Japanese banks aid Indonesia, but ensure of business outlook

Japanese banks aid Indonesia, but ensure of business outlook

TOKYO (Reuters): Japanese banks have moved to support
Indonesia's trade financing and boost capital in their Indonesian
subsidiaries, but they are still far from optimistic about
business prospects there.

Bank of Tokyo-Mitsubishi Ltd (BTM) said yesterday it had
agreed with the central bank, Bank Indonesia, to guarantee
letters of credit issued by 28 major Indonesian banks.

Under the agreement, BTM and Bank Indonesia will guarantee
letters of credit issued by 22 private banks and six state-owned
banks, a BTM spokesman said.

Indonesia's international trade has been bogged down for
several months following refusals by most overseas banks to
accept Indonesian letters of credit (L/C) due to plunging
confidence in the crisis-hit country.

This hurt its exporters, which depend largely on imported raw
materials for production.

Some foreign banks have now started to accept local L/Cs after
an international commitment to provide guarantee facilities for
Indonesia's imports.

The Export-Import Bank of Japan, the Singapore government, and
the U.S. Export-Import Bank have also offered help to guarantee
the country's L/Cs.

Meanwhile, major Japanese commercial banks are considering
raising capital for Indonesian subsidiaries jointly set up with
local companies there, banking sources in Tokyo said.

But the amount of capital to be raised and the timing have yet
to be decided, they said.

"We will be raising capital. But given the stalling debt
negotiations between foreign creditor banks and Indonesian
companies and lingering uncertainty over the (President) Habibie
administration, a final decision cannot be made," said a Japanese
bank official, who declined to be named.

Analysts said the possible capital replenishment by Japanese
banks was not out of growing optimism about Jakarta but due to
sheer technical necessity.

Banks operating in Indonesia are required to set aside loan
loss reserves of up to 100 percent of the original value of the
loans to cover possible losses.

"If banks were to set aside such reserves, it would eat up
part of the capital of their Indonesian banking subsidiaries,
raising the need for replenishment of capital in the near
future," said a senior analyst at a Japanese think tank.

If banks are not being paid interest on loans to Indonesian
firms at present, they are likely to fall into the category of
problem loans that require them to put up 50 to 100 percent loan
loss reserves when they close their books at the end the first
half of the business year on Sept. 30, he said.

BTM, which has the largest exposure, said on Monday its
outstanding loans to Indonesia totaled 450 billion yen, of which
47 billion yen was subject to loan loss reserves.

The Indonesian government has called for banks operating there
to raise their minimum capital to Rp 250 billion.

The maximum capitalization among Indonesian subsidiaries of
Japanese banks is currently Rp 150 billion.

The banking sources said the amount of reserves that are
needed cannot be estimated at a time when talks over the debt of
Indonesian companies have stalled.

Talks on how to reschedule Indonesia's $80 billion private
sector debt, originally set for May 26 in Frankfurt, have been
postponed until June 1 due to the turmoil in the nation leading
up to the resignation of Soeharto from the presidency last week.