This Selected Issues paper takes stock of Indonesia’s performance against the original macroeconomic objectives under the IMF’s extended arrangement. The paper compares the performance of the Indonesian economy in the post-crisis period with that of the other major “crisis” countries in the region. It reviews the background to the current extended arrangement and describes the core macroeconomic objectives of the program. The paper also considers Indonesia’s performance against objectives for growth, inflation, the balance of payments, and improving Indonesia’s debt sustainability.


This Selected Issues paper takes stock of Indonesia’s performance against the original macroeconomic objectives under the IMF’s extended arrangement. The paper compares the performance of the Indonesian economy in the post-crisis period with that of the other major “crisis” countries in the region. It reviews the background to the current extended arrangement and describes the core macroeconomic objectives of the program. The paper also considers Indonesia’s performance against objectives for growth, inflation, the balance of payments, and improving Indonesia’s debt sustainability.

III. IBRA: Taking Stock After Four Years of Operation1

A. Introduction and Summary

1. The Indonesian Bank Restructuring Agency (IBRA) was established in January 1998 in response to the banking and economic crisis that hit Indonesia in 1997. The agency was mandated to administer the government’s blanket guarantee programs for all banks’ liabilities; manage and restructure banks taken over by IBRA; restructure and dispose of loans in closed IBRA banks; manage shareholder settlement by former bank owners; and recover state funds provided as liquidity support loans to banks.

2. As part of the bank restructuring program, IBRA has received assets with a face value of roughly Rp 550 trillion (43 percent of 2000 GDP). 2 Receipts from the management and disposal of these assets sales will help to offset the Rp 703 trillion (55 percent of 2000 GDP) in public sector debt issued towards recapitalizing Indonesia’s banks and shoring up the financial sector.3 However, as the market value of these assets is estimated to be considerably lower than the face value, total recoveries are likely to cover only a fraction of the public cost of the banking crisis.

Table 1.

IBRA: Total Transferred Assets

(Rp trillions) 1/

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Source: IBRA.

Represents total assets transferred to IBRA through end-2001.

Principal only.

May include some commercial loans.

Include Rp 12 trillion settlement of Bank BIL.

Represents book value of government investment, after deduction of returned excess recap bonds and exercise of share option rights.

3. IBRA’s performance to date has been mixed. The annual cash collection targets have been broadly met. However, there has been a significant shortfall in bond recoveries and thus in debt reduction. Between April 1999 and December 2001, cash recoveries amounted to Rp 59 trillion, and recapitalization bonds with a nominal value of Rp 11 trillion were returned to IBRA (Figure 1). The bulk of recoveries (60 percent) has come from loan assets, mainly in the form of debt service on loans. Proceeds from shareholder settlement agreements with former bank owners account for roughly one-quarter of total cash recoveries since 1999, while income from bank equity positions managed by IBRA represents less than 5 percent of the total. The remainder was accounted for by income from investments of IBRA funds as well as guarantee premium payments from banks for funding the deposit guarantee scheme.4

Figure 1.
Figure 1.

IBRA Cash Recovery: 1999-2001

(Rp trillions)

Citation: IMF Staff Country Reports 2002, 154; 10.5089/9781451818239.002.A003

4. However, IBRA’s asset disposal has lagged. Loans sales were not launched until May 1999, and have proceeded slowly since then. Due to ongoing disputes, lack of cooperation, and/or outright default of nearly all shareholder settlement agreements with former bank owners, proceeds from the sale of pledged assets have also fallen significantly short of original projections. Finally, bank equity received by the government as part of the recapitalization program remains largely in government hands, due to a lack of political consensus to reprivatize the IBRA banks. As a result of these delays in asset disposal, at end-2001 IBRA still had assets with a face value of roughly Rp 475 trillion (32 percent of 2001 GDP) on its books, nearly four years after establishment of the agency.5

5. Asset recovery rates have been quite low, indicating that total recoveries will fall well short of offsetting the total cost of recapitalizing the banking system. The low market valuation of IBRA assets has been due to several factors: (i) the high degree of impairment of transferred non-performing loan assets; (ii) overvaluation of pledged shareholder assets when originally transferred to IBRA; (iii) weaker conditions in Indonesia’s financial and property markets than originally anticipated; and (iv) depreciation of assets since they were transferred to IBRA, in part due to poor management of these assets by IBRA. Thus, after all assets are disposed of, Indonesia will be left with a large public debt stock as a legacy of the 1997–98 crisis.

6. This chapter reviews the performance of IBRA to date in light of its original strategy, and assesses the challenges that remain for completing its mandate. Section B presents the main operational units of IBRA, and sets out the original strategy adopted for asset recovery by each of these units. Progress to date is examined in Section C, while Section D considers the challenges that remain for IBRA to complete its goal of returning all assets to the private sector by its sunset date of February 2004. Section E concludes.

