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.