DJN: Indon Bank Closures Clear Way for IMF Lending (fwd)

[Robert Weissman <rob@essential.org>]

March 13, 1999
*Indonesia Closes 38 Private Banks,
Clearing the Way for IMF Lending
By GRAINNE MCCARTHY and KATE LINEBAUGH
Dow Jones Newswires

JAKARTA, Indonesia -- Under pressure to overhaul its crippled banking
system,
Indonesia pressed ahead Saturday with bank reform, closing 38 private
banks,
taking over seven others and pledging to recapitalize an additional nine.
The amount of banks closed was broadly in line with market expectations and
should lift the rupiah when Asian trade resumes Monday.
The move clears the way for the resumption of International Monetary Fund
lending to Indonesia at a time when it badly needs it, the IMF's top Asian
official Hubert Neiss said. It also ends months of speculation about
whether
Indonesia would take the steps necessary to tackle its banking crisis at
all.
"This is a sweeping set of fundamental reforms designed to bring our
banking
system back to financial health," said Indonesian Senior Economics Minister
Ginandjar Kartasasmita.
The government stressed its guarantee on deposits shouldn't lead to any
deposit runs when customers learn of the bank closures.
"The deposit guarantee remains a cornerstone of government policy," central
bank Governor Sjahril Sabirin said. "We would like to assure the banking
public that these reforms will in no way affect the safety of their
deposits."
The government first closed banks in November 1997, which then sparked a
massive deposit runs on banks. This didn't happen in August, however, when
it
last closed banks, largely due to the government deposit guarantee.
Closed Banks Were Deeply Insolvent
Of the 38 banks that have been closed -- six of which are listed -- most
are
small banks in woeful financial positions. "These banks are deeply
insolvent
and have no prospects of regaining financial viability," said the
government.
"They have therefore been shut."
The government also said 73 of the 128 private domestic banks don't require
public financial assistance.
Indonesia's banks have been devastated by the economic crisis, hit by high
interest rates and the dramatic plunge of the rupiah. Many are left with
little or no capital and are saddled with mountains of nonperforming loans.
On
top of that the country has far too many banks and has long been under
pressure to close many of them.
The government intends to spend up to 300 trillion rupiah ($30 billion) to
recapitalize banks, provided their capital levels meet a minimum
requirement
and bank owners can come up with 20% of the recapitalization costs.
Despite the urgency of overhauling its banks, the government has long
appeared
to drag its feet on bank restructuring, seeming reluctant to implement
painful
reforms. It also has been accused of pandering to the wishes of
well-connected
bank owners who sought to avert plans to close their banks. Saturday's
announcement is clearly designed to quash that perception.
The nine banks slated for recapitalization have until April 21 to come up
with
the 20% capital needed to match the government's 80% "and enter into
investment contracts with the government," the government said in a
statement.
Banks taken over by the government include Bank Nusa Nasional, part of the
Bakrie Group. The government and its multilateral lenders Saturday defended
the decision to take over the banks rather than shut them, noting that all
of
the seven had more than the cutoff level of 80,000 depositors as well as
extensive branch networks.
They are being taken over "in the public interest to minimize disruption to
the payments system," the government said. "With 100% government ownership,
the former owners will have no role in the operation of these banks."
Selection of Banks Isn't Arbitrary
World Bank Indonesia director Dennis de Tray stressed the government
decided
to allow the seven banks to stay open because it "wanted to have a more
gradual, even-handed process for dealing with especially the larger banks
in
the system. The cut-off point is clearly not an analytic number -- it is a
judgmental factor," he said.
"It is not an arbitrary selection of banks," Mr. Neiss said. "A clear
criteria
has been established, and a clear rationale has been given as to why this
had
to be done."
Indonesia's relations with the IMF -- which is leading a $43 billion
bailout
program for the country -- have appeared strained over recent weeks, with
the
fund publicly encouraging the government to press ahead speedily and
transparently with restructuring its banks. Mr. Neiss said he was satisfied
that the decisions on banking "were made in a transparent way."
One of the chief executives of the banks being recapitalized -- Bank Bali
President Rudy Ramli -- welcomed the decision and also applauded the
transparency of the measure. But "this is only a start," Mr. Rudy said.
"You
won't be able to start the economy by recapitalizing the banks."
He said restructuring corporate debt is key to getting the economy moving
again. "This is more important, then the businessman can think how to
export
and how to increase production -- now he's just thinking about how to
defend
himself from his bankers."