B. IBRA Organizational Units and Original Asset Recovery Strategy

Asset Management Credit (AMC)

7. AMC was set up to restructure and dispose of loans and other (non-core) assets transferred to IBRA from closed (or frozen) and recapitalized banks, including state-owned, joint recap, and taken-over banks. AMC has been entrusted with managing a Rp 262 trillion portfolio of loans, composed of Rp 225 trillion in corporate loans (principal over Rp 50 billion), Rp 27 trillion in commercial loans (principal of Rp 5-50 billion), and Rp 11 trillion in SME/retail loans (principal under Rp 5 billion).6 AMC was also tasked with disposing of non-core assets transferred from closed banks, with an estimated face value of Rp 13 trillion.

Corporate loans

8. The initial strategy for IBRA’s corporate debts entailed restructuring the loans before offering them for sale. The purpose of undertaking restructuring was to aid real sector recovery through improving the financial position of indebted firms, thus allowing them to regain access to credit markets. Also, the aim was for debt restructuring to lead to improve corporate governance and managerial control, as IBRA was usually the primary creditor and could install new management. Another motivation for undertaking debt restructuring before sale, was concern about the risks inherent in returning a large amount of non-performing loans to a still-weak banking system.

9. The focus of the restructuring effort has been on loans owed by the so-called “Top 21 obligors”, given their large share (roughly one-third) in total IBRA loans. The strategy for managing loan assets was based on an “obligor” concept, under which debtor companies belonging to the same conglomerate (“obligor”) would be handled together. Restructuring would entail a careful assessment of the financial condition of the debtor company and its business prospects, which would then allow the determination of a “sustainable” amount of debt. This sustainable portion of debt would be sold and the remaining, “unsustainable” portion of debt converted into equity or quasi-equity, also with a view to its eventual sale.

10. The disposal of corporate loans was to take place through transparent and market-based auction mechanisms. There was also a provision for “direct sale” of loans (i.e. without launching a public tender), in cases where a potential buyer offered a minimum of 70 percent of the face value of the loan. In late 2001, IBRA also developed a mechanism to allow for recap bonds to be used as a means of payment for loan purchases (the so-called “Asset-Bond Swap Program”). Strict guidelines were drawn up to govern these sales, which set out a market-based valuation mechanism for calculating the cash equivalent of these bonds, as well as prohibitions on the use of recap bonds to pay for loans of Top 21 obligors (unless the loan’s face value was below Rp 250 billion).

Commercial loans

11. For commercial loans, the asset recovery strategy was based on outsourcing the management of a large share of these loans. This approach was chosen so as to allow IBRA to concentrate its limited resources on restructuring corporate loans, which represented the bulk of the loan portfolio. Between May and August 2000, IBRA awarded contracts to four banks for the servicing of separate tranches of commercial loans, with a total face value of roughly Rp 13.5 trillion. The servicing agents are paid a management fee for handling the loans and for following up on debt service problems.7 For the other commercial loans, the strategy envisioned restructuring as well as outright sales.

Retail and SME loans

12. IBRA’s strategy for handling its Rp 10.6 trillion portfolio of SME and retail loans was focused on rapid settlement or disposal. To encourage debt settlement, incentive programs were offered which granted interest and penalty write-offs (“Crash” program), and in some cases even a 25 percent principal reduction (“Special Crash” program), for settling debt in full within a given time period (usually six months). Loans that did not enter these settlement mechanisms would be offered for sale through loan auctions.

Asset Management and Investment (AMI)

13. AMI was given responsibility for managing and disposing of industrial and real estate assets transferred to IBRA from bank shareholders in settlement of outstanding liabilities, and for bank equity holdings acquired by IBRA in the process of bank recapitalization. Shareholder settlement agreements provided the legal basis under which former owners of closed and taken over banks would settle claims related to their violation of prudential norms, primarily connected party legal lending limits (Box 1). In some cases, shareholders were able to sign agreements under which they pledged sufficient collateral to “settle” their claim in full. These were the so-called Master Shareholder and Settlement Agreements. In cases where shareholders were not able to pledge sufficient collateral, the agreement entailed a “refinancing” of their obligation, and shareholders had to provide a personal guarantee for the entire liability; in other words, would remain personally liable for the entire outstanding amount remaining after recoveries from the sale of pledged collateral. The total due under all settlement agreements amounts to Rp 140 trillion. AMI was also entrusted with the management of other assets originating from taken over banks. These have included collateral pledged by debtor companies, as well as equity positions in debtor companies obtained by the government as a result of the restructuring of loans under AMC.

14. The strategy for recovery on bank shareholder liabilities was based on selling assets pledged as collateral, as well as receiving regular cash payments as debt service on the settlement agreements. As described in Box 1, most of the 1998 IBRA banks established holding companies to handle the management and sale of pledged assets.8 IBRA had representation on these holding companies, and would be closely involved in determining an asset disposal plan. IBRA’s ability to enforce the agreements was strengthened by the quasi-judicial power vested in it through government regulation PP17, which gave it the right to sell assets pledged under the holding companies (see below).

