If you’ve a fistful of dollars – or even a briefcase stuffed full of devalued Indonesian rupiah – there’s a multitude of top banking choices in Indonesia these days.
A customer driving down the main streets of the capital, Jakarta, can take his pick from an array of hi-tech options, whether he has funds to deposit, remittances to send, or simply wants a credit card.
“The immediate future of Indonesian banking is in retail,” says Paul Milton of Australia’s Commonwealth Bank, which has a joint venture with Bank Internasional Indonesia, a large local bank. “There’s hardly any corporate lending going on – most banks are just trying to get their money back.” To tempt customers he’s offering cash prizes and free trips overseas along with new flexible accounts.
As so often in Asian retail banking, Citibank leads the way. Its new boutique ATM product combines the convenience of electronic banking with an opportunity for human contact. It’s less than a branch, more than a machine – customers who use it can open accounts, deposit or withdraw money, pay credit cards or utilities bills, even apply for consumer loans.
Nor is it necessary any more to leave home to perform financial chores. HSBC Bank offers a complete set of retail banking services including overseas transfers and switched currency accounts by telephone. American Express and ABN-Amro Bank also offer telephone banking. Several of the banks are also studying the possibility of offering internet banking.
Bottom-fishing foreign banks have already spotted opportunities to expand their retail operations in Indonesia. Standard Chartered Bank agreed last month to pay $56 million to take a 20% stake in Bank Bali, a well-managed medium-size bank that has qualified for help in recapitalization from the government and which has a strong retail branch network.
Australia’s ANZ Bank, which earlier took out options to acquire for $25 million a 25% stake in Pan Indonesia (Panin) Bank, which has survived the crisis intact, also spent $9 million to snap up the credit-card operations of Bank Papan Sejahtera, a mortgage bank closed by the government in March.
Bleeding to death
But as foreign banks jostle to provide the kinds of direct banking services now sweeping western countries, the local Indonesian banking system is rapidly bleeding to death. The level of non-performing loans shows few signs of improving and the negative spread – the gap between high deposit rates and lower revenues from loans – is gobbling up banks’ capital.
The cost of a carefully crafted scheme drawn up by the government and the IMF to restructure the banking sector is now ballooning, threatening to further weaken the country’s finances.
Under the plan, announced in March, the government proposed to recapitalize four state-owned commercial banks, nine private banks, 27 small regional development banks and 15 formerly private banks now under the control of the Indonesian Bank Restructuring Agency (Ibra).
The total global cost of the restructuring was estimated at Rp300 trillion ($37.5 billion). The government planned to finance this recapitalization by issuing bonds to the banks in return for 80% stakes, in the case of private banks. The banks would hold these assets on their balance sheets and the bonds would pay interest partly at a rate equivalent to the central bank’s short-term bill rate and partly at a lower fixed rate.
Ballooning costs
The cost to the government of paying the interest on the bonds was calculated at Rp34 trillion annually when the plan was announced. Of this figure, Rp17 billion was expected to come from asset sales of banks taken over and the rest from the national budget.
By the time the bonds matured in three to 10 years the government hoped it would have sold off enough assets to pay the costs. Now, the latest due diligence performed on the banks reveals that the cost has ballooned, in some cases to almost double the levels expected.
Of the bigger private banks, recapitalization of Bank Internasional Indonesia will now cost the government Rp8.7 trillion. Bank Lippo will cost Rp7.7 trillion and Bank Universal will cost Rp4.6 trillion. The cost of recapitalizing Bank Bali, of which Standard Chartered Bank will bear 20% if it proceeds with its agreement to buy a stake, has risen to Rp2.3 trillion.
In March the finance ministry estimated the recapitalization costs for the nine private banks to be Rp21.3 trillion. This has now increased to Rp34 trillion, up 60%. Owners of the banks did not have the cash to make up their 20% contribution, so the government was forced to increase its stake. In the case of Bank Niaga, the government will pay the full cost since shareholders are unable to pay at all.
The rocketing costs are alarming the government, especially since recapitalization of the state banks is expected to cost at least Rp200 trillion, and possibly much more than dealing with the private banks.
Ministers are already scrambling to cut the cost. A targeted increase in capital to a capital adequacy ratio of 8% at Bank Central Asia and Bank Danamon – two large banks under Ibra control that the government wants to sell off – has been changed to 4%. Recapitalization of the four state-owned banks, planned for this month, has been delayed until later this year.
Bank Indonesia, the central bank, has seized the market opportunity provided by recent good news on Asian economic recovery to try to lower interest rates and close the negative spread gap. In May, Indonesia was able to report that growth had resumed in the first quarter, measured against the final quarter of last year, and that inflation had returned to single digits from a high of 70% last year. Economic ministers forecast that growth of between 1% and 2% was achievable for the full fiscal year. The rupiah strengthened temporarily and the stock market began a rapid rise, helped by a comparatively peaceful election campaign.
Bank Indonesia director Miranda Goeltom believes that the link between interest rates and the currency has now been severed. “The market is now looking at things like capital inflows and the political situation,” she says. ‘We believe we can now bring interest rates down more quickly.”
