Louise Williams, Jakarta – Automatic-teller machines ran out of cash as thousands of Indonesians raced to withdraw their savings ahead of yesterday's announcement that seven ailing banks had been closed and seven more placed under Government management, including two of the country's largest commercial banks.
The closed banks – which had massive liquidity problems – included two controlled by a cousin of President Soeharto and another run by the brother of the President's powerful son-in-law, General Prabowo Subianto.
The closures are the first big banking reforms since the liquidation of 16 unsound banks last October as part of the $A70 billion International Monetary Fund bail-out package. The reforms are also the first actions taken by the Indonesian Bank Restructuring Agency which was formed in January to accelerate the costly shake-out in the banking industry. The agency is now reviewing 54 of Indonesia's 200 or so banks which an economist, Rizal Ramli, says have bad loans of up to 50 per cent of total loans.
The move comes ahead of the expected signing this week of a third agreement on conditions attached to the IMF bail-out funds, following the failure of two earlier IMF economic reform programs to restore confidence in the Indonesian economy.
Analysts say Indonesia's oversupplied and undercapitalised banking sector is one of the main roots of its economic problems and in recent months the Central Bank has been propping up ailing banks with cheap loans, essentially printing more money which has a dangerous inflationary impact on the economy.
The banking sector has been hard hit by the 70 per cent devaluation of the rupiah and sharp rises in interest rates. Rates were recently increased to close to 50 per cent to slow inflation and attract deposits, meaning business loans are almost impossible to secure and banks have frozen new housing loans.
The Indonesian Government took out newspaper advertisements at the weekend urging the public not to panic, following a run on banks and automatic-teller machines that began late on Friday, and reminding depositors the Government has guaranteed the entire banking system.
In announcing the closures and the seizure of management by the restructuring agency, the Finance Minister, Fuad Bawazier, did not reveal the cost of the measures to the cash-strapped Government which must be ready to pay out all depositors or whether punitive action would be taken against the management of banks that have run up massive bad debts.
Economist Kwik Kian Gee said: "The Government is using the taxpayers' money (to guarantee the banks) but there is no indication yet that those responsible for the debts will be prosecuted."