By : J. Soedradjad Djiwandono
Gurubesar tetap Ilmu Ekonomi, Universitas Indonesia

A presentation at a Seminar, Indonesia at the Crossroads, organized by Asian Studies Program, School of Foreign Service Georgetown University, Washington DC, April 7, 1999.



  • The role of banking in the Indonesian crisis is very pivotal, and so is its place in the path toward a recovery. This is why restructuring the banking sector, including bank recapitalization, is a very important part of Indonesia's IMF-supported program to cope with the economic crisis and putting the economy on its course toward recovery.

  • With a crisis that has gone from a currency shock at the start, but ultimately turned into a full-fledged crisis that caused so much human sufferings, problems of bank restructuring become very complex. I would like to discuss the role of banking in the crisis and the viability of bank restructuring and recapitalization program to end the crisis towards economic recovery and beyond. However, this has to be put in the context of an overall program to stop the economic slide and to resume economic growth and stability.


  1. The Indonesian crisis developed from a combination of an external contagion and structural weaknesses of the national economy. It started with an external shock from a regional financial panic hitting the Indonesian currency market that caused the Rupiah, to depreciate tremendously. Facing the shock, the national economy that was embedded with structural weaknesses, in banking as well as in the real sector, was unable to adjust, and was disintegrating. A contagious process developed, such that a currency shock very quickly spread to become a financial crisis, and soon after, an economic crisis. And since the social structure as well as the political structure was also suffering from weaknesses, the contagion worked quickly to hit the social and political foundation, and ultimately Indonesia experienced a total crisis.

  2. Two related factors are very crucial in the economic crisis of Indonesia, namely the large amount of corporate debts, short term in particular, and the weakness of the banking sector. The complex problems in these two areas, plus social and political problems associated with them, put Indonesia in the position as the worst among the crisis countries. Be that as it may, discussing Indonesia's bank recapitalization as the organizer of the seminar asked me to should be put in its wider context. Bank recapitalization is part and partial of bank restructuring or systemic bank restructuring to use a more accurate term 1 Due to the strategic position of banking in the Indonesian economy, bank restructuring, including bank closures and recapitalization as well as strengthening banking infrastructures, is very crucial for the economy to move out from the crisis. However, since corporate debt, both external and domestic, is very much a part of the problem, it is not proper to discuss bank restructuring without addressing issues and problems of corporate debt restructuring 2.

  3. Problems and prospects of bank restructuring are partly determined by the nature of the national debts, which for Indonesia includes the followings:

    • Indonesia has been a high debt country for sometime, and it will even be more so after the crisis. The Economist Intelligence Unit (EIU) put the Indonesian stock of debt by 2001 to be around $175 billion. Since the beginning of the nineties the national debt has been increasing very rapidly, mainly due to a very rapid increase in private sector indebtedness. From 1992 to 1997 the government debt increased by five billions dollar, from $ 55.5 billion to $59.9 billion. But, the private sector debt went up from $28.2 billion to $78.1 billion, or an increase of fifty billions dollars.
    • International exposure of Banks is relatively small, less than 10 per cent of total exposures. This suggests that corporate sector exposures are mostly direct loans from international financial institutions.
    • Corporate sector's exposures are mostly in foreign currencies (dollar). Even their exposures to domestic banks are fifty per cent in foreign currencies.

Indonesia's External Debt Outstanding (Billions of US dollars)

1992/9 1993/9 1994/9 1995/9 1996/9 1997/9
Total 83.7 89.3 101.2 105.8 113.1 138.0
Public 55.5 60.2 67.6 62.8 56.3 59.9
Private 28.2 29.1 33.7 42.9 56.9 78.1
Banks 6.1 8.2 9.0 8.9 9.6 12.8
Non-banks 22.1 20.9 24.6 34.0 47.2 60.8


1 Stijn Claessens, Systemic Bank and Corporate Restructuring: Experiences and Lessons for East Asia, World Bank: Washington DC, Background Papers, 1998 Annual Meetings of the IMF and the WB.

