INDONESIA FINANCIAL SECTOR MONTHLY REPORT NO. 41 January 2004

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1 INDONESIA FINANCIAL SECTOR MONTHLY REPORT NO. 41 January 2004 RECENT DEVELOPMENTS: IBRA announced Preferred Bidder for the divestment of Bank Lippo. IBRA recently selected the Swissasia consortium as the preferred bidder in the divestment of 52.05% shares of Bank Lippo. IBRA also said that the consortium agreed to buy the bank s shares at Rp591.5 per share. The bid price is equivalent to Bank Lippo s book value per share (December 2002). The Swissasia consortium which is led by Swissfirst Bank AG, is currently preparing documents required for the fit and proper test conducted by Bank Indonesia. IBRA aims to close the sale by mid February 2004 and expects to receive Rp1.2 trillion from the sale. IBRA secured parliament approval for selling more shares in banks. Despite a number of bank divestment programs completed thus far, IBRA currently still holds majority shares in Bank Permata and controlling shares in other banks (see Table 1). Very recently IBRA got approval from the parliament to sell 71% of its Bank Permata shares. However, the sale of Permata is conditioned on the issuance of a final court decision on the Bank Bali cessie scandal. It is likely that IBRA will adopt a strategy to sell 51% of Bank Permata shares to a strategic investor and 20% shares to stock market investors. Although the selling process could start immediately, the whole process will not be completed until June Given that situation, the new post-ibra holding company will have to continue this process. In addition to that, the parliament also approved government s intention to sell IBRA s shares in the remaining banks and reduce the ownership to around 20%. IBRA sold its claims in Asia Pulp and Paper (APP). IBRA announced that, through its latest strategic asset sales program (PPAS), the agency sold APP s debts with nominal value of US$880 million to Orleans Investment of the US. APP was one of IBRA s largest debtors and its debts originally belonged to Bank Internasional Indonesia (BII). The proceeds of this sale amounted to US$213 million which reflected a recovery rate of 24.2%. IBRA estimated that, including payments from APP amounted to Rp225 million and transfer of 18% shares in BII, the total recovery rate of APP group debts reached 44.3%. The agency also said that this purchase is not yet final because APP under the signed restructuring agreement, has a right to buy back its debt with a price 1% higher than the bid price of Orleans Investment and with consents from the other creditors. IBRA has not released further information regarding the status of this transaction and the buy back option. IBRA signed closing agreements and issued full payment certificate to PKPS obligors. IBRA recently signed closing agreements with 5 (five) obligors of PKPS (banks shareholders) that were considered to have paid all of their obligations. These obligors were Andy H. Sardjito (Bank Baja Internasional), Soeparno Adijanto (Bank Monthly Report January 2004 Page 1 of 7

