IBRA to take over more ailing banks, says Fitch IBCA

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)