IBRA disappoints ahead of early closure next year

Reiner S., The Jakarta Post, Jakarta

Officials at the Indonesian Bank Restructuring Agency (IBRA) have been quietly talking about a severance package for themselves after Chairman Syafruddin Temenggung announced an ambitious plan to close the powerful agency eight months earlier than scheduled.

Its success in raising cash this year to help finance the 2002 state budget provides additional justification for the extra bonus. But do they really deserve it?

The public does not think so.

A recent annual survey by a leading newspaper revealed that a majority of respondents were not satisfied with the work carried out by IBRA, particularly as regards the rehabilitation of the weak banking sector and recovering debts owed by former bank owners to the government. The public are also concerned with reports of alleged corrupt and collusive practices within the agency. This result is quite similar to that of a similar survey last year.

IBRA was set up in early 1998 with a mission to fix the troubled banking industry and to raise cash to minimize the burden on the government in covering the huge cost of the 1997 financial crisis.

The agency took over various assets from troubled banks and former bank owners, estimated to be worth a gigantic Rp 650 trillion (US$73 billion) at the time. The agency must restructure and sell these assets to raise cash. This year, for instance, the agency has managed to raise some Rp 45 trillion, well above the targeted amount of Rp 42 trillion.

But IBRA has been a major disappointment in other important areas.

Efforts to recover the debts of the ex-bank owners, who are mostly the family and friends of former authoritarian president Soeharto, and were considered to be the richest people in this country at the time, are moving in a direction that will end up with the state effectively covering the greater part of the huge debts owed. This means that the government will have to further cut other important spending such as subsidies for the poor, education, health, and defense and security to be able to allocate a larger portion of state revenue to covering the debts. The taxpayers will also have to shoulder the burden.

What is more disappointing is that most of the ex-bank owners will be freed from the possibility of prosecution for their past banking crimes. These once high-flying businessmen like Sudono Salim (founder of Bank BCA), Sjamsul Nursalim (of the now defunct Bank BDNI), Bob Hasan (of the now defunct Bank BUN, but who is currently serving a six-year jail term for other corruption offenses), and Usman Admadjaja (founder of Bank Danamon), breached the bank legal lending limits by forcing their banks to channel most of the money to affiliated businesses. Such irresponsible banking practices contributed to the outbreak of the 1997 financial crisis, which prompted the government to lend a massive amount of money to bail out the troubled banks in the face of runs by depositors. The bank owners were also accused of misusing these government loan, by either channeling them to other affiliated companies or even using them to speculate against the rupiah.

The decision to release these businessmen from prosecution was finalized during a meeting at the house of President Megawati Soekarnoputri late on Nov. 7, according to a report. The Cabinet meeting was chaired by Megawati and attended by senior economics ministers, the Attorney General, the National Police chief, and IBRA's Syafruddin, who made the proposal, which is basically the same as the much-criticized debt settlement schemes agreed by the debtors and IBRA four years ago.

Under these schemes, analysts say, the state will suffer huge losses because the assets surrendered by the debtors will be far from enough to cover the debts as their value has either deteriorated or might have been deliberately marked-up when they were transferred to IBRA. One analyst estimated that the recovery rate from the assets is likely to be only 20-30 percent.

Salim, for instance, who owes the largest amount at more than Rp 52 trillion, had surrendered his ownership in over 100 companies, considered the jewels in IBRA's crown. But after most of these assets had been sold, IBRA could only rake in around Rp 18 trillion as of the end of November.

Salim is considered as having been relatively cooperative in settling his debt.

But critics say that other debtors should be punished because they clearly do not have any intention of settling their debts to the state.

The government's decision to free the ex-bank owners from their crimes and to let them escape the responsibility of fully repaying their debts creates a moral hazard that jeopardizes the country's drive to push for healthy and prudential banking practices in the industry. This is because people will see that wrongdoers can easily get away with their crimes.

Another failure by IBRA is the effort to restructure the huge non-performing loans (NPLs) taken over from troubled banks.

A special unit under the agency, called the Asset Management Credit (AMC) division, was initially set up to restructure these loan assets before exchanging them for government bonds held by the banks. When the banks transferred the NPLs to IBRA, the government injected an equal amount of bonds.

