Established on Jan 27 under a presidential deuce, Ibra was to spearhead the country's banking reform as required by the International Monetary Fund (IMF) in exchange for a US$43 billion rescue package. The banking reform, implemented on Nov 1 last year, was expected to strengthen the country's banking industry and in turn reinvigorate activities in the real sector which was severely hit by the monetary crisis. However, it did the opposite.

The government liquidated 16 banks on the IMF's recommendation. By closing the banks it opened Pandora's Box. Instead of improving public confidence, the move wrecked the country's banking industry. People flocked to national banks to make withdrawals and to 1~t their money in state banks, foreign banks or at home as they were worried about more bank liquidations.

The massive rush forced many banks to turn to Bank Indonesia, the central bank, for bridging loans because they could not immediately liquidate their credit portfolios. It was Ibra's initial task to supervise banks that received loans from Bank Indonesia and help solve their problems. Since February, Ibra has been authorized to take over Bank Indonesia's total cash injection of 54.9 trillion rupiah, given to 54 cash -drained banks since the monetary crisis hit the country last August. Ibra was also given the authority to inject more cash into other insolvent banks.

So far, many banks under Ibra's supervision have returned to normal, in terms that they have lowered the number of loans to below 200 per cent of their paid, -up capital and increased their capital adequacy ratio to at least 5.0 per cent. However, some banks under Ibra's supervision deteriorated on continuing public run. As a result, Ibra had to inject new money into these troubled banks, increasing their bridging loans to 140.44 trillion rupiah as at July 24. This amount is slightly below the state budget of 147.22 trillion rupiah.

The increasing number of cash injections indicates that the government is still struggling with its banking reform. Many attribute the failure to the government's lack of transparency and its unfairness in handling troubled banks. Banks with strong political connections are believed to have received special treatment. The government has also been criticized for its soft stance towards the owners of the troubled banks , - it has yet to take action against them. However, they are barred from going abroad.

I Nyoman Moena, a senior banking observer, says there are non-economic factors like social unrest and political uncertainty that hinder efforts to improve the banking sector. Another factor is the government's policy to increase interest rates. [Flaring the first half of the year the central bank's short-term treasury notes or Certificates of Bank Indonesia (SEI) increased three times to as high as 70 percentage points per year. Despite the high interest rates, the banks still failed to attract people to deposit their money due to the contented social unrest and political uncertainty. The government's policy in February to fully guarantee all deposits in the banking system, including interbank liabilities, has also failed to stop the massive run on the banks. One banker says his bank has to offer higher-than-average interest rates to prevent its depositors from withdrawing their funds. Many small banks were reported to have offered deposit interest rates at a higher level than their lending rates.

Many government policies have become ineffective. Tile high interest rate policy, for (Inc, has made it difficult for banks to channel new credits. At the same time, banks also find it hard to coiled their loans portfolio as most of their debtors have been severely hit by the monetary crisis. As a result, nonperforming loans (NP'S) went up 50 per cent in July from 10 per cent July last year. These NP'S are estimated to increase further on a prolonged monetary crisis.

The policy of channeling bridging loans to troubled banks is not without implications. As the cash supports are derived from printing new money, soaring inflation then becomes inevitable. Many estimate that the inflation rate will reach three digits this year. Moreover, many worry that Ibra might incur huge losses from channeling the loans because of the worsening condition of the recipient banks.

Meanwhile, the government's decision to freeze seven banks in April and to take over the management of seven others has disrupted plans by some to merge. The Tirtamas Group, for example, received last December, a license in principle to merge four banks tinder its control. The plan was, however, scrapped as two of its banks' licenses - Bank Pelita and Bank Kredit Asia were frozen. The takeover of Bank Dagang Nasional Indonesia and Bank Tiara Asia's management on the other hand, had caused both banks to abandon their merger plan with Bank Internasional Indonesia.

What the Indonesian government has achieved so far with the banking reform seems unsatisfactory, mainly for the IMP. The IMF wants Indonesia's banking reform to be accelerated. Under the previous agreement (the 2opoint Supplementary Memorandum of Economic and Financial Policies signed in April), Ibra is required by the IMF to have internationally-recognized audit firms review portfolios, systems and financial conditions of bank's under its control, and other major non-Ibra's banks.

IMP also wants stern action to be taken towards insolvent banks under Ibra. On Aug 2, the government announced the suspension of Bank Dagang Nasional Indonesia, Bank Umum Nasional and Bank Modern. It also took over the ownership of four banks under its management: Bank Central Asia, Bank Danamon, Bank Tiara Asia and Bank PDFCI. The fate of the other 38 banks under Ibra's supervision will be decided after a complete auditing exercise has been completed.

Meanwhile, the government will also resume its long-planned merger of four state banks - Bank Ekspor Impor Indonesia, Bank Dagang Negara, Bank Bumi Daya and Bank Pembangunan Indonesia into a new entity called Bank Mandin.. The government will hire an international financial institution to assist in the merging of the banks.

Finance Minister Bambang Subianto says the government has no intention to own the four banks permanently. Owners of the banks may regain ownership if and when they repay the bridging loans and recover the loans given to their affiliated groups. If the owners fail to meet their liabilities, the government would restructure the four banks' capital base before selling them to foreign or d

omestic investors through private placement or the stock market.

As to the unpaid bridging loans, Bambang says the government will confiscate assets of bank owners who fail to repay the liquidity support extended to them by the central bank and Ibra. For example, if the country's wealthiest tycoon, Lien Sioe Liong, fails to repay the liquidity support received by Bank Central Asia, in which Liem has a 70 per cent share, the government will confiscate Liem's share in the car-making arm VI' Indomobil, food giant I,'T Indofood Sukses Makmur and cement maker PT Indocement Tunggal Prakarsa. Meanwhile, the bank's NP'S will be transferred to Ibra's asset management unit.

Jaka Cahyono is The Edge's correspondent based in Jakarta

Published in THE HEDGE, September, 1998