2 In other words, I look at bank restructuring in a broader context, the way Claessens defined in the paper I cited before. Restructuring, he wrote 'refers to several, related processes: recognizing financial losses; restructuring financial claims; and operational restructuring of corporations and banks. In cases of systemic restructuring, in tandem with these restructuring processes, the institutional framework for the financial and corporate sector undergoes major changes'

Indonesia's Debt - June 1998
(Billions of dollars)

Share of
External debt
Share of
Corporate debt
143,1 100%
Public sector 71 50%
Private sector 72,1 50%
Government 61,1 43%
Corporate Sector 67,1 47% 57%
Financial sector 11 8%
Rupiah 30.4
Dollar 20.5
Rupiah 30.4
Dollar 87.6

Source: World Bank


  1. Bank restructuring is by nature a complex and costly endeavor. In Indonesia there are further complications, partly due to some characteristics that I mentioned before with respect to the national debts. The fact that Indonesian banks' exposures constitute a minor part of the national debts turns out to be a complicating factor in debts restructuring. Why? Since corporations constitute the major part of the national debtors, debt restructuring has to involve a large number of entities. From the debtor's side there are more than 2000 corporations involve in foreign debts. The creditors are banks and other financial institutions; Japanese banks take the lead, followed by European, Korean and a small number of American and other banks. Altogether they are in hundreds. This is different from the Korean or Thai case.

  2. A World Bank report on corporate debt restructuring in Indonesia identifies vulnerabilities of corporate debts in Indonesia that include the followings: There are ten big companies with strong ties to the banking system that own more than 50 per cent of market capitalization of Indonesia's corporations. These companies also have close ties with the Suharto family. Corporations are highly leveraging. A substantial portion of corporate borrowings is denominated in foreign currency (even domestic borrowings), unhedged, and short- term 3. In addition, a large portion of loans is used to finance speculative investments in non-tradable projects, like properties. These make corporate balance sheets extremely vulnerable to sharp depreciation of rupiah and fluctuation of interest rates.

  3. It is curious to compare corporate debt restructuring in the three crisis countries. Thailand addressed problems of short-term debts very early at the beginning of the crisis. Korea did the same thing. Both countries resorted to debt restructuring rapidly. In fact, in both cases the IMF dealt with corporate debt problems from early on as a part of IMF-supported programs. This has not been the case with Indonesia. Even though the crisis hit Korea later than it hit Indonesia, the debtors and creditors agreed upon a framework of corporate debt restructuring much earlier in Korea than Indonesia. In the case of Indonesia, the first letter of intent (LOI) for stand-by arrangement in October 1997, did not mention corporate debts, except for stating the amount of the national debts ($140 billion), and that the private sector debt was $80 billion, of which $35 billion was short-term 4. Only after the second LOI that IMF was agreeing to discuss problems of the private sector debt (late January 1998). After a very slow and confusing start, some agreement was reached in June 1998 (Frankfurt Agreement), and a framework was agreed upon in September 1998 (the Jakarta Initiative), close to a year after.

  4. Corporate debt restructuring in Indonesia is proceeding very slowly, even though this is part of the lynchpin of the crisis. In June 1997 the Government of Indonesia (GOI) reached agreement with a group of private creditors on restructuring Indonesian debt (Frankfurt Agreement). It started with an agreement for Indonesian debtors to pay trade credit arrears and restructuring of some inter-bank debt. This is the result of a series of discussions between creditors and the Indonesian corporations, organized by GOI with the help of the Fund and WB. Indonesia also established the Indonesian Debt Restructuring Agency (INDRA). Since then, the GOI has developed a framework for corporate restructuring with the objective of helping viable, market oriented corporations which can generate sustainable growth. This framework is designed to encourage out-of-court, voluntary corporate restructuring.