Bank Restructuring Unit (BRU)

15. BRU was entrusted with a variety of responsibilities related to restructuring the Indonesian banking system. Initially, IBRA oversaw a major consolidation of the banking system through closing unhealthy and non-viable banks. BRU was given responsibility for: (i) administering the government guarantee program for bank liabilities; (ii) managing transactions related to closed or frozen banks; (iii) supervising the financial status and operational performance of banks under IBRA care (“banks-taken-over” (BTO) and “joint-recap” banks); and (iv) the formulation of an annual disposal strategy for bank assets managed by IBRA.

16. A major responsibility for BRU is managing the equity stakes obtained by the government as a result of its bank recapitalization program. The government received majority equity stakes in four BTO banks and seven joint-recap banks (Table 2), with a total book value of Rp 132 trillion. The original divestment strategy envisioned the privatization of banks BCA and Niaga by end-2000, and completion of the process of bank divestiture by end-2001.9

Table 2.

IBRA Equity Stakes in Joint-Recap and Taken Over Banks 1/

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Before sales of equity in bank BCA and exercise of share option rights by owners of joint-recap banks.

IBRA Legal Powers

17. In recognition of the fact that IBRA was mandated with recovering a large amount of government value from bank-related assets, it was vested with quasi-judicial rights to enforce its claims.10 Based on Government Regulation 17 (“PP17”), IBRA has public authority to issue a writ (which has legal status and power as a final and binding court decision) to declare a debtor’s and its guarantor’s debt payable to IBRA within a certain time.11 Other legal avenues available to IBRA include (i) petitioning the execution of security rights over certain assets (District Court); (ii) submitting a civil lawsuit and petition for debtor imprisonment (District Court); (iii) submitting a bankruptcy petition (Commercial Court); and (iv) submitting a criminal report against the debtor or the company/bank directors to the police (for general crimes, e.g. embezzlement) or to the Attorney General’s Office (for special crimes, e.g. corruption). Table 3 below sets out some of these legal remedies and the timeframe each course of action is expected to entail. PP17 legal action is the first priority action for IBRA rather than legal action through a district or commercial court, as actions taken under PP17 can in theory only be postponed or cancelled by a final and binding court decision.

Table 3.

Possible Legal Remedies Against Banks and Bank Owners

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Sources: Netherlands Technical Assistance Project.

As there is a significant degree of intra-group indebtedness amongst IBRA debtor groups, IBRA can force group bankruptcy by calling in group debts.

IBRA has the authority to request summary debtor imprisonment.

C. IBRA’s Performance Through 2001


18. Although AMC has generally met its annual recovery targets, it has managed to do so primarily thanks to receipts from debt service, as loan disposal has been limited. By end-2001 only Rp 25 trillion in loans (principal amount) had been either settled by debtors or sold, leaving IBRA with a loan stock of Rp 237 trillion still on its books. From an estimated Rp 13 trillion in non-core assets, roughly Rp 3 trillion has been sold.

Corporate loan restructuring

19. The loan restructuring effort got off to a slow start. This was due in part to delays in processing the loans transferred to IBRA from closed or frozen banks, and significant documentation problems encountered in the loan transfer process (known as the “Asset Transfer Kit” or ATK). By June 2000, only 23 percent (in terms of face value) of Top 21 loans that were not in litigation had reached the debt restructuring proposal stage (MOU), while only 2 percent had actually started implementing a restructuring agreement (Table 4). Restructuring accelerated significantly during the following six months, but has stagnated since then; by end-March 2002, the share of loans in the restructuring implementation stages remained below 25 percent. For other corporate loans (i.e. not Top 21), progress in restructuring has been significantly slower, with only 33 percent of non-litigation loans reaching the MOU stage or beyond by end-March 2002. However, a relatively larger share of these (27 percent of total non-litigation loans) had reached the implementation stage of restructuring agreements.

Table 4.

Progress in Corporate Loan Restructuring, December 1999–March 2002

(in percent of total loan stock)

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Includes loans handled by other IBRA units, non-resident debtors, retail loans, interbank claims, and derivatives and marketable securities.

20. During 2000, concerns emerged that AMC-brokered debt restructurings were providing debtors with excessively favorable restructuring terms. Key concerns related to the fact that agreements were not based on an adequate assessment of the underlying viability of the enterprise, and thus risked keeping nonviable companies alive (thus exposing the government to further loss of value through asset stripping and the possible incurrence of new liabilities in the future). These agreements also typically were based on below-market interest rates and long maturities, and involved the conversion of a large share of IBRA debt into equity (compared to debt-to-equity conversions proposed for other creditors), thus significantly eroding IBRA’s position as a preferred creditor.12

21. In order to enhance the transparency and quality of debt restructurings, the government publicly adopted a set of Corporate Debt Restructuring Principles in March 2001 (Box 2). The principles set out specific guidelines for debt restructurings, and introduced an independent review process for deals involving large debtors. To ensure transparency, reviews of large debtor restructurings by IBRA’s Oversight Committee (OC) have been made public (see Box 3 for a description of the Oversight Committee). Although the OC’s suggested revisions are not binding, they have generally been taken into consideration by the Financial Sector Policy Committee (FSPC) 13, which then formally requests IBRA to revise the terms; there have been a number of cases, however, where the final restructuring outcome still featured many of the provisions that were criticized by the OC. By March 20, 2002, the OC had completed reviews of 54 debt restructuring proposals, with another 46 in the pipeline for 2002.