There were at least three objectives for this restructuring program. First, the banks could swap the recapitalization bonds with the restructured loans so they could have a healthier asset portfolio and reduce dependency on government bonds for revenue. Second, if the banks return the government bonds, the state budget burden in covering the interest rate could be reduced. Third, by purchasing the restructured loans, the banks could resume lending to the indebted companies and in turn help the overall real sector to revive after the years of anemia.

But in a bid to meet the planned early closure of IBRA, Syafruddin pushed the sale of the NPLs although most of them had not been restructured yet. Not only did this result in a low recovery rate, but there are suspicions that the buyers of the loans were actually the original debtors themselves who benefited from the large discounts offered by IBRA.

For example, the agency's largest loan asset sale was held late in July involving some 2,532 debt accounts worth Rp 135 trillion. But only some Rp 111 trillion of the loans attracted investors, and only Rp 52.2 trillion were sold above the floor price set by the agency. And the investors managed to win a huge discount, only paying some Rp 17.7 trillion for the loans.

The IBRA loan asset sale program could only provide the agency with a recovery rate of around 28 percent. Agency officials may claim that this was relatively better than the rate achieved by similar agencies in Thailand (27 percent) and in South Korea (20 percent). But critics said that it took much longer for IBRA to make the sale, making the IBRA program more costly, while Thailand had already completed its program two years ago.

A huge part of the NPLs are also owed by some of the country's once-mighty business groups such as Chandra Asri, Texmaco, Sinar Mas, Djajanti, Dharmala, PSP, Gunung Sewu, Humpuss, Bimantara, and APAC.

There are concerns that IBRA had been giving favorable restructuring terms for these indebted business groups, again at the expense of taxpayers who will later have to cover the losses.

Many also suspect that the sale of the NPLs has become an arena for the debtors to illegally buy back their debts at huge discounts. The government has banned the original debtors from buying back their loans.

Top IBRA officials have always claimed they are unaware of this practice. Are they really that naive? Or are they just trying to deliberately cover up the buy back activity for certain reasons?

Suspicion of collusion and corruption in the agency is running high. Some analysts have said that the regulation banning original debtors from purchasing back their loans has only provided an opportunity for "brokers" to step in, who reap huge commissions if they can complete the buy-backs for the original debtors.

Finally, the restructuring work as regards the NPLs at IBRA provides one big lesson for future debtors: If you owe money to banks, don't repay them, or try to gradually reduce your debts without having to make any payments.

There is still other unfinished business for IBRA ahead of its early closure. So Syafruddin's plan to close down the agency by June 2003, eight months ahead of the February 2004 schedule, is raising many questions that are difficult to answer.

For instance, who will continue the work of collecting the debts owed by the former bank owners? Who will manage the assets surrendered by the ex-bank owners for debt settlement? And what about the rehabilitation of the ailing banking sector?

But one big question concerns the accountability mechanism when IBRA is officially closed down. Who will be responsible for the poor decisions taken in the past? Will it become the sole responsibility of the last IBRA chairman or will each chairman be held responsible for the respective policies they adopted.

Some members of the House of Representatives wanted to launch a special investigative audit on the agency as IBRA had totally failed to implement its mission: from the selling of assets at very large discounts, thus generating financial losses for the state, to the slow progress in the rehabilitation of ailing banks.

One analyst said that whoever is in charge of closing down IBRA, he or she can play a role in covering up the "mistakes" made in the past by changing documents, data, or even eliminating evidence.

Controversial IBRA programs:

1. The sale of PT Indomobil Sukses Makmur, a company owned by the Salim group, for Rp 625 million to a consortium led by Trimegah Securities. The company was worth Rp 2.14 trillion when IBRA took it over 1998.

The transaction aroused suspicions that Salim had bought back the company.

2. IBRA pushed ahead with the sale of non-performing loans this year despite the fact that most of them had yet to be restructured. Suspicions were rife that the buyers of the loans were actually the original debtors themselves.

3. IBRA proposed that former bank-owners be freed from criminal charges and their obligations to repay their debts. The controversial proposal was later accepted by the government.