  5. The Jakarta Initiative that was announced in September 1998 is designed to facilitate and encourage voluntary corporate debt restructuring. Basically it provides a framework of out-of court negotiations, which applies to domestic and foreign creditors in a non-discriminatory manner. So far, 125 firms have entered negotiations under the Jakarta Initiative, covering $17.5 billion in foreign debt and 7.8 trillion rupiah in domestic debt. Out of these, agreements have been reached with 15 companies covering $2 billion in foreign debt and 600 billion rupiah in domestic rupiah debt 5.

3 World Bank Brief on Corporate Restructuring in Indonesia, (mimeo)
4 Contrary to what has been widely believed in the country, the first LOI to the Fund (October 31, 1997) was already reporting the total national debt of $140 billion, of which $33 billion was short-term, as well as an estimate of private sector debt around $80 billion. For sure, the data was not complete, since part of the private debts was only acquired directly from a number of big companies (konglomerat) after series of meetings to ask them to report to Bank Indonesia. It is unfortunate that the first letter of intent has not been made public as the current practice.


  • It has been rightly argued by many that bank restructuring is a process, not an event 6. For Indonesia during the crisis, since the first agreement with the IMF for a stand-by arrangement October 1997 until the most recent one in March 16, 1999, there are 9 letters of intent signed by the government of Indonesia. In each LOI there are some part that itemize steps to be taken as an on-going process of bank restructuring.

  • Before last month policy of bank restructuring and re-capitalization, several important steps in bank restructuring taken by the government include the followings:

    • The controversial closure of 16 insolvent banks in November 1,1997
    • The policy to providing guarantee to all depositors and creditors of all locally incorporated banks and the establishment of the Indonesia Bank Restructuring Agency (IBRA) in January 27, 1998
    • The transfer to IBRA control, or nationalization of 7 large private banks accounting for over 75% of past Bank Indonesia liquidity support and 7 banks that have borrowed more than 500% of their capital, in April 22, 1998
    • The closure of 6 insolvent banks and restructuring 6 banks that was taken over by IBRA previously, in August 21,1998
    • The merger of 4 state banks (Exim, Bumi Daya, BDN and Bappindo) into Bank Mandiri in September 1998.
    • And a number of steps taken aimed at strengthening banking infrastructures in areas, like a new bill to make Bank Indonesia an independent central bank, technical assistance for improvement of bank supervision, improvements of banking act, introduction of bankruptcy law and commercial court, etc.

  • The most recent steps in bank restructuring and re-capitalization involved different policies concerning 128 private banks that were given chances for restructuring after completing due diligence process. From 128 private banks with different categories, the followings decisions were made:

    • 73 banks with CAR of 4 per cent or higher (class A banks) are allowed to operate normally without obligation for re-capitalization
    • 9 banks with CAR between -25 to 4 per cent (class B banks) are allowed to operate with an obligation to re-capitalize aimed at a CAR of 4 per cent by April 21, 1999. To re-capitalize bank owners have to provide in cash, 20% of capital needed, while the rest will be borne by the Government using bonds.
    • 9 class B banks are taken over by IBRA, and
    • 38 banks of class C and class B banks were closed.

  • With the last steps of bank restructuring, Indonesia's banking industry comprises of 73 healthy, but small private banks, constituting less than 6 per cent of banking system liabilities, and large but unhealthy banks (state and nationalized banks), plus a number of joined venture banks. Joined venture banks are relatively small, even though their conditions are relatively all right. In terms of total assets and liabilities, seven state banks plus a number of nationalized banks, all with weak conditions, dominate the Indonesian banking industry. The non-performing loans are quite high, some estimate goes as high as 60-75%. The World Bank report said that nearly half of all Indonesian corporations are insolvent and having problem to meet their debt-service obligations to external and domestic creditors.

  • To re-capitalize the state banks plus regional banks and the nationalized banks (four from the previous decision and seven from the latest one) the Government plans to issue 300 trillion rupiahs (approximately $35 billion or 30% of GDP) worth of bonds. The budgetary cost for interest payments on these bonds will amount to about 3.5% of GDP.

