When depositors started to form queues at branches of Indonesia’s fourth largest bank late last year, the banking community knew that a crisis was at hand. For weeks, rumours circulated in the media about the state of the Lippo group, a large financial services and property conglomerate. It was not the only group to have come under pressure.
Owned by the ethnic Chinese Riady family and headed by star Indonesian banker Mochtar Riady, the group has a high profile in Asia. In Jakarta its activities in banking, insurance and the capital markets are professionally run and well-marketed. The Hong Kong branch of the group is also active in China.
The cause of the trouble, rumour had it, was the group’s massive expansion into property. Two giant satellite towns outside Jakarta which Lippo group had invested in, featuring condominium apartments, hotels, hospitals, shopping mega-malls and industrial estates, were reportedly running into trouble as property prices fell and sales slowed in a glutted market.
Fears grew that the problems could spill over into Bank Lippo, widely regarded as well capitalized and professionally managed. The Riady family strongly denied that the group had any insurmountable problems, and staunchly defended the bank.
But wily Singaporeans, who had parked their spare cash in rupiah to take advantage of high Indonesian interest rates, soon rushed to extract their money from Bank Lippo branches.
Well-informed rich Indonesians were also quietly draining their accounts, and newspapers reported that, one afternoon, the bank technically failed to clear. Central bank governor Soedradjat Djiwandono swung into action. “Don’t laugh at Lippo,” he told a conference of local bankers. “This could easily happen to you.”
A group of private-sector banks took informal action quickly, flooding Lippo’s coffers with funds. After a wobbly week, the rumours subsided and have now dissipated completely.
“A few of us had a gentleman’s agreement to help Lippo,” says Rudy Ramli, president of Bank Bali, one of the few major Indonesian banks which is not part of a conglomerate. “We only needed to make one injection. The central bank is now pretty good at managing the system.”
Bank Lippo wasn’t alone in the dock. At the same time, Bank Indonesia was forced to take even stronger action when two smaller banks got into trouble through exceeding the central bank mandated legal lending limit to affiliated businesses.
The management of Bank Pacific, owned by the prominent Sutowo family, was replaced, and the bank put under the supervision of state-owned Bank Negara Indonesia, when it was found to be exposed to bad property loans made to affiliates.
In January, governor Soedradjat warned bankers that exceeding the limit wouldn’t be tolerated and revealed that 70 banks had violated the legal lending limit – up from 44 the year before. Banks are allowed to lend a maximum of 10% of their capital to an affiliated firm and 20% to a non-affiliated firm.
He also closed one of the business groups’ favourite borrowing loopholes – affiliated finance and leasing companies, whose accounts were not previously monitored by the central bank. No new finance companies may be opened. Existing ones are now under Bank Indonesia supervision, and have been given clear limitations on borrowing and commercial paper issues.
In addition, insured loans, which were previously excluded in calculations of the legal limit, are now included.
Bankers agree that the limit is now being observed. “The big conglomerates were swapping their excessive intra-group loans for a while, but that now seems to have stopped also,” says a foreign banker. Some intra-group loans were not transferable, in any case, due to the sweetheart terms of the loans.
But no sooner had the system weathered the Lippo crisis than bankers were galvanized by the revelation early in the new year that the Jakarta branch of the Hongkong and Shanghai Banking Corporation (HSBC) had lost $34 million through a well-orchestrated international fraud.
Fraudulent faxes containing secret key codes were sent over the Christmas break – apparently from large European banks – to the Jakarta branch of HSBC. They asked the bank to transfer cash totalling Rp165 billion ($71 million) to several small banks in Jakarta.
Senior supervisors were away, but staff spotted some of the faxes and rejected them. Others were processed and the small banks subsequently paid out millions of dollars in cash to the fraudsters. One suspect has been arrested but the others have escaped.
