Indonesian banking sector remains shaky: EIU

Indonesian banking sector remains shaky: EIU

Dadan Wijaksana, The Jakarta Post, Jakarta

Banking reform in the country is still far from complete despite
the closure of the Indonesian Bank Restructuring Agency (IBRA),
according to a new survey.

The Economist Intelligence Unit (EIU), a global agency that
reviews risk ratings of 100 emerging and indebted markets on a
monthly basis, said the setting up of other government agencies
to complete the IBRA's unfinished business confirmed the huge
challenge ahead.

"Much still needs to be done to restore the banking sector to
health and many of the IBRA's duties will be taken up and quietly
continued by other bodies, probably for at least another 12
months," the study, released on Tuesday, said.

The IBRA was set up in 1998 to restructure Rp 600 trillion
(about US$70 billion) worth of assets it took over from indebted
banks. It was dissolved last month and three state bodies
have been established to take over its unfinished work.

They are a department in the Office of the State Minister of
State Enterprises, who will restructure some Rp 60 trillion worth
of unsold assets; a body under the Ministry of Finance, which
will continue the blanket guarantees program; and a new trouble-
shooting team, which will oversee legal battles with recalcitrant
debtors.

The government had already found selling distressed unsold
assets had proved a headache, and dealing with large debtors in
the future would not be any easier, the study said.

"On the legal front, only three bad debtors have been taken to
court, seven other cases have been filed, and a further eight are
still being completed. And all of the three tycoons who were
prosecuted were acquitted," it said.

While consolidation of the banking system had taken place --
seen in the improvements of many banks' balance sheets and in
successful mergers and sell offs -- about two-thirds of the
banking system remained in the government's control.

While acknowledging bank borrowing had started to improve, the
EIU raised concerns over the quality of due diligence on the
loans, saying: "While credit risk assessment has undoubtedly
improved, many question marks remain."

It cited high-profile banking scams involving officials from
Bank Negara Indonesia and Bank Rakyat Indonesia -- both state-
owned -- amounting to Rp 1.7 trillion and Rp 294 billion,
respectively.

EIU warned of similar occurrences if banking fraud was not
dealt with properly.

"Combined with Indonesia's endemic corruption, short-term
lending buoyancy could in fact develop into a medium-term bubble
that will burst into another, albeit smaller, banking scandal,"
the study said.

In a related development, the Supreme Audit Agency said on
Tuesday it would complete its audit of IBRA's bank restructuring
performance on April 30.