RI urged to overhaul banking system, bankruptcy laws

RI urged to overhaul banking system, bankruptcy laws

HONG KONG (Reuters): Two of the quickest routes to restoring
confidence in the crashing rupiah would be for Indonesia to allow
its bad banks to fail and draft new bankruptcy laws, experts and
analysts said on Friday.

"The best way to create confidence is to clean the banking
system, and the only way I know of doing that is to let a couple
of names go," said Philippe Dalhaise, president of Thomson
BankWatch Asia.

Foreign creditors lining up to seize assets have met a wall of
frustration in Indonesia, partly because of an antiquated and
badly-written bankruptcy law that has thwarted efforts to force
debtor companies and banks into liquidation.

"A good start would be to write a better bankruptcy code,"
said Sandra Lawson, a U.S.-trained lawyer and political risk
analyst at Goldman Sachs.

"That could be done really quite quickly because there are all
sorts of model codes, and Indonesia has all sorts of foreign
advisers able to draft one," she said.

Virtually no Indonesian banks or corporations have gone into
liquidation despite a relentless slide in the rupiah that has
lifted debt service costs to impossible levels.

As Indonesia's economy grinds to a halt with exporters unable
to find credit to finance raw materials, Indonesian borrowers
have simply stopped servicing their debts in the knowledge that
creditors were powerless to respond, analysts said.

"The bankruptcy laws are extremely vague in Asia and foreign
creditors don't have much power, especially since they have to
enforce their claims in local courts," said Mark Faber, fund
manager and Asia expert.

Asian corporations, many of them widely diversified
conglomerates dominated by politically-connected families, would
exploit the situation to their advantage, Faber said.

"I think the families will keep the assets," he said.

Indonesia's bankruptcy code is considered the least advanced
among Asian nations. Experts said only Hong Kong and Singapore
had effective legislation, with Malaysia a distant third.

Thailand ranked last with Indonesia until it made a commitment
to revise its old bankruptcy code, something that went some way
to restoring foreign confidence.

Even if Indonesia followed Thailand's example, there were big
hurdles to overcome, including an overworked and understaffed
judiciary and the time required to win legislative approval and
train judges, Lawson said.

Cultural resistance was another obstacle.

After years of relying upon relationships to guide economic
and lending decisions, some Asian nations were confronting the
prospect of a law-based system for the first time.

"You may not need formal legal protection if you can rely on
channels outside the legal system," Lawson said. "I don't really
want to say this is part of corruption, but you don't even need
to go that far to say it's an outdated model."

The Asian system was completely alien to the West, where
lending decisions were based on credit analysis to establish a
borrower's ability to meet obligations, said Dalhaise.

"Here you lend because you're told to lend, or he's a friend
or because you believe his family's honest... or you believe he's
going to give you something in return, or you're plainly cheating
and lending someone else's money," he said.

The Asian system also depended heavily upon collateral, where
borrowers forfeit assets in return for loans.

This was one of the overriding causes of structural fragility
undermining Asia's banking system and threatening the broader
economy as a whole, Roy Ramos, head of banking research at
Goldman Sachs, said.

"I think it's fair to say that in most parts of Asia there is
an undue reliance on collateral values, and not enough attention
to cash flows," Ramos said this week in Hong Kong.

Although foreign bankers demanding their money back have won
little sympathy in crisis-hit Asia, their decision to lend in
Asia was not as stupid as it now seems, the analysts said.

"Many of these guys went in with their eyes wide open," said
Dalhaise. "The problem was they relied too much on the bicycle
theory -- that as long as you don't slow down too much the
bicycle will keep on rolling."

The region's extraordinary growth rates lent confidence to
borrowers ability to service debt -- until creeping problems
torpedoed the entire region.

"And perhaps the foreigners were blinded by the fact they all
thought that local banks and in many ways a number of local
companies would never go bust because there was that implied
protection by the authorities," he said.

Analysts said foreign bankers left holding a bag of bad
Indonesian debt had just two options: rollovers or write-offs.