All local banks launched an immediate check on their internal security procedures. “For us,” says Ramli, “it is a case of balancing good customer service with controls. For very large cash payouts – common in Jakarta – I think there should be several grace days, so banks can perform proper checks. A cash withdrawal of millions of US dollars represents a temptationprofit for a small bank.”
The case exposed the difficulties created by Indonesia’s inadequate legal system. HSBC is still trying to retrieve one tranche of millions of dollars which was still at a small bank when the fraud was exposed. Indonesian police believe the funds are “evidence”.
Lack of legal redress is also causing banks to have second thoughts in terms of lending policy, particularly after several years of rapid growth in consumer lending, mainly for housing and cars. There is no concept of negative equity in Indonesia, and if house or car prices fall, consumers vacate their houses or return their cars to the bank and stop paying the loan.
Al Njoo, president of Bank Papas Sejahtera, a bank specializing in housing finance, says that currently high interest rates could cause a problem for the banks if house prices fall. “We demand a 50% deposit to protect ourselves,” he says. That level could rise if the market plummets.
Car loans are in an even more dramatic state of flux following the announcement last month of a new national car project. The car, to be built by a company owned by Huomo Mandala Putra, the third son of Indonesian president Suharto, is to be exempted from import duties and taxes for three years, and will retail at Rp25 million – half the price of existing sedans.
“Car sales are right down,” says Ramli of Bank Bali. People are waiting to see the new car, due on the market in September. “We are concerned that people may stop paying existing loans if car prices fall across the board. It’s happened before.”
Announcement of the national car policy followed hard on the heels of central bank measures to cool the overheating economy, which are also squeezing the banks. A ceiling of 18% on credit growth for big banks was imposed and banks have been required to up their deposit reserves with the central bank to 3% from 2%.
Foreign borrowing has been restricted – except where export-related projects are involved – in part to curb the rise of Indonesia’s foreign commercial debt which has now risen to $30 billion.
Added to the restraints on funding, banks are now experiencing a dearth of new credit worthy borrowers. On top of this, with more than 240 banks competing, it’s tough to maintain loan quality, particularly with lending rates between 20% and 22%.
The rapid expansion of banks followed a 1988 deregulation package designed to inject life into a sector which had been dominated by inefficient state banks. But growth has been beyond expectations, and the central bank is now aiming for consolidation.
Banks dealing with foreign exchange will be required to raise their capital from a derisory Rp10 billion ($4.3 million) to Rp150 billion in five years’ time, a figure that many bankers believe is still too low. Minimum capital-adequacy ratios are to be raised from 6% to 12% over five years. The aim is to promote the merger of smaller banks.
Merger activity has so far been minor, but the policy has allowed the Tirtamas group, owned by the prominent Bjodohadikusumo family, to develop a banking arm almost overnight. Tirtamas has acquired four banks specializing in consumer credit and trade financing, as well as Bank Papan, the mortgage bank.
The latter fell into its lap last year after a storm of protest greeted Indonesia’s first attempted bank acquisition via the stock market. Bank Papan was, at the time, a sleepy housing finance outfit owned by the government and a number of foreign investors.
Jopie Wijaya, a local entrepreneur active in the transport business, spotted a good opportunity and persuaded several of the foreign shareholders to sell. “The bank had a foreign exchange licence it wasn’t using,” Wijaya says. “I thought it could be developed into a much more profitable institution.”
But Wijaya’s entrepreneurial approach got him into trouble. He was accused of insider trading and conflict of interest over his choice of adviser, and suspected of operating behind the government’s back and planning to change the mission of the bank.
“He called on us for help,” says Al Njoo. Tirtamas took over the shareholding and, as the share’s price had risen, presented Wijaya with a nice profit for his trouble.
Tirtamas now has big plans for Bank Papan, including the development of a securitization programme to produce long-term funding. The aim is also to reduce the typical mortgage interest rate of 20% and to extend the typical term from 10 years.
Private banks, in their search for new customers, are also encroaching on business which traditionally belonged to the state sector. Private banks and foreign banks together now account for 60% of all bank lending in Indonesia.
