It's not that easy to solve banking problems

It's not that easy to solve banking problems

By Kwik Kian Gie

JAKARTA (JP): The new government which will be established
after the June 7 general election will clearly face huge and
sophisticated hurdles in trying to revive the deteriorating
banking industry because many existing problems have yet to be
solved.

The Asset Management Unit (AMU), an institution the government
recently established to manage assets confiscated from bad
debtors, for example, is overburdened by piles of bad assets,
becoming a monstrous entity that is very difficult to deal with.

There are, at least, three areas of vulnerability involved in
the management of the seized assets, particularly those in the
form of companies, under AMU's control. First, lack of knowledge,
business experience and entrepreneurship may lead AMU executives
to sell the companies at low prices.

Second, executives of the confiscated companies may manage
them unprofessionally, regarding them as companies without
specific owners. Meanwhile, the former owners are reluctant to
supervise the companies' management because they are worried
about being regarded as errant businesspeople. In the meantime,
AMU executives are unable to manage the companies or properly
supervise their management.

Third, company executives who are not shareholders may abuse
their management positions in order to enrich themselves.

There is also an indication that the government is reluctant
to disclose debt problems at state banks. According to sources,
some debtors still have influence with government officials and
are able to successfully lobby the officials not to disclose
their debts so they will not be legally processed. Some debtors
might even be using their money to persuade executives at state
banks to write off their bad debts and delete all of the data
relating to their debts.

Sources said corruption, collusion and nepotism involving bank
executives and borrowers, which used to be aimed at arranging
large loans without adequate collateral, still exist, with the
main objective now being to cover up past misdeeds and abolish
evidence.

The government's bank recapitalization program has also run
into trouble because implementing the program requires more funds
than previously calculated. The government guaranteed the
recapitalized banks would deposit their share of the funds -- 20
percent of required recapitalization funding -- in an escrow
account before the program's implementation. However, long delays
in the program caused the banks to lose more money due to
negative interest rate spread. The funds needed to recapitalize
the banks, therefore, increased substantially.

The banks should not necessarily have to generate funds from
the public simply because their interest rates are higher than
their lending rates, but apparently they are forced to raise
funds to finance their daily operations.

Considering the sophisticated problems being encountered by
the banks, the next government will not be able to solve the
banking industry's problems without dealing with borrowers' bad
debts. Solving the borrowers' debts will require individual
scrutiny because their problems are different and specific.

One of the problems which must be addressed is the valuation
of borrowers' assets. Some bankers say AMU and the Indonesian
Bank Restructuring Agency (IBRA), which are assisted by
consultants JP Morgan and Lehman Brothers, have undervalued
borrowers' assets by some 80 percent. According to the bankers,
the two institutions were too mechanical in determining the value
of the assets, using a preset computer program to devalue the
numbers in the borrowers' balance and profit-loss statements.
Such a way of valuation surely cannot be accepted.

There are actually three ways of valuing assets. The first way
is to calculate the possible costs to construct similar
production facilities. The machinery must be valued in U.S.
dollars because it has to be imported with dollars, and the
dollar-termed value should be converted to rupiah.

The second way is to multiply the annual profits of the
borrowing companies, while the third way is to determine the net
present value of the companies' future cash flow.

It would be fair for the bankers to demand the depreciated
value of their assets be recalculated, taking into consideration
whether the value of the assets had been marked up by the
borrowers, whether the value depreciation was affected by the
economic depression or whether the assets had been mismanaged.
Such differences in asset valuation could also be used to
proportionally share the responsibility between creditors and
debtors.

Some bankers suspect Lehman Brothers and JP Morgan, as
investment banks, have not been objective in carrying out their
due diligence reports. The two investment banks, according to
some bankers, may have had an interest in "undervaluing" the
assets because they themselves might want to purchase the assets
at the lowest price possible.

The next government, whose officials are expected to be free
from corruption, collusion and nepotism, should reconsider
whether it will continue using the services of the two investment
banks or, instead, appoint valuers or accountants to carry out
due diligence in order to objectively value the assets.