    5 Indonesia: Supplementary Memorandum of Economic and Financial Policies, (Washington DC: IMF), March 16, 1999.
    6 For examples, Financial Reform: Theory and Experience, Gerard Capricio, et al, Eds. (New York: Cambridge University Press), 1994 and Bank Restructuring: Lessons from the 1980s,, Andrew Sheng, ed. (Washington DC: The World Bank), 1996


  • Bank restructuring is a process, a complex and costly process, and thus, usually a long drawn one. Since it is costly, and ultimately the public is paying the cost of restructuring, social and political considerations usually play a big role. This, I think, is an additional complication to the already complex problem of bank restructuring. A set of very technical issues which has not been publicly known, partly due to general lack of transparency in Indonesia on top of some abuse of bank secrecy concept, combined with pre and misconception about bank ownership in Indonesia, result in a problem that seems to be unsolvable. This is a gloomy picture of bank restructuring in Indonesia. However, there is no other path than addressing the real problem no matter how gloomy the problem is. For many, recognizing and accepting the nature of the problem still have to be initiated.

  • Even though bank restructuring is a long drawn and costly process, it is not an end itself. The objective for bank restructuring is to strengthen and to make the banking sector robust in its role to serve the national economy. It was argued before that after the last policy decision on bank restructuring, the Indonesian banking system remain weak and fragile. Expecting the Indonesian banking sector to start increasing their lending to corporations so that the national economy could start a recovery, is expecting too much to the banking sector. As it was shown here, after the last policy initiative, Indonesian banking industry comprises of a number of healthy but small banks, plus a number of big but weak banks. The healthy but small banks are too small to give a substantial impact to the national economy. While the other group of banks are preoccupied with their own internal problems of restructuring and re-capitalization to start operating normally. In addition, all banks are still suffering from negative spread as an implication of high rate of interest rate policy.

  • With the current condition in the background, it may be advisable to resort to a temporary means to give incentive for healthy banks to focus on high priority sectors, like export financing and domestic trading to support distribution of food and others. This has to be done without creating other distortions. In the meantime, restructuring and re-capitalization program of state banks as well as nationalized banks has to be implemented judiciously and timely. Indonesia has been losing too much time in addressing this problem. This is due, to resorting more to political solution at the cost of losing track on the problems and time. Any alternative of solutions is complicated and risky. And the uncertain environment constrains any effort to make resolution. Meanwhile, the dictum 'the sooner the better' is valid here, because the longer the postponement of the solution the more complex and costlier it becomes.

  • Indonesian banking problems seem to be more complicated than it should. This, in my opinion to a certain degree because of the presence of misunderstanding about what bank ownership actually means. Due to rampant 'malpractice' of banking - like excessive group lending, fraud, etc. - it seems to be the way people understand about what banking actually mean. As if it becomes a conventional wisdom that owning a bank is the same as owning a private property. The fact that banking has the characteristics of a public good (service) is conveniently ignored. Part of the problem why bank ownership becomes a social issue, Pribumi vs. Chinese, and Indonesian vs. foreign ownership; is rooted in a wrong understanding of what it means by bank ownership. Actually, what the national economy needs is just a robust banking system that serves the national economy well. In this environment, bank ownership does not matter. Of course, for banking system to function robustly, servicing the national economy as financial intermediary and a means of payment system, the whole set of robust financial infrastructures has to exist. In this environment, banks and their owners cannot abuse their position to enrich themselves by stealing public funds. The absence of robust financial infrastructures; including strictly enforced prudential rules and regulations, well functioning banking supervision, disclosures, and good governance in public as well as private sector; in the past had contributed to the complexity of Indonesian banking problem.

@ Professor of Economics, the University of Indonesia, Jakarta, currently a Visiting Scholar at the Harvard Institute for International Development (HIID), Cambridge, MA.

Cambridge, March 1999.