Sander Thoenes, Jakarta – The International Monetary Fund is to approve its second tranche of (£1.7bn) in stand-by credits to Indonesia in February, earlier expected, in recognition of the country's radical reforms and bank restructuring, an IMF official said yesterday day.

Mr Bijan Aghevli, deputy director IMF's Asia and Pacific Department, said the Fund's board was to approve the second disbursement well before it is due on 15 March, following Indonesia's announcement this week fully to guarantee deposits and credits to commercial banks and create an agency to restructure the banking, following a drastic deregulation package earlier this month.

In October Indonesia obtained $38bn in credit pledges from the IMF and other lenders which with $5bn from its own resources makes up a total rescue package of $43bn. When President Suharto reneged on some of the terms sending the rupiah into a tailspin, the Fund and the government put together a more radical set of measures this month. "They have acted on their promises in record speed," Mr Aghevli said. "They produced 15 decrees in six days." Bankers and investors reacted positively to most of the banking reforms, but some doubted whether the government could risk a full guarantee for the banks. Mr Aghevli and Sudradjad Djiwandono, governor of the central bank, in separate interviews defended these moves as the least of all evils.

"It's a huge amount of money, more than Rp350,000bn (£13 6bn)," Mr Sudradjad said. "But this guarantee only becomes a real cost it someone is defaulting. We have to guarantee everything and then we put some banks under receivership."

"There certainly will be a cost, but much of that cost is already there," Mr Aghevli added. Indonesian bankers estimate the central bank spent Rp60,000bn in November and December alone to prop up many of Indonesia's 225 banks. "In effect the government already owns a majority stake in some of these banks, as most of the other depositors have left."

Mr Sudradjad said that IBRA, the bank restructuring agency, could spend Rp30,000bn but it would also be able to collect bad loans and sell assets of banks it took over. Indonesia lacks precedents for corporate bankruptcies but it has a state debt collecting agency which can evade the courts in foreclosures for stated enterprises.

Mr Sudradjad conceded, however, that plans to issue bonds to fund IBRA had not been finalised. Standard & Poor's downgraded the country's debt rating within hours of the reform announcement. "Right now we have very bad ratings" we can't sell any bonds," he said. "We may just have to rely on rupiah bonds."

The governor said that he still encouraged bank mergers but added that increases of the capital require to meet, and a deadline, had yet to be set. "The most important thing is that they are healthy, and only then that they are big."