Indonesian bank sector reform lagging: S&P's

JAKARTA (JP): Ratings agency Standard and Poor's (S&P's) of the United States expressed concern yesterday over the restructuring of the banking sector in Indonesia, saying it was not proceeding quickly enough.

The agency said Indonesia lagged behind its neighbors in restructuring its banking sector.

"A key factor in the return of confidence and stability to the banking sector will be the emergence of a number of strong, well capitalized financial institutions that have the ability to cope with adverse economic circumstances," the agency said in a statement sent by its Melbourne office.

The agency said recent action by the Indonesian Banking Restructuring Agency (IBRA) to release weak banks from its supervision may delay the process and further erode confidence in the Indonesian banking system.

IBRA was set up by the government on Jan. 27 to closely supervise banks with liquidity problems in an effort to nurse them back to health.

Forty banks were initially placed under IBRA tutelage, but Minister of Finance Fuad Bawazier recently said the agency had discharged eight banks, including three state banks, one provincial development bank and four private banks.

The rationalization of weaker banks is necessary if the Indonesian banking sector is to regain "financial flexibility equal to that of other international banking systems", the New York-based credit assessor said.

"S&P's considers that this could be achieved at a more rapid pace if the Indonesian regulators were not as committed to protecting all financial institutions, regardless of their economic viability," it said.

The agency said all Indonesian banks were dramatically undercapitalized, with massive asset-quality problems that were not expected to stabilize in the short term.

"With more than 200 banks currently operating in Indonesia, the system is considered to be overbanked," it said, projecting nonperforming loans at the country's banks to peak at 55 percent by the end of 1998.

The agency compared the situation in Indonesia with that in Thailand and Malaysia where, it said, regulators had shown a greater sense of urgency in seeking to rationalize the sector.

In Thailand, a number of banks have been nationalized, recapitalized and earmarked for privatization once problem assets have been removed. In Malaysia, the government has announced its plans for the rationalization of its finance company sector.

"The response in Indonesia, by comparison, has been lackluster," the agency said, noting that no significant bank mergers had been finalized.

The Indonesian banking sector is in dire need of rationalization and recapitalization if IBRA's objectives of nursing the banking sector back to health are to be achieved, said the agency.

Without the intervention of Bank Indonesia and IBRA, a considerable number of banks would already have failed, it said.

"S&P's considers that allowing these vulnerable banks to return to normal business may delay the ultimate recovery of the Indonesian banking system," the ratings agency warned. (jsk)