Lippobank chief endorses scheme to help ailing banks

Lippobank chief endorses scheme to help ailing banks

JAKARTA (JP): The government should encourage healthy banks to
take over the nonperforming loans of ailing banks to help breathe
new life into the country's ailing banking industry, a noted
banker suggested here yesterday.

Chairman of Lippobank Mochtar Riady said yesterday the healthy
banks should then swap the nonperforming loans with convertible
bonds with the defaulting companies.

He said the convertible bonds should carry low interest rates
and mature in at least five years to seven years to allow the
borrowers breathing space to reestablish their businesses.

"Many debtors have not been able to pay their loans because of
the current high interest rates," he said at a seminar on
banking.

The loan takeover would exact no cost for the healthy banks
because it would not involve any use of public funds but only by
providing an equity to the government.

Mochtar said Bank Indonesia, which has spent trillions of
rupiah in liquidity credits to rescue the country's banks,
technically controls more than half of the industry.

"This is a blessing in disguise. The question now is how
should the government take advantage of its wealth. The easiest
way is to transform the nonperforming loans into government
equity at healthy banks."

He admitted that not all nonperforming loans could be
salvaged, adding only those which still had prospects based on
audits made by international accounting firms could be
transferred into convertible bonds.

"Banks are sick because their customers (debtors) are also
sick. To help the banks we must help the customers. This is the
principle of the scheme," Mochtar said.

"The government must rescue the banking sector, not clean it
up," he said. He said the grim alternative -- closing down of the
country's banks -- would be costly and unending.

The government established the Indonesian Bank Restructuring
Agency (IBRA) in January with a mission to guarantee all bank
obligations and restructure the country's more than 200 banks.

The agency has taken over six large private banks and
supervises 32 others.

International auditors have completed their due diligence on
the six banks, and based on the IMF reform programs the banks
should be quickly recapitalized or shut down.

The auditors are expected to complete due diligence on all
banks by October.

Some government officials are keen to close down audited banks
which have no prospects of meeting the minimum 4 percent capital
adequacy ratio (CAR) to be fulfilled by the end of this year.

IBRA is expected to soon launch an asset management unit (AMU)
to handle the massive nonperforming loans at domestic banks,
which according to domestic rating agency Pefindo might reach 60
percent of outstanding loans by year's end.

Mochtar argued that handling the nonperforming loans through
the AMU would require from one year to two years, leading to a
deterioration in machinery owned by customers and massive
layoffs.

"I think we should let the bankers handle the nonperforming
loans problem and prevent layoffs," he said.

But he believed the AMU could handle the difficult dilemma of
the nonperforming loans.

Economist Sri Mulyani said it would be extremely difficult for
the government to really clean up the banking sector because
closing down a large number of banks would trigger widespread
runs on banks and carry undesirable political implications.

"I think the government is easing down by restructuring the
banking sector gradually. This is good news for bankers who have
been frightened that their banks may have to be closed down," she
said. (rei)