Indonesian banks still in a bind: Moody's Inc

Indonesian banks still in a bind: Moody's Inc

JAKARTA (Dow Jones): Indonesia's banking system remains
insolvent, despite some recent progress in restructuring bad
debt, Moody's Investor Service Inc. said on Tuesday.

Without foreign investment in local banks - which remains
unlikely in the short-term due to political instability - the
sector will be too weak to start lending again, said Deborah
Schuler, a senior analyst at Moody's in Hong Kong.

"Most banks remain insolvent on an economic basis. They have
more bad loans than capital," she told Dow Jones Newswires.

"There will be some more capital needed," she added.

On Tuesday, Moody's released its annual report on Indonesia's
banking system, which crashed in 1997 following years of wasteful
lending by institutions to related companies.

Despite a multi-billion-dollar state bailout, which took the
worst bad debt off banks' books, most institutions are still
heavily weighed down with problem loans, Schuler said.

Most banks remain dependent on government bonds to give them
adequate capital to continue to operate, she added. The
government issued the bonds last year to banks as a way of
pushing up capital-adequacy ratios to above the minimum 4
percent.

A major problem is that banks are unable to sell the bonds due
to lack of investor interest. Also, any market price would likely
be much lower than the book value of the bonds, which would
further reduce banks' capital levels.

With such weak capital positions, banks are unable to make new
loans, especially when the risk of companies defaulting remains
high.

"With low capital-adequacy ratios, and a ton of government
bonds on their books, the banks can't lend," Schuler said.

The banking system's inability to lend could hamper economic
recovery, if local companies are unable to get access to fresh
credit to meet a nascent recovery in consumer confidence,
economists say.

Further state help isn't an option, as the current bailout
program has already pushed government debt to alarming levels,
sparking a heated political debate over the cost to the taxpayer,
Schuler said.

The budget deficit this year is expected at a whopping 4% of
gross domestic product, due in part to the cost of interest
payments on the recapitalization bonds.

Foreign investors are also unlikely to buy Indonesian banks
while the stability of President Abdurrahman Wahid's government
remains in question, and violent sectarian clashes continue to
rage across the archipelago.

Standard Chartered PLC's failure to push through a plan to
take a majority stake in PT Bank Bali has added to negative
foreign investor sentiment toward the system, Schuler said.

The deal fell through amid protests from Bank Bali staff
against the take over, and against a backdrop of allegations the
bank fraudulently lent $80 million last year to a company linked
to the then-ruling Golkar party.

"The way the Bank Bali deal went has left a bad taste in the
mouths of foreign investors," Schuler said.
Banks Push Back Deadlines

Local banks have made some progress in debt rescheduling,
which involves pushing back debt repayment deadlines, rather than
writing-off debt.

Interest rates on rescheduled debt are higher than current
deposit rates, or the cost of a bank's funds, and this is helping
most institutions return to operating profits this year, Schuler
said.

Banks with stronger capital-adequacy ratios - such as PT Bank
Danamon Indonesia, PT Bank Central Asia, PT Bank Pan Indonesia,
and Bank Internasional Indonesia - can move more aggressively to
take losses on bad debt.

However most banks remain unwilling to write off loans because
they still don't have enough capital to take the losses now,
Schuler said.

Moody's puts the system's outstanding foreign currency debt at
$70 billion, with only $5 billion restructured so far. The weak
rupiah currency has pushed up foreign debt in local currency
terms.

Simply pushing back deadlines for the repayment of this debt
could lead to problems further down the line if companies are
unable to meet the new repayment schedules, Schuler said.

Only fresh capital injections will allow the banks to start
writing off the debt.

While foreigners remain on the sidelines, a push to get rid of
the debt, and resume lending, is likely to remain on hold.