2 Bumi Raya), Mulianto Tanaga and Hadiwijaya Tanaga (Bank Indotrade), Philip S. Wijaya (Bank Mashill) and Ganda Eka (Bank Sanho). The closing agreement can only be signed after FSPC endorses the status of these obligors based on IBRA s recommendation and inputs received from IBRA s Oversight Committee and Legal Counsel team (TPBH). Earlier the month, IBRA also signed closing agreements with 4 (four) PKPS obligors. These were Sudwikatmono (Bank Surya), Ibrahim Risjad (Bank RSI), Hendra Liem (Bank Budi) and The Ning King (Bank Danahutama). Signing of a closing agreement is a requirement for the issuance of a Surat Keterangan Lunas (SKL) or Certificate of Full Payment by IBRA. IBRA says the granting of SKL is to implement the Presidential Instruction (INPRES) No. 8 year 2002, which rules that the government will grant legal security to the debtors who have settled their obligations. IBRA very recently issued 2 (two) SKLs to Sudwikatmono and The Ning King. IBRA is expected to issue SKL to the remaining 7 obligors above. IBRA achieved its target for 2003 and to collect Rp5 trillions in IBRA achieved its 2003 collection target of Rp26 trillion and transferred Rp26.1 trillion to the Ministry of Finance (see Table 2). Including non-target items, total collection amounted to Rp28.3 trillion. For the year of 2004, IBRA has been given the task to collect Rp5 trillion. IBRA is optimistic to meet the target and expects to receive recovery from the following transactions: (i) carry over payments from last year s asset sales, (2) new asset sales programs in 2004 and (iii) sale of 52% shares of Bank Lippo. To meet the current year target, IBRA has prepared a number of assets disposal programs consisting of non performing loans sale (PPAK), investment assets sale (PPAI) and property assets sale (PPAP) (see Table 3 and Table 4). Former IBRA chairman and BI governor named suspects in a corruption case. In mid January 2004, a senior officer of the Attorney General Office named Syahril Sabirin (former BI governor) and Ary Suta (former IBRA chairman) as suspects in a corruption case related to the use of account no This account was created in 1999 to provide financing for the implementation of banks' liabilities (blanket) guarantee program. The allegation of corruption is based on the release of the BPK audit report in August 2003 which concluded that Rp20.9 trillion of the funds were used illegally (Rp17.6 trillion by BI and Rp3.3 trillion by IBRA). BPK found a number of illegal payments which were caused by faulty policies and criminal acts by BI and IBRA officials. It is understood that the police are now collecting evidences to bring the case before the court. Government plans to raise money from international bonds market. The Ministry of Finance indicated that the government plans to issue US Dollar denominated bonds this year. The nominal amount of the bonds has not been fixed but is expected to be around US$500 million. If the plan goes ahead, it will be the first US Dollar bonds issuance by the government since The government is also expected to issue Rupiah bonds by the end of February with a nominal amount of Rp2.5 trillion. For the current fiscal year, the parliament approved a total bonds issuance of Rp32.5 trillions. Monthly Report January 2004 Page 2 of 7

3 Bank Indonesia completed a study on Banking Architecture. In December 2003 Bank Indonesia completed its study on Indonesian Banking Architecture (API). The API has a vision to achieve a banking system that is healthy, strong and efficient in order to create a stable financial system to support economic growth. The design of API was constructed based on 6 (six) pillars i.e.: (i) Healthy banking structure, (ii) Effective regulatory system, (iii) Effective and independent supervisory system, (iv) Strong banking industry, (v) Adequate infrastructure and (vi) Robust customer protection. Each of the pillars will be implemented through specific programs and action plans over the period of 2004 to 2014 (see Table 5). Progress of implementation of the White Paper in January The government released a report on the implementation of the economic program of the Government s Economic Package for the month of January With regard to key measures in the financial sector, the progress was in the area of money laundering, which consists of: (i) Issuance of 2 (two) presidential decrees on the Remuneration System and the Staffing of the Center for Financial Intelligence Unit (PPATK) in January The issuance of the two decrees completes all four decrees required by the Center to operate effectively; (ii) Issuance of another Presidential decree on National Committee on Money Laundering chaired by the Coordinating Minister for Political and Security Affairs; (iii) The Chairman of PPATK has issued a decree on Guidance on Analyzing and Reporting Suspicious Financial Transactions for Financial Agencies. Table 1: Portfolio of IBRA Banks Shares Banks IBRA Ownership Book Value (Rpbn) BCA 6.9% Niaga 28.0% Danamon 28.4% 1,592.6 BII 22.5% Lippo 54.8% 1,270.0 Permata 97.1% 1,331.8 Source: Published financial statements September 2003 Table 2: IBRA s Collection Report 2003 (Rp billion) Actual Target Performance FY 2003 FY 2003 to Target AMC (loan assets received) 11, , % CASH COLLECTIONS 4, CORE ASSET SALES 4, , NON CORE ASSETS 2, , MARKETABLE SECURITIES AMI (enterprise equities pledged) 1, , % P/N REDEMPTION , Monthly Report January 2004 Page 3 of 7

