Program for the rehabilitation of Indonesian banks

Program for the rehabilitation of Indonesian banks

JAKARTA (JP): The following is the full text of a statement on
the Indonesian banking reform issued by the government here
yesterday.

In order to restore the confidence of depositors and creditors
-- domestic and foreign -- in the Indonesian banking system, and
to re-establish the soundness of the system, we are undertaking a
comprehensive program to rehabilitate the system. This program
comprises two main elements.

First, the provision of a full guarantee by the Government of
Indonesia to all depositors and creditors of locally incorporated
commercial banks.

And second, the creation of the Indonesian Bank Restructuring
Agency -- IBRA -- which will be responsible for rehabilitating
those banks that are at present not sound and do not have good
prospects of restoring themselves to soundness.

The relevant legislative and regulatory changes will be put in
place shortly.

Guarantee

Effective immediately, the Government of Indonesia is
guaranteeing that the claims of depositors and creditors of all
locally incorporated banks will be met. Both rupiah and foreign
currency claims are covered.

In the case of foreign currency claims, payment of the
guarantee will be in rupiah at the market exchange rate.

The only exceptions to coverage of this guarantee are
shareholdings and subordinated debt.

The guarantee applies equally to private and state-owned
banks.

The guarantee also applies to banks under restructuring
(merger, acquisition, etc.) including state-owned banks, joint
venture banks and private national banks.

In addition, in order to ensure adequate supplies of essential
commodities, Bank Indonesia will provide guarantee in foreign
currency for imports of such commodities.

Thus Indonesian banks are going to be able to meet their
commitments. We anticipate that most depositors and creditors
will wish to keep their funds in the Indonesian banks by rolling
over maturing claims, while they will receive payment if they do
choose to withdraw those funds.

In exchange for this guarantee, all locally-incorporated banks
will be subject to the enhanced supervisory oversight that is
necessary in present circumstances.

Banks will also be required to pay a fee based on the value of
their liabilities in order to help defray the possible costs of
that guarantee.

The guarantee will remain in place for at least two years, and
will not be terminated before the soundness of the banking system
has been restored.

We will give at least six months' notice of the ending of the
guarantee. At that point, the guarantee could be replaced by a
deposit insurance system, the modalities of which will be studied
by Bank Indonesia with the assistance of The Asian Development
Bank.

Requirements

Bank Indonesia, in consultation with the IMF and World Bank is
developing a comprehensive set of prudential requirements of a
banking system operating with the guarantee.

In this connection, Bank Indonesia will be issuing additional
prudential requirements in order to prevent irregular practices.

During the period of the guarantee, there will be limits
imposed on rates to ensure that banks do not offer terms
substantially in excess of markets terms.

There will also be limits on the rates of growth of credit.

These limits, together with prudential norms on banks'
customers' uncovered positions, will be announced by Bank
Indonesia in the next few days.

IBRA

As the second major element in the rehabilitation program, the
government has established IBRA, the Indonesian Bank
restructuring Agency.

This is an autonomous agency, operating under the auspices of
the Ministry of Finance.

It will be headed by Dr. Bambang Subianto (Director General of
Financial Institutions).

The agency will have a limited lifespan, and will be wound up
once the bank rehabilitation program is complete.

The objective is to restore the banking system to soundness at
least cost to the government within the constraints under which
we are operating, thus existing shareholders will be taking on a
share of the burden.

We are also eliminating all restrictions of foreign ownership
of Indonesian banks, so that foreign capital can help provide the
resources for a fully capitalized banking system.

In order to make IBRA fully operational at once, initial staff
are being transferred on secondment from Bank Indonesia, the
Ministry of Finance and other public and private institutions,
and the agency will be supported by foreign expert advisors.

IBRA will have two main functions; first, it will supervise
the banks in need of restructuring, and it will manage the
restructuring process, and second, it will be the management
agency for assets that it acquires in the course of the bank
restructuring.

Bank Indonesia is assessing the condition of the banks. Those
that fail to meet certain standards are to be reviewed by IBRA.
Where relevant, shareholders of those banks are to be given the
opportunity to recapitalize their banks.

In the event that recapitalization does not take place and a
bank fails an IBRA-commissioned review, IBRA will assume full
supervisory authority over it.

IBRA will consider how to restore such banks to full
soundness, whether through recapitalization or through merger or
takeover, at least cost to the public; in any case where public
money is involved, existing shareholders will have their equity
written down or eliminated.

IBRA will take over responsibility for implementing the
government's plans for merging state banks to improve their
financial condition and/or operational efficiency.

This will include the merger of four state banks, by end-June
1998, and the introduction of new management by the end of
February 1998.

IBRA will, where appropriate, also purchase problem assets in
cases in which it concludes that such purchases would enable
higher realizations from the sale of the bank or of the asset.

IBRA will develop a specialized asset management capability to
maximize its recoveries after restructuring them. IBRA will aim
to sell the banks and portfolios it has acquired.

This process will thus include the privatization of the state
banks over which it exercises control, as well as those for which
it assumes control as part of the restructuring process.

The government will issue bonds in order to provide the
initial funding for IBRA. Further issuances can be expected as
IBRA's operations develop. Over time, as recoveries increase,
IBRA will be able to become more self-financing.

Other measures

The government is committed to revising the legal framework
for banking operations, after a thorough review of the central
bank and banking regulations; areas of focus will include
contract enforcement, bankruptcy, banking disclosure, taking and
realizing collateral, and regulations on financial instruments.

There are to be improvements in the data that banks will be
required to publish.

Prudential regulations will be reviewed; various sanctions
will be enforced, including withdrawals of bank licenses and the
imposition of appropriate penalties of management and directors
who fail to conform to safe and sound banking practices.

Conclusion

This comprehensive program reflects our determination to
restore the soundness of Indonesia's banking system. We are
protecting fully the banks' customers while dealing forcefully
with the banks themselves.

Once this process is over, Indonesia will have a banking
system that will be able to meet fully the challenges of
restoring rapid growth to the Indonesian economy.