Recouping liquidity loans

The finance ministry's one-month blitzkrieg to force 10 suspended and four nationalized banks to repay about Rp 140 trillion (US$12.7 billion) in emergency liquidity finance from the central bank should satisfy the public's clamor for harsh measures against what have long been widely perceived, rightly or wrongly, as bad bankers.

The parade of business tycoons arriving at the Attorney General's Office to face demands for payments or risk being charged with corruption could have succeeded in conveying the message that the government is really serious about dealing firmly and objectively with recalcitrant bankers. Pictures and television footage of the businesspeople being hounded by reporters upon arrival and when emerging from the chief prosecutor's office could have been seen as a stigma to keep other bankers on their toes.

However, the results so far are still a long way from achieving the ultimate goal of restructuring the banking industry. Even the ceding of Rp 177 trillion worth of a wide range of assets by bank owners through agreements signed at the Attorney General's Office is simply the beginning of a long process of recouping taxpayers' money.

The Indonesian Bank Restructuring Agency (IBRA), which is in charge of ailing banks, and its Asset Management Unit (AMU), are now being overburdened with the complex valuation of the fixed assets handed over by bankers. This not only requires property valuations but also the verification of thousands of documents related to share certificates in more than 100 companies operating in numerous areas. No less important is the task of ensuring that the companies in which IBRA now owns equity continue to operate normally, otherwise the value of the shares would fall and what could eventually be recouped may be much less than what was originally assessed.

Given the volume of this job and the variety of skills needed for the valuation, it is easy to see how costly are the operations of both IBRA and its AMU. This cost, which is part of the overall cost of restructuring the banking industry under financing support from the Asian Development Bank, the International Monetary Fund and World Bank, could well be much larger than the Rp 15 trillion budgeted in the current fiscal year alone.

It is therefore imperative that the hundreds of experts at the AMU should be able to package the assets into such saleable forms so as to get maximum net sales value. Most important too is that all this process should be performed transparently to ensure fairness based on market values.

Nonetheless, as stated at the outset of this column, recovering the liquidity finance is not the ultimate goal but more of a means to discipline bank managers and owners, to make owners bear a substantial portion of the losses of their banks.

True, the central bank, as the lender of last resort, is obliged by law to provide timely support to illiquid but solvent banks to prevent panics and runs. But as the case of the 10 suspended and four nationalized banks shows, the central bank pumped liquidity finance not only to illiquid banks but also to insolvent ones.

One may argue that it is extremely difficult to distinguish between illiquidity and insolvency within the banking industry. Particularly at a time when the rupiah has lost almost 80 percent of its value against the American dollar, the political situation is uncertain and most businesses are on the verge of bankruptcy as a result of punitively high interest rates and a contracting economy.

Nevertheless, as most of the 14 banks were found to have violated the legal lending limits, meaning their intragroup lendings far exceeded the ceilings set in the prudential regulations, it is reasonable to suspect that some central bank executives might have been linked to collusive deals with several of the ailing banks. It is therefore legitimate to demand that the central bank's process of having injected so huge a sum of liquidity support to the 14 banks be thoroughly audited to root out corrupt bank supervisors. The bank restructuring process will never be completed if the central bank is not cleaned off venal executives.