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.