Recouping liquidity loans

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.