State banks' subterfuge

State banks' subterfuge

Even in this supposed reform era, Indonesian state banks,
notoriously known for corrupt and collusive lending practices,
are never short of tricks to defend the vested interests of their
managements and crony customers, many of whom have powerful
political connections. With negative capital, all are now
technically bankrupt, and are only able to remain open with an
injection of funds guaranteed by the government. Despite this
support, the banks have aggressively lobbied to take back more
than Rp 100 trillion (US$12.5 billion) worth of bad assets or
nonperforming loans (NPLs) already transferred to the asset
management unit of the Indonesian Bank Restructuring Agency
(IBRA) in return for recapitalization funds from the government.

For now, the state banks have only succeeded in taking back a
small portion of their NPLs from IBRA. However, this may only be
the first step in a larger scheme. This clumsy approach only
reinforces the public's lingering suspicion that the government
is not serious about pursuing the large debtors who are partly
responsible for bankrupting the state banks.

Widigdo Sukarman, president of publicly listed Bank BNI, one
of the seven state banks, claimed, to the disgust of most
analysts, that state bank managements were better able to recover
the bad credits, because they knew their customers. Widigdo,
chairman of the Consultative Forum of State Banks, even went as
far to indirectly blame the central bank for most of the NPLs. He
argued that many of the NPLs would not have ended up in the
category had it not been for the punitively high interest rates.

High interest rates, especially since April, 1998, have added
to the woes of businesses, and contributed in part to devolving
the viability of loans. But this point oversimplifies the
problem. It has long been common knowledge that state banks have
been squeezed by those in power as cash cows for their business
interests. Conglomerates willing to share the spoils with bank
managements, easily obtained big loans without proper assessment
of their businesses and collateral put up as security for their
debts. The list of the 50 biggest debtors of state banks speaks
volumes about the widespread, politically directed and collusive
lending sprees.

Therefore, nobody is fooled by the state bankers' subterfuge
to conceal their corrupt and collusive practices. Bankers want to
take back the NPLs from IBRA, but not in good faith to recover
the debts. They are simply bent on continuing their collusions
and hiding issues of malpractice behind the NPLs. The state
bankers know that IBRA -- which is managed mostly by highly
reputable professionals and foreign consultants, under the close
supervision of the International Monetary Fund -- cannot easily
be compromised with regard to the management of the bad debtors.
IBRA also is subject to more stringent transparency provisions
than state banks, which often try to hide their crimes behind
banking secrecy provisions.

Minister of Finance Bambang Subianto who, as the director
general for banking and financial institutions in the early 1990s
must have known the inside operations of state banks, clearly
stated on Thursday that NPLs of the state banks would remain
under IBRA. But IBRA deputy chairman Eko S. Budianto said later
on Friday that individual NPLs of less than Rp 25 billion would
be transferred back to the management of state banks.

The backtrack is very discouraging. The government must have
known that the unloading of bad assets from ailing banks to an
asset management company -- in this case IBRA -- aims primarily
to enable the banks being restructured to focus their resources
on managing good assets which, given the inimical macroeconomic
conditions, could easily slip into bad credits.

Handling of bad loans requires skills that are usually not
provided in a bank. Personnel involved in such activities include
real estate specialists, liquidation experts and people with
insights into various industrial sectors. The debt recovery
process is quite complex, and involves the conversion of the bad
loans into assets, real or financial, then the restructuring of
these assets into easily sellable forms, and finally the selling
process to maximize the net sales value.

Since managing bad assets would interfere with the daily
running of a bank, one could easily suspect that important
decisions regarding bad assets would receive lower priority than
incoming new business. If not separated, the bank's management
and board of directors would have to use scarce time to discuss
matters relating to bad assets instead of focusing on current
business and strategy planning.

IBRA is in a stronger position to pursue debtors, as this
agency is vested with extrajudicial power to foreclose on assets
and sell them, cutting through the red tape to maximize credit
recovery.

Although state bankers succeeded in securing from IBRA only
individual NPLs of less than Rp 25 billion, it could be only part
of a bigger deception that might eventually subvert the recovery
of state banks' credits and consequently kill public trust in the
whole bank restructuring program.