22. Movement through the restructuring process continues to be slow. Legal delays have arisen in some cases, which has slowed down implementation considerably. In other cases, agreement with debtors had only been reached provisionally, so that negotiations are in fact still ongoing. There have also been cases where restructuring agreements concluded between IBRA and the debtors were deemed unsatisfactory by the OC, which has resulted in a revision of the original agreements. Finally, disposal of IBRA assets has been slowed somewhat by IBRA capacity constraints on organizing loan sales, and a reluctance to recognize the losses inherent in its loan book.

23. Despite enhanced oversight, the debt restructuring process has not generally been viewed as a success, with many of the restructured loans effectively in default. In other cases, loans that have reached the MOU stage have remained stuck there, as the agreements were considered preliminary by the debtors, who appear to have had little intention of completing the process. These difficulties are indicative of the more general weaknesses that still remain in the bankruptcy framework in Indonesia.

Corporate loan sales

24. The first sale of restructured corporate loans was launched in June 2000; loan assets with a face value of Rp 17 trillion had been returned to the private sector by end-February 2002. So far, no loans from the Top 21 obligors have been sold, although some such loans will be put on the market during 2002. The recovery rate from these sales started out fairly high, equivalent to 70 percent of bids accepted in the June 2000 Corporate Loan Sales I program (Table 5).14 Subsequent sales saw the recovery rate fall to about 20 percent. Due in part to the decline in the recovery rates offered by bidding investors, IBRA has only managed to sell 57 percent of the corporate loans it has offered for sale through February 2002.

Table 5.

Corporate Loan Sales

(Rp trillions)

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Note: CLS is “Corporate Loan Sale”, while CCAS is “Corporate Core Asset Sale”. The former entailed the sale of restructured portions of IBRA corporate loans only, whereas the latter included the sale of equity and quasi-equity positions in the debtor companies that had resulted from the restructuring process.

25. The decline in recovery rates has been due to several factors. First, assets sold earlier on were generally in better condition (both financially and in terms of documentation) than those sold later. Another reason is that, beginning in May 2001, AMC began selling for sale corporate asset packages, composed of sustainable and non-sustainable debt portions (with the latter having been converted into equity, bonds, and convertible bonds in the debtor companies). This “mixed” portfolio of corporate assets would be expected to fetch a lower rate of return. In addition, the lack of proper restructuring of the loans sold, and purchasers’ poor experience in enforcing their creditor rights over the collateral backing purchased loans, may have contributed to the decline in recovery rates.

26. So far, Indonesian banks appear to have purchased only a small share of the corporate loans offered for sale by IBRA. Official estimates indicate that domestic banks purchased less than 10 percent of the total principal value of corporate loans sold through February 2002 (Figure 2). Domestic finance companies and investment funds purchased roughly 40 percent of the total face value sold, while foreign banks and investors accounted for just over half of the total.

Figure 2.
Figure 2.

Sales of corporate loan assets

(Percent of principal sold, by buyer)

Citation: IMF Staff Country Reports 2002, 154; 10.5089/9781451818239.002.A003

27. IBRA’s other disposal mechanisms for corporate loans have not been very successful. The direct sales program, which requires the purchase price to be at least 70 percent of the face value of the loan, has only resulted in the sale of loans with principal amounting to roughly Rp 130 billion in 2001. With the launch of the asset-bond swap program delayed as technical guidelines were being worked out, bonds have not yet been used as a form of payment in IBRA loan auctions.15 Moreover, bonds cannot be used as a means of payment in the purchase of large loans.

Commercial loans

28. Cash recovery from the outsourcing program for the servicing of commercial loans has been poor, and progress in settlement and disposal of non-outsourced commercial loans has been slow. Through end-February 2002, gross receipts from the program (debt service and debt settlement) were estimated at Rp 2.1 trillion, a rather disappointing result given the size of the loan stock and the management fees paid to the servicing agents. Reports indicate that the program has been less successful than anticipated due to lack of proper incentives in the outsourcing contracts (e.g., compensation for servicing agents was not sufficiently related to performance on the loans they managed). AMC has also been able to settle directly (i.e. not through the outsourcing program) about Rp 3.4 trillion of commercial loans either through full repayment or through sales. A large share of commercial loans has also entered the restructuring process, although most of these remain at a preliminary stage of restructuring.

