Reforms 'strong enough' to restore banking industry

JAKARTA (JP): Banking sector reforms -- part of overall sweeping reforms announced by President Soeharto Thursday -- were adequate enough to restore the ailing banking industry, analysts said yesterday.

But they said the reforms should be fully implemented to ensure that the battered banking industry recovered as expected.

"It's good news," Steven Rogers, an analyst with PT Usaha Bersama Securities, said, "assuming the government is consistent with them."

The announcement had been anticipated by many in the industry, said a research official at Bank Dagang Nasional Indonesia (BDNI).

"But it's positive", Rogers said, citing that plans to introduce a stipulation on bankruptcy and an insurance deposit scheme were a breakthrough. "But it's a long-term plan and many things remain to be seen."

He said that what many in the sector wanted to hear was measures with short-term implications, such as a ruling to raise the minimum capital requirement and a more detailed plan about mergers in the industry.

President Soeharto announced a series of drastic economic measures Thursday, including financial sector restructuring, as part of a deal in exchange for a US$40 billion bailout package arranged by the International Monetary Fund.

The banking sector overhaul includes raising the autonomy of the central bank; amending banking laws to allow full privatization of state banks; tightening supervision of commercial banks; and lifting restrictions on branches of foreign banks, all by February.

"The announcement is positive to the industry," said Ferry Y. Hartoyo, a banking analyst with PT Vickers Ballas Tamara.

However, he said that many were surprised because the government did not scrap the 49 percent foreign ownership limitation in banks traded at stock markets.

He explained that because domestic banks had fallen on their knees, hit by their mounting debt burden due to the rupiah's sharp drop against the U.S. dollar, the most feasible alternative to save ailing banks was to attract foreign capital and management know-how.

"There's no way local investors can provide the amount of money needed," he said.

However, the BDNI research executive said the government would probably revise the foreign ownership limitation.

The banking reform program states that a new banking law, which will abolish the ownership limitation, will be introduced by the end of June 1998.

"To ensure the success of mergers in the industry, there's no other way other than to scrap the ownership limitation," he said.

He pointed out that international rating agencies had slashed the ratings of domestic banks below investment grade, with investment in the sector made even more unattractive by the limitation on ownership imposition.

The long-term nature of banking reform is reflected in one of the programs which will introduce a deposit insurance scheme, which will act as a safety net for depositors at troubled banks.

"The scheme is positive," said Vickers Ballas' Ferry.

However, he said that during the current financial situation, such a scheme could not be implemented, saying that irresponsible bank managements might let their banks go bust.

The banking industry's merger plan poses another predicament for some analysts. "It will not be completed in a short time period," Ferry said.

He said the slashing of about 200 banks into half would create massive layoffs with extensive repercussions. Rumors in the industry said the country would only need 30 private banks. (08)