RI bank reform on course, WB says

RI bank reform on course, WB says

SINGAPORE (Reuters): Indonesia is on track to reform its banking system after sweeping measures to clean up the sector was announced last month, a source at the World Bank told Reuters on Friday.

"It's a huge task. My sense is so far they are, broadly speaking, on track," said the Jakarta-based source, who was on a visit in Singapore.

On March 13, Indonesia closed 38 banks and nationalized seven under a program seen as a lynchpin of any economic recovery. Part of Indonesia's crisis was blamed on bad banking practices.

The source said the main concern was whether the government could stay on course to achieve its goal.

He said the key priority of the government was implementing measures that had been announced, including ensuring liabilities were met by closed-down banks, depositors were not inconvenienced and bad assets were transferred to Indonesia's Asset Management Unit.

"Implementation, implementation is the key," the source said, adding other actions included ensuring that banks that had been taken over had developed restructuring plans and these were subsequently being implemented.

"It requires sustained efforts. It's too early to tell whether they will be able to stay on course," he said.

"These are all complex, difficult tasks and the problem is the government has to be focused on carrying out the job."

On the possible impact on interest rates from the issuing of trillions of rupiah bonds to finance the recapitalization program, the source said it would be market neutral.

He said bonds issued by the government would be placed in banks and nobody was going to buy it, therefore, there would be no inflation effect.

"Details of the bonds are yet to be finalized ... It should be coming out very soon."

He said the bonds would have no impact on interest rates as they had been factored in by the market as the government had already allocated substantial amounts of the budget to make interest payments on the bonds.

Asked about interest rate trends in Indonesia, the source said: "The trend is clear. It's heading down, provided inflation remains in check and confidence continues to improve."

He was in Singapore for a meeting on corporate and bank restructuring for East Asia.

The meeting assessed the progress of debt payments and recapitalization in countries hit hardest by Asia's economic crisis.

Overviews on the progress of restructuring and the financing needs of various countries topped the agenda for discussions, a copy of the program obtained by Reuters said.

Delegates at the conference, who included officials from China's finance ministry and central bank, Indonesia's central bank and Bank Restructuring Agency, Malaysia's finance ministry, South Korea's Corporate Restructuring Committee, said the meeting was timely.

"This roundtable discussion so far has been very good for us and gives us a real world feel about the problems in Asia," a representative from a multilateral institution who declined to be identified, told Reuters on the sidelines of the conference.