Jakarta closes down 38 banks

In the long-waited reform move, it also takes over seven state banks and announces plans to re-capitalise nine INDONESIA yesterday axed 38 banks as part of a long-awaited reform drive to revive its ailing financial sector.

In a move described by the International Monetary Fund (IMF) as “a decisive breakthrough” in banking reform, the government also took over seven state banks and announced plans to re- capitalise nine.

Finance Minister Bambang Subianto announced the clean-up of the debt-laden industry at a joint press conference with Coordinating Minister for Finance and Industry Ginandjar Kartasasmita and IMF Asia-Pacific director Hubert Neiss.

Mr Subianto said the 38 banks “are deeply insolvent and have no prospects of regaining financial viability”. Of the closed banks, he said, 21 had been considered previously as candidates for re-capitalisation. Three were owned by ex-president Suharto’s children.

He said the seven banks taken over were the largest in the group that had been seen as candidates for re-capitalisation. They had “extensive branch networks” across the country with over 80,000 customer accounts each.

“They are being taken over in the public interest to minimise disruption of the payment system,” he added. The nine banks on the re-capitalisation list were given government assurances that they would receive 80 per cent of the costs through a bond issue.

Mr Ginandjar assured customers of the affected banks that their money was safe, pointing to a ruling in 1997 that issued a blanket guarantee on money deposited in Indonesian banks.

He said Jakarta’s latest initiative was done in consultation with the IMF and the World Bank. Both organisations endorsed the revamp.

Said Mr Neiss: “The banks are being taken over in the public interest and not to the benefit of the owners. In fact, the owners will be out. Their banks will be owned 100 per cent by the government.”

He said the package would help Indonesia’s stricken rupiah to recover. Its serious depreciation in 1997, down to 70 per cent of its value, triggered a deep recession in the country.

The IMF had for some time been concerned about the pace of banking reform, even more so after Jakarta delayed announcing bank closures due on Feb 27.

Some speculated that the government had given in to political pressures from well-connected bank owners whose banks faced closure.

A senior IMF official told The Sunday Times that the bank restructuring was a big step forward in rescuing the battered economy.

“The crippled banking sector was the biggest impediment to economic recovery,” he said. “The government can now put all the ailing banks behind them and concentrate on the healthy ones. If it goes according to the script, there will be recovery.”

He said that besides banking reform, the IMF also wanted to see corporate restructuring taking place. He said recent decisions by the bankruptcy court in favour of debtors are “a worrying sign for foreign investors that the judicial system will not be fair in its decisions”.

“Indonesia cannot attract fresh foreign investments to take over insolvent companies unless the bankruptcy law is enforced,” he said.

Of concern also was the prevailing political climate. Noted the source: “Indonesia has actually achieved a semblance of economic stability, but this stability is a fragile one because of the political situation.

“Indonesia’s economic recovery will depend a great deal on whether there are bouts of political instability, which could derail the whole process.”

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