Two private banks are in talks over financing a toll road project which also features private companies in the owning consortium. Formerly, infrastructure lending was dominated by the big state banks, but the sector was opened to private and foreign participation three years ago, and projects structured on build-own-operate (BOT) terms have become increasingly common.
The government’s privatization programme is also generating more business for private banks as state companies are released from their obligations to support the state banks. Big deposits are now flowing into private banks from privatized firms like PT Telkom, the telephone utility.
But the tighter restrictions are likely to curb private banks’ lending growth and profitability this year. Lending growth last year slowed to 14% from 25% the previous year, although the bigger banks still achieved growth levels of 25% or more. Earnings at listed banks grew by an average of 32%.
The state-owned banks are meanwhile struggling under the burden of non-performing assets accumulated in the early 1990s, when the economy expanded too rapidly, forcing the authorities to take dramatic action. Interest rates shot to 30% in 1991, creating major defaults. The crash of the Summa banking and property conglomerate with debts of $800 million was one of the most spectacular collapses.
The government has now embarked a programme to privatize the state banks and has selected two profitable banks as first candidates; Bank Negara Indonesia (BNI) which is expected to make an initial public offering this year and Bank Ekspor Impor.
But Moody’s recent dismal rating of the state banks has cast a shadow over the listings. In its new bank financial strength rating, both Bank BNI and Bank Exim were given a D+ – the highest rating received. Other state banks were rated as low as E.
State bankers complained that Moody’s was wrong to ignore support offered to the banks by the government. However, Moody’s standard ratings for Indonesian state banks’ bonds and long-term deposit obligations range from Baa3 to Ba1, reflecting the government’s support.
Bad debts at the seven state banks reached Rp7.9 trillion ($3.4 billion) at the end of last year, with the banking system as a whole recording Rp10.4 trillion in non-performing assets, 2.4% of outstanding loans. Private-sector banks’ debts have declined to Rp1.55 trillion. But the state banks’ bad debts have more than doubled in the past three years.
However, the listing of BNI seems likely to go ahead in the second half of this year. The bank had a net profit of Rp406 billion last year, up from Rp309 billion in 1994. With four privatizations already under its belt, three of them in London and one in New York, the Indonesian government is determined to keep up the momentum. Wall Street firms are preening themselves for beauty contests as stock market conditions in Asia improve.
Projects open to foreigners
Taking politics and personalities into account is nothing new for bankers operating in Indonesia. But when HSBC looked at raising funds to finance the building of a toll road, it realized that it was in a whole new ball game.
The road, running from the provincial capital of Bandung in West Java to join the existing toll road from Jakarta to Cikampek, will be the first to be built, owned and operated by a consortium which includes foreign investors. Infrastructure projects were opened to the Indonesian private sector only three years ago and to foreigners in 1995.
The consortium is majority-owned by Hong Kong Land and Britain’s Trafalgar House, which will build the road, along with the American AIG infrastructure fund, which invests in Asian projects. Jasa Marga, the state-owned Indonesian road building company soon to be privatized, is the main local partner. A small stake is owned by the Citra Lamtoro Gung. Citra has built one major toll road in Jakarta in collaboration with Jasa Marga, and has also won contracts in Malaysia and the Philippines.
“We realized that we needed local investors in the consortium from the start,” says Hariati Sudiro, director of project advisory services for HSBC Securities.
The bank is planning to raise $350 million offshore and Rp450 billion ($196 million) inside Indonesia. As a priority project, it had little difficulty getting approval for the offshore borrowing from the government’s foreign borrowing review committee.
Normally the province of the state-owned banks, infrastructure projects are now attracting interest from local private banks: HSBC is negotiating forms with two prominent listed banks. But the syndication is not proving easy.
“The local banks are quite comfortable with things like traffic projections to Bandung and the toll rate adjustment system,” says Sudiro. “But foreign banks are still not comfortable with Indonesian toll road projects and would like a government letter of comfort.”