SME and retail loans

29. The program for disposing of SME and retail loans has been a notable area of success. By end-2001, roughly 70 percent of IBRA’s original Rp 10.6 trillion stock of SME and retail loans had been returned to the private sector. Roughly Rp 2.9 trillion in SME/retail debt has been settled through the Crash and Special Crash incentive programs. The other principal mechanism, auctioning SME/retail debt packages, has returned Rp 4.4 trillion in SME/retail debt to the private sector (Table 6).

Table 6.

Retail and SME loan sales

(Rp billions)

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Source: AMC.


30. Asset recovery from the shareholder settlement agreements has fallen significantly short of original targets, as only one shareholder settlement agreement has produced significant recoveries. In addition, the rate of return on assets sold has been lower than originally expected, due in part to the decline in market valuation of assets, but due also to an initial overestimation of the value of many of the pledged assets. Given these facts, total recovery for AMI is likely to be significantly lower than originally envisioned.

Performance of shareholder settlement agreements

31. Only three of the nine bank owners who signed initial agreements in 1998 have actually finalized them (by completing the transfer of pledged assets). These bank owners are the Salim Group (which accounts for roughly 90 percent of all proceeds through end-2001), and the two non-holding company shareholder groups (Sudwikatmono and Risjad). All other agreements have some outstanding issues, and four holding companies have not produced any proceeds (Table 1, Box 1). In the case of MRNIAs, where the former shareholders have given a personal guarantee for any liability that may remain after pledged assets have been sold, the considerable decline in the market value of their pledged assets will leave them with a significant debt obligation; it is unclear how these obligations will be met. In the case of Bank Danamon, for example, the remaining assets may only be worth Rp 2 trillion, while the outstanding liability is roughly Rp 11 trillion. Given shareholder’s hopes that improving financial and investment conditions may increase the market value of their pledged assets, and inadequate pressure from IBRA to meet their obligations, there has been little incentive for the shareholders to sell their pledged assets.

32. Nearly all shareholder settlement agreements are either in dispute or in default. Those in dispute may feature lack of agreement on the amount of the liability, as well as lack of cooperation from former bank owners in transferring assets to the holding companies. IBRA has had significantly less control over pledged assets than had been envisioned under the original strategy. Under the APUs (debt acknowledgement agreements for the 1999 closed banks), the agreements are simply in default, with bank owners having missed most debt service payments. As a result of these problems, AMI has received considerably less income than originally expected. Only one of the settlement agreements, that for Bank BCA (Salim Group), has actually been performing broadly in accordance with its original terms. Nearly all of AMI’s revenue to date (roughly 90 percent) has come from this agreement. Although IBRA has power of attorney (executed and on file) to sell pledged assets in case of default on the agreement, this power has been contested in the courts, and IBRA has been reluctant to use it on a broad scale. Moreover, defaulting and uncooperative shareholders have only in few cases faced significant penalties for their opposition to the use of PP17.

New policy towards shareholder settlement agreements

33. In light of the poor performance of the settlement agreements, the government introduced a new policy in March 2002 aimed at strengthening enforcement and collections under the agreements.16 The stated aim of the policy is to increase the public’s sense of economic justice, by ensuring that the former bank owners are made to repay their obligations, while also providing legal certainty for both parties to the agreements. The government has declared its determination to take strict legal actions so as to demonstrate its commitment to (i) “enforcing the law and listening to the voice of the people”; (ii) eradicating “KKN” (corruption, collusion, and nepotism); and (iii) endeavoring to accelerate recoveries for the State which have been pending for four years. The key features of the new policy are as follow:

  • Within 30 days, the government shall make a legal determination regarding whether debtors are in compliance with their agreements. A high-level legal team has been appointed to undertake this work, and IBRA’s Oversight Committee shall review the determination made by this team before it is communicated to the debtor.

  • Within 30 days of the original determination, debtors who are in compliance with their agreement shall be provided with a release and discharge from any future criminal charges related to the original violation that gave rise to the liabilities.

  • Debtors who are in default will be given three months from receipt of the default determination to come into full compliance with their agreements, before facing strict legal actions to enforce the agreements. These legal actions could include: declaration of bankruptcy, seizure of assets, imprisonment, prosecution on corruption charges, or a travel ban.

  • All government agencies involved in enforcing these agreements, namely the Ministry for State-Owned Enterprises, IBRA, Ministry of Justice and Home Affairs, the Attorney General, and the Police, shall step up their cooperation so as to enhance the success of this policy. The Minister of State-Owned Enterprise shall provide monthly progress reports to the President.


