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.