When Hotman Hutapea, Indonesia's premier bankruptcy advocate, presented his first case to the new commercial court on September 1, he set telephones ringing in bank offices all over town. "Now they believe it," says one senior banker. "They see they'd better do a deal - or else."
Hotman's case was the first of hundreds scheduled to be presented to the court, and the strict time limit - 30 days before a judgment must be reached - leaves no way out for even the biggest deadbeat corporates. The first foreign creditor to front up to the court was the Jakarta branch of American Express, which is suing listed cocoa producer Davomas Abadi for the alleged failure to make good on a $3 million promissory note issued last January.
Indonesia's new political reality means that its companies can no longer ignore the law. "Companies can see that the government is dependent on the money from the IMF," says one bank analyst. "If the commercial court doesn't operate properly, all the foreign bankers have to do is complain to the IMF. There's no way the government is going to protect the companies at the expense of its survival."
The court's opening follows strong action against the family and friends of ex-president Suharto. A succession of bank nationalizations and closures has hit some of his closest allies. Top of the list: Liem Sioe Liong and two Suharto children - eldest daughter Tutut and eldest son Sigit. Their Bank Central Asia, the largest private bank in the country, has been nationalized. Top crony Bob Hasan's bank, Bank Umum Nasional, was closed.
The government has also cancelled Suharto family and crony contracts at a wide range of state companies from oil giant Pertamina to state airline Garuda, with a string of others under review.
Glenn Yusuf, chairman of the Indonesian Bank Restructuring Agency (Ibra), will spend most of September at Indonesia's parliament piloting through new legislation to allow a wholesale restructuring of the financial sector.
By the end of the year banks will have to meet a capital adequacy ratio of 4% and 8% by 1999. Yusuf believes the Indonesian banking system will then consist of a maximum of 50 healthy banks (down from 200 now) including 10 to 15 commercial banks, a few niche banks and a community banking and microcredit operation for the poor. An audit of the entire banking system by foreign accounting firms should be complete by the end of October.
The government has pumped Rp140 trillion ($11 billion) in "liquidity credits" into the banking system over the past eight months in an effort to stem bank runs following the abrupt closure of 16 banks last September. These credits will be converted into equity, controlled by Ibra.
"We have told shareholders to recapitalize their own banks, either with their own money or with partners, foreign or local," says Yusuf. "We may help some well-run banks who can't quite make it. We will take over the rest. If assets are bad we will go after the collateral. The assets will be securitized and sold off by our asset management corporation."
Auditors have discovered that a large number of banks had been illegally lending to affiliated parties, exceeding the limit of 20% of total loans. Ibra is negotiating to recover the funds pending legislation to enable it to confiscate shareholders' other, often very visible, assets and sell them to recover the funds. "The possibility is that Ibra will end up owning 25% of Indonesia's commercial property," he says.
Some bigger banks may require a combination of methods to resolve their problems. Shareholders of Bank Central Asia and two other large banks are required to repay by September 21 loans that broke the limit or the banks will be nationalized. After the deadline, non-performing loans will be transferred to Ibra for securitization and sale.
Yusuf envisages a raft of flotations, privatizations and rights issues - when the stock market recovers - along with sell-offs to foreign investors. "This is a corporate finance problem, not a banking problem," he says.
That should suit Yusuf. The 43-year-old former chairman of Danareksa, the state-owned investment bank, was a key player in Indonesia's privatization programme in the early 1990s. After taking an MBA at the Asian Institute of Management in the Philippines, he started his banking career as a corporate financier with Citicorp, before moving on to Bank Niaga, which has strong links with Citicorp.
Despite interest rates of 70% and non-performing loans that are estimated at 50% of the total in the banking system, some of Indonesia's better banks are managing to struggle through the crisis. Foreign-exchange earnings, as a result of the volatile rupiah, have been the key. "The banks benefited from widening spreads, rather than taking positions," says Peter Sutton, research director of Crédit Lyonnais Capital Indonesia. "Spreads are now at 10% on foreign-exchange trading, compared with less than 1% a year ago." Indonesia's largest bank, Bank Negara Indonesia, made Rp4.2 trillion in net gains on foreign-exchange trading in the first half of this year while Bank Lippo made Rp629 billion and Bank Niaga Rp1.7 trillion. In many cases, such as Bank Danamon, foreign-exchange trading gains were virtually the only contributor to operating profit.
There are also survivors in the corporate sector. Some very large companies such as the Sinar Mas group, which exports pulp paper and palm oil, have met their obligations throughout, as have the Salim and Lippo groups, which have sold overseas assets to repay debt."Decently managed companies where the shareholders have not siphoned off funds have a good chance of doing a deal, especially if they are switching to export production," says one banker.
Although the shake-out in Indonesia promises to be widespread and deeply painful, those who have strayed on the side of virtue - honest with their bankers, diversified in their markets, not to greedy or too heavily borrowed - should survive, even prosper. The new era could look very different from the past. Maggie Ford