December 8, 2001	Saturday	Ramazan 22, 1422

JAKARTA, Dec 7: Indonesia’s banking sector could be heading for another collapse amid slack regulations and signs that President Megawati Sukarnoputri is wavering on banking reforms, according to a research report published on Friday.

With Megawati not showing any inclination to press ahead with reform before the 2004 election, (pressure on the banking sector) is likely to continue and the 1998 decree to guarantee the liabilities of all banks can potentially cost the already cash-strapped government a fortune, said Singapore-based IDEAglobal.com

Meanwhile, confidence will continue to erode and worryingly, there is nothing to suggest that the banking sector will not drift into another round of failures.

The risk is, if sentiment does not improve and investors maintain their distance from Indonesia, then the stress could eventually nudge the sector to breaking point again before 2004.

The research firm said the central bank is continually being forced to freeze banks and place them in the care of the Indonesian Bank Restructuring Agency (IBRA), whose progress on rehabilitating them has been slow.

The government on Thursday announced a reshuffle of senior management positions at IBRA in a bid to improve its performance.

At the height of the 1997/98 financial crisis the government took over four banks and recapitalised seven. The eleven banks are under the supervision of IBRA.

The government forced many small banks to close and issued recapitalisation bonds worth now $64.7 billion to help the remainder.

Bank Indonesia, the central bank, says all banks must achieve a capital adequacy ratio (CAR) of eight per cent by year-end, from four percent last year, and that this should rise to 12 per cent at an unspecified time.

IDEAglobal.com said slack prudential guidelines disguise the real state of the banking sector, with a loose definition of what constitutes “capital” for the purpose of calculating banks’ CARs.

Capital may include exposure to companies affiliated to the bank through ownership and the guidelines allow banks to attach face value rather than market value to their recapitalised bonds, it said.

IDEAglobal.com said the high cost of bailing out the sector could only be met in the long run if IBRA manages to sell off its assets. But it noted that only one major foreign bank was shortlisted as a potential buyer of Bank Central Asia.

It said lack of interest stems from relapsing non-performing loans, non-existent demand for new loans and the dubious asset quality due to the slack prudential regulations.

Bank Indonesia spokesman Halim Alamsyah took issue with the report.

Our banking sector has been improving. Small and medium size banks are performing well. It is true large banks still have many problems, especially concerning credit restructuring. Maybe they are referring to those large banks, he said.

I think it’s not fair to say that our prudential regulations are lax. Our minimum CAR regulation of eight per cent is not negotiable. Either they (banks) have to follow the CAR or merge or cease operations.

Alamsyah attributed problems mainly to macro-economic and socio-political conditions.—AFP