WB says stronger measures needed to improve RI banks

JAKARTA (JP): The government should adopt a more transparent, market-oriented strategy to solve banking problems and take timely action to penalize chronic offenders, the World Bank says.

In its latest report on Indonesia, the World Bank says the government has been successful in its case-by-case approach to solving banking problems.

"However, the government could increase the pace of progress by adopting a more transparent, market-oriented strategy," the report, Indonesia sustaining high growth with equity, says.

It says the cost of local credit is still high, there is limited access to long-term finance, and cites problems because of the large number of highly leveraged businesses.

Because enforcing contracts and exercise collateral is often difficult, there is a good chance the typical businessman could walk away from a project without major financial losses, even in a worst case scenario, the report adds.

"As a result the risk of default is high and banks must charge high rates to cover debts," it says.

The World Bank notes a decline in banks' classified assets in relation to total assets last year to two thirds of that recorded in 1993.

"However, classified assets (substandard, doubtful and bad credit) still rose in absolute amount," it says. It says that bad debts as of December, 1996 were Rp 9.6 trillion (US$3.9 billion), or 2.9 percent of total credit outstanding.

It calls for more high-level political support to assist state banks' collect their bad debts which amounted to 4.6 percent of their total credit outstanding (Rp 139 trillion) as of last December.

The report suggests Bank Indonesia's (central bank) regulations be strongly enforced -- a shift in classifying credit away from the current approach of waiting until payments are late -- and a closer look at banks' procedures for valuing collateral.

The World Bank also stresses the need for clear guidelines on access to Bank Indonesia's assistance, stronger sanctions for repeat violations and higher capital requirements for non-foreign exchange banks.

It suggests the names of the state banks' biggest bad debtors be published.

It also urges Bank Indonesia to publish the cost and terms of its assistance to troubled banks in its annual report and to disclose its financial statements in more detail.

The World Bank says there appeared to have been little change in the state banks' efficiency or credit assessment procedures.

"Major changes will be needed to address these weaknesses which are essentially one of corporate governance," the report asserts.

"Closures, mergers and downsizing of state banks could be given more consideration, possibly in conjunction with the unbundling of some activities that could be competitively sold off to the private sector," the report says. (vin)

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