WB says stronger measures needed to improve RI banks

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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