A similar demand slowed loan syndication last year for the $2.5 billion Paiton power station complex in East Java. This is owned by a consortium involving Mission Energy and General Electric of the US, Mitsui of Japan and local partner Batu Hitam Perkasa.
Negotiations with domestic banks on the toll road project are focusing on which interest-rate benchmark to use. A compromise between the Jakarta interbank offered rate (Jibor) and local published time deposit rates is likely.
With a loan period of over 10 years, the domestic banks are going for a longer term than they are usually happy with; repayment is likely to start after five years. For the consortium, which will probably have to pay a spread of 3.25% over Jibor (itself 17%) for their local money, the hope can only be that rates will eventually come down.
An own goal or a smart move?
Indonesia’s stock exchange, banking sector, car and car components makers – not to mention the Japanese auto industry – are trying to figure out the implications of the Indonesian government’s national car project. James Sinclair describes initial reactions to the planned introduction of the Timor, a tax-exempt imported car, and the implications for Indonesian trade and industrial policy
It may seem surprising that the entire Indonesian business community, plus a large part of the population of 200 million, has for weeks focused its attention on the future appearance of a small Korean sedan car manufactured by Kia Motors.
Clearly this new addition to the several dozen models already assembled and sold in Indonesia, is no ordinary car. The car is to be called the Timor and will receive special treatment under a new national car project.
It will be granted exemption from import duties and luxury taxes for three years and will therefore be able to sell at Rp25 million (about $10,000) – half the price of a comparable sedan. The car will be built by a company controlled by Hutomo Mandala Putra (Tommy), the third son of Indonesian president Suharto.
The announcement of the national car project was cheered by Indonesians, delighted at the prospect of a inexpensive new car. But the local motor industry, foreign investors and, especially, the Japanese were outraged. The stock market crashed. Threats of retaliation have been heard.
Adding insult to injury, the government also announced that another Suharto son, Bambang Trihatmoujo, would also receive special treatment – this time for his Chandra Asri petrochemical centre.
Chandra Asri is a controversial project which, for several years, has been the focus of a battle between its influential promoters and technocrats in the government.
Last year it asked for tariff protection against cheaper imports of propylene and ethylene, which it produces. The request was rejected because it contravened Indonesia’s commitment to free trade. But in February, the decision was reversed and a 20% temporary import surcharge was slapped on both products.
Two local companies will be immediately affected: polypropylene maker Tri Polyta – also controlled by Bambang and his associates, but listed on the New York Stock Exchange – and Petrokimia Nusantara Interindo, a polyethylene producer whose foreign majority shareholders include British Petroleum and Japanese trading houses Sumitomo and Mitsui.
The cumulative effect of the three decisions suggested a major reversal in policy by Indonesia, which had formerly been perceived as trying to create a level playing field. Assurances by Tunky Aribowo, trade and industry minister, that the two industries were exceptions, and that tariff reductions and deregulation would continue, were met with scepticism.
Foreign investors reacted quickly. The JSE lost 10% of its value in a week. (More than 70% of trading on the Jakarta Stock Exchange is controlled by overseas investors.) Shares in blue-chip car maker, Astra International, the company which will be most affected by the national car project, sank like a stone. So did the New York-listed shares of Tri Polyta.
Japan, easily the largest investor in Indonesia – with almost $30 billion invested in the country across a wide range of industries – put all new investments on hold. Teams of diplomats and industry executives sought meetings with government officials to investigate Jakarta’s intentions.
Bureaucrats in Tokyo started to comb through world trade organizations to see if Indonesia could be reported for breaking the rules. Questions were asked as to whether Japan’s aid to Indonesia – worth more than $1 billion a year – would be affected.
The Japanese have good reason to feel outraged. Through joint ventures with Indonesia’s two major car companies – Astra International and Indomobil – they dominate the market and, for the past few years, have been upgrading investment in local components manufacturing after government pleas to increase the domestic content of vehicles. Toyota is the brand leader, with its locally-developed Kijang sports utility vehicle accounting for 51% of all vehicles sold in the country. The Kijang already has 50% local content.