By the end of May the central bank had been able to reduce interest rates to 26%, without causing a currency decline. That was within sight of lending rates of around 24%. However, little light penetrated the tunnel, because so few companies – perhaps 30% at most – were paying any interest on loans from local banks.
Biggest debtors
Topping the list of non-payers are the biggest debtors of all – the Suharto family and their cronies. When the IMF, the chief supplier of funds keeping Indonesia afloat, announced its first agreement with Jakarta for 1999, the government was given four months to gather up bad debts at state-owned banks, negotiate deals with the debtors and take the recalcitrants to the bankruptcy court.The April 30 deadline was just asking to be missed. Nervous government officials contemplated the downside of a confrontation with the ex-dictator, still widely believed to possess considerable wealth and power.
The deadline passed without action and the problem passed to Hubert Neiss, the Asia Pacific IMF director. In March Neiss was largely responsible for the successful closure or takeover of 38 bad Indonesian banks and the adoption of the recapitalization plan for the remainder.
The phlegmatic banker has become the front man for the multilateral organizations in negotiating the political minefield infesting the insolvent Indonesian financial system. He’s calm and firm, and his diplomatic but warm personality and ability to grasp the need for both progress and saving face have been crucial to what has been achieved so far.
Carrots and sticks
Last month he devised a new step-by-step approach that mandates the government to go after the 20 largest debtors over several months, with both carrots and sticks available to get a resolution. But a quick look at the list makes it clear that Jakarta will need all the help it can get to retrieve the missing money.
Indonesia’s top-20 state bank debtors are largely responsible for the yawning black hole in these institutions. They provide a paradigm of the Suharto regime and its approach to business. Top of the list is Suharto’s second son, Bambang Trihatmodjo.
He coralled four state banks into joining a syndicate to lend him $2.7 billion to build his Chandra Asri petrochemicals plant. To fund the acquisition of Apac Centertex, a textile firm he acquired five years ago, he borrowed Rp1.4 trillion (worth $623 million at the time) from a further three state banks. His flagship listed firm, Bimantara Citra, extracted Rb421 billion in loans, targeting all four of the major state banks.
Next on the list is Hutomo Mandala Putra (Tommy), Suharto’s youngest son and the only one so far brought to trial on corruption charges. Tommy faces a 20-year jail sentence if he is found guilty of corruption involving $11 million in losses to the state when he allegedly appropriated land to build a hypermarket. But the land deal is a mere pecadillo by Tommy’s grandiose standards.
He dragooned three state banks to join a $400 million syndicate to finance the development of his national car project. With the help of his father, Tommy gained government tax and duty privileges to set up the car plant which was supposed to produce the Timor, in fact a small sedan produced by Kia Motors of South Korea. No cars were ever produced in Indonesia and Tommy has now been asked to repay $500 million in tax and duties owed on the sales of imported Timor cars.
He owes a further Rp1.5 trillion spent on developing Sempati Air, the airline he set up with the help of his father’s close friend, Bob Hasan, which has now shut down. He borrowed Rp900 billion to finance a monopoly on cloves, used in Indonesian cigarettes. Another Rp208 billion in loans went to develop a motor-racing track outside Jakarta, built at the same time as Tommy acquired a majority stake in Lamborghini cars (now sold).
Tommy was also responsible for helping fugitive businessmen Eddy Tansil borrow Rp1.3 trillion from Bank Bapindo, effectively bankrupting the institution in 1992.
Suharto’s daughter Siti Hardijanti Rukmana (Tutut) was a relatively small borrower, with only Rp150 billion owed to state banks by her toll-road company. But other close cronies of the family feature strongly on the trillion-littered rupiah debt list including Prajogo Pangestu, the timber tycoon who partnered Bambang in his petrochemicals plant (Rp2.6 trillion), and Astra International, which was under the control of Bob Hasan and the first family immediately before Suharto left office (Rp1.2 trillion).
Family members expelled
The government, horrified at the gaping hole now emerging in the state budget as the bank recapitalization costs rocket, has now started to move against some of the biggest non-payers, confiscating the Chandra Asri petrochemicals plant and shares in Pangestu’s Barito Pacific timber company, and in PT Astra International.
First-family members have resigned or been removed from management of almost all companies they own and contracts they have won unfairly with state companies have been cancelled. Foreign companies have been encouraged – and many have quickly complied – to find ways of expelling family member from their share registers. Non-family minority shareholders are moving to take control of such companies as RCTI, the TV station that is the main asset of Bambang’s Bimantara group. All first-family-owned banks have either been closed or taken over by the government.
But little progress has yet been made in selling off the assets now under Ibra control. Last year the agency obtained nearly $12 billion of assets from a number of bankers that had received Rb145 trillion in liquidity credits from the central bank during panic runs on the system early last year. Several large banks – including Salim’s Bank Central Asia, where two Suharto children held stakes; Bank Dagang Nasional Indonesi (BDNI), owned by the Gadjah Tunggal tyre and property company; and Bank Danamon – were either closed or taken over by Ibra and bankers were required to produce shares or other assets equivalent to the credits received. But other than auctioning vehicles and fine art, Ibra has not so far announced any asset disposals or sold any stock through the market.