4 CASH SETTLEMENT , PAYMENTS FROM DEBTORS - - MARKETABLE SECURITIES BRU (bank equities held) 7, , % DIVESTMENT 7, , DIVIDENDS MARKETABLE SECURITIES OTHER INCOME % INTEREST OTHER INCOME GROSS CASH RECOVERIES 21, , % EXPENSES , % NET CASH INCOME 20, , % BONDS COLLECTION 3, , % TRANSFERRED TO GOVERNMENT 28, , % Cash 19, , % Bonds 6, , % Non Target 2, , % Source: IBRA Table 3: Timetable of IBRA s PPAK VII and PPAI VI Starts Ends Announcement of the program Announcement of TOR and assets list 30-Jan-04 4-Feb-04 Registration/Due Diligence 4-Feb Feb-04 Submission of bids 13-Feb-04 Announcement of winner 13-Feb Feb-04 Payment (100%) 16-Feb Feb-04 Signing of sales agreement and cessie 18-Feb Feb-04 Return of deposits 19-Feb-04 Transfer of documents 19-Feb Feb-04 Source: IBRA Monthly Report January 2004 Page 4 of 7

5 Table 4: Timetable of IBRA s PPAP VI Starts Ends Announcement of the program Announcement of TOR, assets list and floor prices 30-Jan-04 4-Feb-04 Registration/payment of deposits 4-Feb Feb-04 Open House 4-Feb Feb-04 Submission of bids 12-Feb-04 Evaluation of bids 12-Feb Feb-04 Announcement of winner 14-Feb-04 Payment (100%) 16-Feb Feb-04 Start of returning deposits 19-Feb-04 Transfer of documents 19-Feb Feb-04 Source: IBRA Table 5: Summary of National Banking Architecture (API) 1 Program for Strengthening National Banking Structure 1 Strengthening of banks capital a. Increase minimum capital for commercial bank to Rp100 billion b. Retain Rp3 trillion capital requirement for establishment of new banks through Jan 1, Increase competitiveness of rural banks a. Strengthen linkage program between commercial 2004 and rural banks b. Simplify processes for opening rural bank branch 2004 c. Facilitate establishment of joint services facilities for rural banks Improve access to credit a. Facilitate establishment of credit guarantee scheme b. Promote lending to specific business sectors Programs for Improving Quality of Bank Regulation 1 Formalize syndication process in the formulation of banking policies a. Involving third party in formulation of banking policies 2004 b. Establish panel of banking experts 2004 c. Facilitate establishment of banking research institution at regional and national level 2 Implementation of 25 Basel Core Principles for Effective Banking supervision Programs for Improving Supervisory Function 1 Enhance coordinating among supervisory agencies Monthly Report January 2004 Page 5 of 7

6 a. Institute regular coordination and cooperation Consolidation of the banking sector at Bank Indonesia a. Consolidate supervision and examination functions b. Reorganize the banking sector at Bank Indonesia c. Establish enforcement team d. Establish a specialist examination team Improve competency of bank examiners a. Introduce certification of bank examiners b. Conduct examiners attachment programs with international supervisory agencies 4 Develop system for risk-based supervision a. Design risk-based model for supervision Improve effectiveness of enforcement a. Strengthening investigation process for banking crimes b. Improve transparency of supervision and enforcement c. Establish internal ombudsman for supervisory problems d. Improve legal protection for bank supervisors Program for Quality Improvement of Bank Management and Operations 1 Strengthen Good Corporate Governance a. Establish minimum standards for Good Corporate Governance b. Encourage banks to go public Improve quality of bank risk management a. Introduce compulsory certification of risk managers Improve bank operating capabilities a. Encourage banks to develop shared use of operating facilities to reduce costs b. Facilitate provision of education needed for improvement of banking operations Program for Development of Banking Infrastructure 1 Development of a credit bureau Initiate establishment of a credit bureau Optimize use of credit rating agencies Institute compulsory rating for bonds issued by banks Programs for Improvement of Customer Protection 1 Prepare standards for customer complaint mechanism a. Establish minimum requirement for consumer complaint 2005 Mechanism 2 Establish independent mediation agency a. Facilities establishment of banking mediation agency Design transparency of products information a. Facilitate preparation of minimum standards of transparency in bank product information Promote consumer education a. Encourage banks to educate consumers on financial products 2004 Monthly Report January 2004 Page 6 of 7

7 Source: Bank Indonesia <<<>>> Monthly Report January 2004 Page 7 of 7