IBRA to take over more ailing banks, says Fitch IBCA

JAKARTA (JP): The number of banks to be brought under the Indonesian Bank Restructuring Agency (IBRA) is likely to increase significantly over the next few months as rising levels of bad assets deplete the industry's capital, a credit-rating agency has said.

"A likely scenario would involve most of the Indonesian banking sector being brought under IBRA's management," Fitch IBCA said in a statement over the weekend.

Fitch IBCA said that the likelihood of more banks being brought under IBRA could be a positive development for the banking system.

This would allow authorities to push through a fundamental restructuring program that had not been possible in the past given the strong vested interests of bank owners, it said.

By consolidating more banks under IBRA, the government could merge their operations under its control and reduce them to a managable number.

The agency warned, however, that the country's banking system was in a deep crisis and that the steps being taken were too late to avoid an asset quality disaster.

Indonesia has 215 banks, including those owned by the government.

The government liquidated 16 private banks in November.

IBRA recently suspended seven more banks, took over the management of another seven and placed 40 banks under its supervision.

The government established IBRA in January to oversee the restructuring of the country's banking sector as part of the IMF- sponsored economic reform programs.

Although the banking reforms agreed to with the IMF would significantly improve the banking system, their benefits would not be felt for some time, Fitch IBCA said.

"The short-term outlook remains bleak," it said.

Fitch IBCA bank analyst Sam Chin told Dow Jones that non- performing loans are expected to number at least 50 percent of total outstanding loans in the next few months.

According to Chin's estimates, nonperforming loans -- loans on which payment of principal and interest is more than 90 days overdue -- will soon account for half of all outstanding loans.

Typically, banks are deemed insolvent and need to be recapitalized once nonperforming loans climb above 20 percent, he said. In Indonesia's case, he added, it was "a real banking disaster".

According to a soon-to-be-released report by Fitch IBCA on Indonesia's banking system, the country's banks are facing a two- pronged problem.

Nervous depositors and other lenders are pulling their funds out of local banks causing a liquidity crunch. Further, new rules mandated by Indonesia's central bank, Bank Indonesia, mean that local banks face a situation of being severely under-capitalized.

Under the new rules, banks are now required to make a 5 percent provision on "special-mention" loans, which are loans overdue by between one day and 90 days.

The Fitch IBCA report said, "We understand that nearly 100 percent of all bank loans are 'special-mention' because virtually all Indonesian borrowers have been delaying their payments."

Effectively, "this would mean that from April 1, 1998, banks would have to make provisions of almost 5 percent of their entire loan book," Fitch IBCA said.

The additional, bad-debt provisioning requirements come on top of other pressures on banks' capital adequacy. Once a loan is declared nonperforming, banks must set aside loan-loss reserves equivalent to 15 percent of the loan, and actual losses require write-offs against capital.

At the same time, the banks are getting hit by a devalued rupiah. Capital is denominated in rupiah, while many of the loans they made are denominated in U.S. dollars.

Each time the rupiah weakens, it puts more pressure on their respective capital-adequacy ratios. And once the capital-adequacy ratio falls below 5 percent, IBRA takes over the bank's management.

Previously, Bank Indonesia has allowed banks to calculate their capital-adequacy ratio using an artificially low exchange rate.

"If realistic exchange rates are used, we estimate that only a handful of banks would have capital-adequacy ratios exceeding 5 percent," Fitch IBCA said.

Having IBRA take over many more Indonesian banks could "be a very positive development", Chin said. That is because it could mean a faster restructuring of the Indonesian banking system than would otherwise happen under the previous strategy, which called for weak banks to merge with healthier banks, he said.

In the meantime, he said "Indonesia must face the reality that its banking system is in a deep crisis." (rei)