34. The sale of the government’s equity stakes in IBRA’s banks has proceeded much slower than envisioned under the original disposal strategy. The sale of majority stakes in banks BCA and Niaga was expected by end-2000, and the full divestment of all bank equity stakes by end-2001 (Table 7 shows the government’s current equity holdings in IBRA banks). However, by-end-2001, the only significant sale was a minority share of bank BCA, through a May 2000 IPO (22.5 percent) and a July 2001 public sale (10 percent). 18 These sales raised Rp 1.4 trillion for BRU; the remainder of BRU income for FY 1999-2001, Rp 1.3 trillion, came primarily from bank dividends. The lack of progress in this area is due in part to delays in achieving the necessary political consensus for implementing the original divestment strategy. Another delay was caused by the decision in late 2001 to merge four weak IBRA banks with bank Bali. The merger process, which will involve further restructuring, is expected to be completed by end-2002, with divestment of the new bank to follow in 2003.

Table 7.

IBRA Equity Stakes in Joint-Recap and Taken Over Banks, April 2002

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After the sale of a 51 percent share of Bank BCA to Farallon Capital Management.

BII, previously a joint-recap bank, was taken over by IBRA in July 2001.

Candidate for five-bank merger.

Performance in legal cases and internal financial and control mechanisms

35. IBRA has had only limited success in enforcing its claims either through the courts or by using its quasi-judicial powers. Even though actions taken by IBRA under PP17 have the same power as a court order, affected debtors have been successful in challenging this authority and in effect halting the seizure of collateral and other debtor assets. By end-2001, IBRA had processed 2,400 litigation cases, of which 2,125 cases were through the civil courts while 68 cases were brought to the bankruptcy court. Of the total, only 230 were settled, with IBRA mostly on the losing side. For cases brought by IBRA against Top 21 obligors, as of mid-February 2002, IBRA had won 7 out of 25 of the cases in bankruptcy court, and none of the four cases in civil court.

36. IBRA is seeking to improve its internal financial and control mechanisms. A longstanding issue is the verification of the nominal value of assets as cited in the original “asset transfer kits" (ATKs) against actual loan documentation.19 Owing to the poor quality of ATKs received, IBRA has in many cases had to reconstruct the loan payment history and recalculate the amounts due; this effort has represented a significant strain on IBRA’s human resources, and explains in part why the restructuring process has taken so long, and loan sales have been delayed. In an effort to resolve the matter, IBRA engaged the services of outside consultants to verify the ATK balances for the Top 200 obligors as these represent the bulk of IBRA’s loans received by amount. Preliminary results of this analysis indicate that the nominal value of loan assets was significantly overestimated by the originating banks. IBRA is currently assessing options to address this overcapitalization, including the possible return of the excess bonds.

D. Asset Recovery Plan for 2002

37. At end-2001, IBRA still had assets with an estimated face value of roughly Rp 475 trillion (32 percent of 2001 GDP) on its books (Table 8). This reflects the slow rate of asset disposal so far. If IBRA is to meet its goal of returning all assets under its management to the private sector by its sunset date of February 2004, asset disposal will have to be stepped up considerably.

Table 8.

IBRA: Stock of Assets at end-2001

(Rp trillions)

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Sources: IBRA and staff estimates.

Principal only.

May include some loans that are actually commercial loans in size.

Original stock minus the transfer value of sold MSAA assets and cash payments made under MRNIAs. Includes Rp 12 trillion settlement of Bank BII.

Represents book value of government investment, after deduction of returned excess recap bonds and exercise of share option rights.

38. Recognizing the need to accelerate asset disposal, Parliament has set ambitious IBRA recovery targets for 2002 (Table 9). The target implies an increase of about one third over actual recoveries in 2001. To meet this target, IBRA needs to accelerate efforts in three key areas: (i) sale of its corporate loans, in particular launching the sale of unrestructured corporate loans; (ii) recoveries from its shareholder settlement agreements with former bank owners; and (iii) sale of its banks.

Table 9.

IBRA Recovery Targets for 2002

(Rp trillion)

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Sources: IBRA Finance and Accounting Division.


39. The AMC cash target for 2002 (Rp 24.5 trillion) represents two-thirds of total recoveries targeted for IBRA this year. Another Rp 7.5 trillion in AMC bond recoveries is targeted for 2002. Given that progress in loan restructuring has been slow, most of these recoveries are expected to come from the disposal of unrestructured loans, either through auctions (used for restructured loan sales since December 2000) or new mechanisms, such as joint ventures and securitization. IBRA officials have estimated that achieving the target would require an eight-fold increase in the face value of IBRA loan sales compared with 2001, to nearly Rp 110 trillion. Given this target, AMC will need to move ahead rapidly with the necessary technical preparations. The following loan sales mechanisms are slated for 2002:

  • Loan auctions for restructured corporate loan packages, unrestructured corporate loans, and commercial and SME/retail loans.

  • Joint venture (JV) sales of unrestructured loans. Although the structure for these joint ventures has yet to be determined, it will likely involve the creation of one or more JV asset management companies (AMCs), to which unrestructured loans will be transferred. Both IBRA and the JV partner would hold equity in the AMCs.

