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)