the ending of the guarantee, which could be replaced by a
deposit insurance system.

During the guarantee period, the central bank would impose a
ceiling on deposit rates to ensure that banks would not offer
terms in excess of market terms.

"We anticipate that most depositors and creditors will wish to
keep their funds in the Indonesian banks by rolling over maturing
claims, while they will receive payment if they choose to
withdraw those funds," Soedradjad said.

Bailout

The banking reforms are believed to be part of the massive
economic reform package agreed to by the government and the IMF,
which has arranged a US$43 billion bailout package.

IMF Asia-Pacific deputy director Bijan B. Aghevli said the
government's guarantee for deposits and debts in the banking
sector would cost the equivalent of between 10 percent and 12
percent of the country's gross domestic product (GDP).

Indonesia's GDP was Rp 532.6 trillion in 1996 (about $223.5
billion at the December 1996 rupiah/dollar exchange rate or $48.4
billion at the current rate).

"With this guarantee in place, we expect that confidence in
the banking system will begin to revive soon," Aghevli said in a
statement.

However, a guarantee to bank depositors and creditors would
not be sufficient to restore confidence or make the banking
system financially healthy, Mar'ie said.

For that reason, the government established IBRA to take over
banks in financial distress, restructure them and make them
healthy.

"In this way, bank by bank, IBRA will build a stronger,
healthier and more competitive banking system," Mar'ie said.

The agency will be headed by Director General of Financial
Institutions Bambang Subiyanto. The initial staff will come from
Bank Indonesia, the Ministry of Finance and other public and
private institutions. It will be supported by foreign advisors.

Soedradjad said the agency would be dissolved once the bank
rehabilitation program was completed.

"The objective is to restore soundness in the banking system
with the least cost to the government within the constraints we
are operating in; thus existing shareholders will be taking on a
share of the burden," he said.

In any case, where public money was involved, Soedradjad said,
existing shareholders would have their equity written down or
eliminated altogether.

After restructuring troubled banks, IBRA will then sell them
and portfolios it had acquired to the public or foreign parties.

Soedradjad said the government was eliminating all
restrictions on foreign ownership in Indonesian banks to
encourage a fully capitalized banking system.

To support the banking reforms, Soedradjad said, they would
revise the legal framework for banking operations, including in
contract enforcement, bankruptcy, banking disclosure, getting and
realizing collateral, and financial instruments. (08/rid)

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