Only three years ago, Toyota was persuaded to buy an 8% stake in Astra to shore up the company’s shareholding after control was lost by the founder, William Soeryadjaya. He was forced to sell his Astra shares to repay debts at the bankrupt Summa Group owned by his son and, for a period of time, the company’s future was in doubt.
Toyota agreed only after it became clear the majority control of the company would be held by the government through state pension funds and banks. Japanese banks are also big lenders to Astra, which is the second largest listed company.
All the major Japanese car manufacturers including Suzuki, Isuzu, Daihatsu, Honda, Mitsubishi and Mazda assemble vehicles in the Indonesian market. It may be even more galling for them that the special treatment is being given to a car developed in rival South Korea.
Apart from the clear impact on Indonesia’s international image, the project is already having an impact on the banking sector. Douglas Short, country manager of American Express Bank, is carefully watching developments on political risk. “The Japanese were caught flat-footed by the decision on the national car project,” he says. “They have large-scale investment and a long involvement in the industry. They may use their leverage.”
Yoshihiko Sumi, chief representative of Sakura Bank in Jakarta, is annoyed. “We recommended to our clients in Japan that they make new investments in Indonesia because it was deregulating and simplifying its business environment,” he says. “Now there is uncertainty. It is embarrassing. Japanese banks will not discriminate their lending against Indonesian companies which have a good name and good performance,” he says. “But we will continue to keep our distance from politically-connected firms.”
Japanese firms have not shunned business involvement with companies owned by the Suharto family and their associates, but most of these investments are done on a case-by-case basis by the big trading houses. One Japanese trading house is understood to hold a small stake in the Chandra Asri project, for instance.
The new policy has not affected spreads on Indonesian loans yet, largely because few syndications have gone through this year. But bank lending to Indonesia is already in a state of flux as the government applies strict controls over foreign borrowing in an effort to keep down its foreign debt, now approaching $100 billion.
Debt servicing is placing a strain on the balance of payments, which was in deficit to the tune of almost $8 billion in the last fiscal year to March. Central bankers are well aware of the impact high current account deficits can have in the wake of the Mexican peso crisis early last year.
Offshore borrowing by Indonesian finance companies, which had been attractive to foreign banks because of high spreads, was recently brought under control by the central bank. Bank Indonesia is also aware of fears in the domestic banking sector that banks and finance companies could make big losses on consumer loans because of the impact of the national car policy. There is no concept of negative equity in Indonesia, so if a car’s value falls, consumers will simply return the vehicle to the banks and stop paying the loan.
Car sales have already plummeted as buyers defer purchases until the cheap models are available later this year. If the new policy causes car prices to fall across the board, banks could be hit hard.
So far the impact of the new protectionist policies has been seen most clearly in the capital markets. The ministry of finance will not want to see the Jakarta Stock Exchange languishing for too long, as a prolonged slump would affect its privatization programme. And the government uses the proceeds of privatization to repay foreign debt.
Three privatizations are expected this year, involving a steel company, a bank and a toll road construction company. Two of the companies are set to issue international offerings, possibly involving the London and New York stock exchanges.
Whether or not the new policy causes a serious setback for Indonesia may depend on how the car giants Astra and Indomobil face the new competition. At present passenger cars account for only 16% of the Indonesian vehicle market, with most buyers opting for sports utilities or multi-purpose vans.
Neither company has yet revealed its plans. Trade minister Aribowo expects them to give the new car a run for its money. “It’s the job of a business to turn new rules to its advantage,” he says. Japanese bankers also believe that Astra will find ways to maintain its 55% market share.
Meanwhile, they question Indonesia’s faith in the likely transfer of technology from Kia Motors. According to Aribowo, South Korean firms have pledged to invest up to $2 billion in the Indonesian car parts industry to support the national car.