  • Securitization of MOU-stage loans into collateralized debt obligations (CDOs). This program would entail the creation of an outside investment structure, to which IBRA loans would be transferred or sold, and which would then sell CDOs to the market.

40. Meeting the AMC target represents a major challenge. As noted above, meeting the target will require selling a very large amount of unrestructured loans. It will be important to avoid delays within IBRA and also to ensure that underlying government policies are fully supportive (for example, initiatives such as the recent proposals for large-scale debt write-offs for the SME sector could undermine IBRA’s efforts). It will also be important to ensure that such sales take place through competitive and transparent mechanisms, and that prudential policies are firmly implemented to protect against the risks associated with large sales of unrestructured loans.

41. IBRA also faces the challenge of managing the significant equity positions that the government has received in debtor companies as a result of the restructuring process. As of end-2001, these positions had a face value of Rp 83 trillion. Some of these assets will be sold by AMC through future corporate core asset sales (as has already taken place). However, a large share of these assets is likely to be held back from immediate sale, and instead actively managed and possibly repackaged by IBRA for future sales. The potential establishment by IBRA of holding companies to manage any assets that may remain after the end of IBRA’s tenure in 2004, as well as those deemed as nationally strategic assets, was approved by the FSPC in March 2002. While repackaging of assets may provide a successful avenue for increasing the recovery value of IBRA assets, care will be needed to ensure that these holding companies do not simply become a warehouse for assets that are deemed either too politically contentious, or otherwise difficult, to sell.


42. Asset recovery during 2002 will depend on completing the disposal of assets pledged by the Salim Group, as well as stepping up significantly the enforcement of defaulted shareholder settlement agreements. As outlined above, AMI is in the first phase of implementing the new policy of enforcing the agreements. Steadfast implementation of the policy should result in a significant increase in returns from these agreements.


43. IBRA achieved a major milestone in March 2002 by completing the sale of a 51 percent stake in bank BCA, for an estimated Rp 5.6 trillion. The bid was won by a consortium led by Farallon Capital, a San Francisco-based investment fund, with capital participation by Djarum, a major Indonesian cigarette manufacturer.

44. Unlike in previous years, IBRA has already exceeded its target for bank sales receipts in 2002 with the sale of bank BCA. Over-performance in this area could help offset potential shortfalls elsewhere. Current divestment plans envision the sale of a majority stake in bank Niaga by end-June 2002, with further bank sales slated for the second half. The strategy for the sale of IBRA’s remaining banks is expected to be presented to Parliament shortly.

E. Conclusions and Future Challenges

45. Despite the fact that IBRA is more than two-thirds of the way into its legal tenure, overall progress in asset restructuring and disposal has been relatively slow. This has partly reflected institutional and political obstacles stemming from a marked lack of political consensus regarding IBRA’s mandate, particularly with regards to asset disposal. In addition, there were significant delays in providing IBRA with sufficient legal underpinnings to implement its asset recovery strategy. Frequent management changes (there have been six IBRA chairmen since its establishment) have also been the cause of further delays in the recovery program.

46. Looking ahead, IBRA faces major challenges as it seeks to accelerate asset disposal ahead of its February 2004 sunset date. The 2002 asset recovery targets are appropriately ambitious, but their achievement will require strong commitment on part of IBRA staff, as well as consistent political backing. A key issue in this regard will be the willingness to accept significantly lower returns on many of IBRA’s remaining assets, which almost by definition are more difficult to sell. However, it is unlikely that warehousing these assets within IBRA will do much to increase asset value (and more likely will result in a further reduction in value). IBRA therefore must remain committed to rapidly returning these assets to the private sector, using mechanisms that are both market-based and transparent. In this way, IBRA will play its part in fostering a return of investor confidence and laying the basis for a sustained and robust economic recovery.

Key Features of Shareholder Settlement Agreements

Shareholder settlement agreements provide the legal basis under which former owners of closed and taken over banks are settling claims related to their violation of prudential norms, primarily connected party legal lending limits and liquidity support provided by BL These agreements entail bank shareholder obligations amounting to roughly Rp 141 trillion; at end-2001, the remaining obligation was estimated at Rp 106 trillion.

Of the 14 private banks closed or taken over by IBRA in 1998, nine signed settlement agreements entailing claim settlement over four years, for liabilities totaling Rp 112 trillion (Table 1). 1 In seven cases, the shareholders established holding companies to manage and dispose of assets pledged as collateral for shareholder obligations. (For the remaining two, the small amount of collateral did not necessitate the creation of a holding company.) The holding companies are wholly owned by the original shareholders, although in principle ERA was to participate in managing the company and determine the asset disposal plan. Indebtedness to IBRA was officially transferred from the shareholders to the holding company, which in turn issued promissory notes to IBRA bearing a value equal to the shareholder’s obligation minus cash payments initially made as part of the agreement.

Table 1.

Shareholder Settlement Agreement for 1998 IBRA Banks

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Source: IBRA; and staff estimates.