Ibra officials are hamstrung by several underlying problems including the poor valuation of Indonesian assets in dollar terms following the devaluation of the rupiah, problems relating to title ownership with property and buildings, a big part of the portfolio, poor market conditions until recently, and the unstable political situation in advance of elections later this year, which is causing potential foreign buyers to hold back.
Closer scrutiny
As the cost of restoring the banking sector rises inexorably, along with the concentration of assets in the government’s hands, the role of Ibra and its asset-management unit is coming under ever closer scrutiny. The agency is run by Glenn Yusuf, an investment banker who still retains his post as president director of Danareksa, the state-owned investment bank that last month became the first major Indonesian institution to announce a debt rescheduling with its foreign creditors.
An ex-Citibanker, Yusuf is regarded as competent and honest and is backed up by foreign advisers from JP Morgan, Lehman Brothers, the World Bank and USAID. But Ibra has suffered delays in obtaining adequate funding, skilled staff and information technology and is hamstrung not only by bank secrecy laws but also the need to negotiate deals in confidence with politically powerful debtors. To strengthen its negotiating ability, earlier this year Ibra was given new powers to force debtors to the table and to confiscate assets.
That worries some analysts. “It’s potentially dangerous to have control of so many of the country’s assets in one place when there’s no requirement for transparency and accountability,” says Martin Panggabean, a University of Indonesia economist who also tracks market trends for Lippo Securities.
Calls for transparency
State company chiefs have also called for more transparency in asset sales through privatization, demanding that the government dispose of stakes in already listed companies through the market, rather than through private placements.
The potential for political interference is clear. One of Ibra’s most difficult customers is Aburizal Bakrie, an indigenous Indonesian businessman whose conglomerate owes more than $1 billion to foreign creditors and more than Rp1 trillion to state banks. Bakrie was close to the Suharto regime and is even closer to the current government run by president BJ Habibie. Chairman of the Indonesian chamber of commerce, Bakrie is an official economic adviser to the government. He is fighting hard to ensure the survival of his technically bankrupt conglomerate.
In March when the government tried to close down his insolvent Bank Nusa Nasional, Bakrie forced a postponement of the announcement and was only placated when the government agreed to keep the bank open but under Ibra control.
“Mr Bakrie is not serious about discussing his debt to the local banks,” says an adviser to Ibra. “He sends only very junior people who have no authority to meetings.” Earlier this year the tycoon made a proposal for rescheduling his foreign debt by means of a debt-equity swap of stakes in a number of his companies. Creditors have not yet approved the deal and last month US government-owned Bank Exim, a large creditor, called for a new audit of the company’s assets, claiming the offer lacked transparency.
Other big debtors have also fought back.The Dharmala and Putra Surya Perkasa conglomerates, owned by the ethnic Chinese Gondokusumo family, fought strongly against bankruptcy petitions brought in the new commercial court. Strong pressure from the International Finance Corporation, an arm of the World Bank that lent money to a Dharmala subsidiary, was required before the Indonesian government took steps to strengthen the court’s ability to follow the law correctly.
The failure of the bankruptcy court is one major reason why Indonesian domestic banks are bleeding as they have been unable to force debtors into bankruptcy and foreclose on their assets. Nor have they been helped much by the activities of the Jakarta Initiative, set up to bring debtors and creditors together to negotiate deals.
Although many indebted companies have joined the initiative, progress on deals is slow. Only two major international reschedulings have been announced, involving Danareksa and vehicle maker Astra International, neither of which went through the programme, although several other large deals are believed to be imminent.
Wider-open field
The delay in recapitalizing the local banks has left the field wide open for foreign banks, most of which have already written off their Indonesian exposure. With all legal restraints on investment in the sector now removed so as to encourage foreign institutions to take stakes in Indonesian banks, those banks already active in Indonesia are targeting the retail customer with extensive advertising and new products.
Because of their perceived safety and better services, the foreign banks can offer lower deposit rates, remaining unaffected by the negative spread. Local banks backed by a government guarantee can only compete by offering high interest rates, further bleeding their capital.
One bank due to be launched this month may give the foreign banks a run for their money. Bank Mandiri, a large new state bank that is being set up to replace four insolvent banks, will target the retail sector and will have a clean balance sheet and a nationwide network. The bank is chaired by Mar’ie Muhammad, a popular former finance minister known as the Mr Clean of the Suharto era. President director Robby Djohan, another former Citibanker with a long career in private banking, has seized the opportunity to revamp the entire government-owned banking sector, launching a total service-oriented culture change, rejigging staff, setting up new systems and training staff in modern banking products.
“Many people really have no choice but to use state banks, so I’m not worried about attracting customers,” he said. “But we have to rebuild confidence. The cost is too high for compromise on standards if we want a new beginning rather than a return to the past.”