The Indonesians have justified their choice of Kia after an investigation of the industrial performance of the Malaysian national car, the Proton, built in collaboration with Mitsubishi. “The Malaysians say Mitsubishi wouldn’t transfer technology, especially the car engine,” the minister says.
But Sumi of Sakura Bank points out that a majority of Korean car components are still imported from Japan and that Korean car technology is based on US and Japanese engineering.
He already expects that Tommy’s new company will have to collaborate with Astra on components supply to meet a mandatory 20% local content requirement by the end of the first year of production. The Timor will lose its tax and tariff privileges if it fails to meet these content rules, which rise to 60% in the third year.
Much will also depend on what Indonesians think of the new car. They have greeted the prospect of a cheap national car with acclaim, after paying through the nose for cars for years.
“Indonesians don’t realize it’s the government’s fault cars are expensive,” says an aggrieved Subronta Laras, president of Indomobil, the second-largest producer. The government collects $2 billion in revenues from car tax per year.
But Indonesians are also style and status conscious as well as keen on value for money. An undistinguished small cheap sedan introduced by Indomobil a few years ago bombed in the market.
However, if anyone can produce a stylish, well-made car, the Indonesian government believes Tommy is likely to be the man. A Grand Prix fanatic who has built Indonesia’s first racing circuit near Jakarta, Tommy recently acquired a controlling stake in Italian car-maker Lamborghini. He also owns the high-end Vector sports car firm in the US.
But his good fortune in landing the national car project may have been at the expense of sibling ire. Brother Bambang, whose Bimentara group started assembling Hyundai cars from South Korea in Indonesia only last year, is likely to be a major loser. Bambang has already demanded national car privileges for his company – so far to no avail.
Help for Bambang on petrochemicals has, in turn, affected elder brother Sigit Hardojudanto. He will be watching the government’s moves in June, when a decision is due on extending the petrochemical import surcharge. Sigit is the local partner in the BP petrochemical plant which was the major loser when the government decided to support the Chandra Asri complex.
Some will be tempted to downplay this latest Indonesian move as simply another case of Suharto sibling rivalry – if rather more extreme than usual. They may note that Suharto family companies have been receiving special treatment – especially access to monopolies – for years.
“When exposed to competition, they often feel the heat,” says one observer. Commercial TV stations owned by Suharto brother and sister, Bambang and Tutut, are facing strong pressure from new rival broadcasters.
A new battle is also expected to commence next month in the telecoms sector.
This will pit Telkomsel, a mobile phone company owned by Indosat and Telkom, the state telecom providers, along with the Dutch state telecom company PTT Nederland, against Satelindo, currently the monopoly operator of the digital mobile phone system in the Jakarta area. Satelindo is controlled by Bambang, with the German telecom company Deutsche Telekom holding a minority stake. Telkomsel is already promising price cuts.
But there is no doubt that many foreign companies fear that the recent measures could be the start of a new trend. They remain worried about a third government measure which could hit much closer to home.
American Express Bank is only one of many banks and companies which have received a letter pointing out that in January president Suharto asked companies to donate 2% of their profits to a foundation set up to help the poor. “It remains unclear whether this donation is compulsory or voluntary,” Short says. “Foreign shareholders are unlikely to accept such a levy. We already pay our fair share by obeying the tax regulations.” The saga looks set to run and run.
Banking industry structure |
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December 1994 |
Number of banks |
% of loans |
State-owned banks |
7 |
42.4 |
Private banks |
166 |
45.7 |
Foreign and joint-venture banks |
40 |
9.7 |
Local government-owned banks |
27 |
2.2 |
December 1993 |
Number of banks |
% of loans |
State-owned banks |
7 |
49.0 |
Private banks |
161 |
40.8 |
Foreign and joint-venture banks |
39 |
7.8 |
Local government-owned banks |
27 |
2.4 |
Source: Bank Indonesia annual reports. |
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Non-performing loans of private banks