For shareholder without a holding company, represents estimated value of assets pledged by shareholders.

Gross sales receipts through end-2001; excludes dividend payments.

The 1998 shareholder agreements came in two variants, the Master Shareholder Acquisition Agreement (MSAA) and the Master Refinancing and Note Issuance Agreement (MRNIA), depending on the owners’ ability to pledge assets sufficient to cover their liability (Table 2). The most important distinction between the two agreements is that in the case of the MSAA, the agreement was intended to entail a final settlement of the bank owners’ liability, as the pledged collateral was deemed sufficient in value to cover the entire outstanding liability. In the case of the MRNIA, the agreement entailed a refinancing of the liability over four years (although with no set repayment schedule), with bank owners required to provide a personal guarantee through which they remained liable for the entire cash amount set out as the liability.

Table 2.

Main Features of MSAAs and MRNIAs

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Under MSAAs, shareholders pledged additional “holdback” assets to cover potential losses stemming from incorrect information provided by shareholders in the settlement process.

Additional settlement agreements in the form of a “deed of (debt) acknowledgement” (APU) were concluded with the owners of 22 banks frozen in 1999, with liabilities of Rp 12.7 trillion. 2 These four-year agreements entailed a regular debt service schedule, with the interest rate set at the SBI rate plus 3 percent. Primary shareholders were required to provide a personal guarantee to back up the agreement. One more settlement agreement was signed in February 2001 with the owners of bank BU on claims amounting to Rp 12 trillion. A personal guarantee and pledge of assets amounting to 145 percent of the liability was obtained from the bank owners.

1 The remaining four (smaller) banks contested their liability and were referred to the Attorney General’s office for litigation; these cases have not yet reached legal resolution. There was also a merger of two 1998 IBRA banks.2 Of the 44 banks frozen in 1999, eight were found not to have a BLBI liability (hence no settlement agreement was needed), three settled their obligations in cash, six are contesting their liability and were referred to the Attorney General’s Office, and two still in the process of reaching a shareholder settlement agreement.

IBRA’s Corporate Debt Restructuring Principles

In March 2001, the government adopted Corporate Debt Restructuring Principles, with the aim of fostering a transparent debt restructuring process that will maximize recoveries for the government. The Principles are designed to promote economically viable restructurings, which are critical for allowing indebted companies regain their financial strength, while allowing the government to maximize recoveries. The Principles require that restructuring proposals be based on an assessment of the future viability of the enterprise and estimates of the level of sustainable debt. The assessment is to be based on a full legal and financial due diligence, and include an independent review of the company’s business plan. All options for recovery are to be explored, including the sale of loss-making and/or non-core units, or dissolution if the company is found not to be viable.

Sustainable debt is to be rescheduled on market terms, non-productive assets sold and the remaining debt converted into quasi-equity (normally long-term convertible bonds) and equity. IBRA should aim to extract the maximum in cash or other assets as payment and thereafter would maximize the use of convertible bonds or other quasi-equity instruments that require periodic coupon payment. Quasi-equity instruments will retain upside potential by providing IBRA with a right to redeem and/or convert the instruments if there is improvement in the performance or value of the company. With regard to equity, IBRA, together with other similarly situated creditors, will endeavor to assume a majority position (depending on the amount of unsustainable debt converted into equity). This equity position is envisaged to be of a temporary nature and will be used to protect and ensure ultimate recovery of remaining debts to the State.

The Principles entail significantly enhanced oversight of debt workouts proposed by IBRA. The OC is to conduct an independent review of each proposed restructuring transaction above Rp 250 billion that has not been legally closed and that involves single obligors with outstanding debts to IBRA of Rp 750 billion and above. An additional budget is to be provided to allow the OC to hire independent restructuring professionals to carry out the reviews. Reviews have first been carried out for those cases where MOUs had already been considered by the FSPC. For all new cases, reviews are being carried out as soon as IBRA formulates a debt restructuring proposal. The result of the OC’s review is submitted together with IBRA’s Executive Committee recommendation to the FSPC, which is to publish its final decision on each restructuring case. Although the OC’s recommendations are non-binding, the FSPC is required to publish an explanation for any OC recommendation that is not accepted. The OC is also charged with undertaking annual ex-post reviews of those restructuring agreements previously reviewed by the OC to ensure that implementation of the agreements is in line with the original objectives, and will advise IBRA and the FSPC of its findings.

IBRA’s Oversight Committee

An Oversight Committee (OC) for IBRA was established in July 2000 in order to enhance IBRA’s performance, governance, and transparency. The OC has been tasked with three key responsibilities: (i) to uphold and strengthen corporate governance and transparency at IBRA and ensure policy compliance; (ii) to monitor IBRA’s performance, especially in strategic areas; and (iii) to make recommendations to IBRA and the FSPC on improvements in these areas. The OC reports to the Minister of Finance and maintains strong links to the FSPC. Its nine members are independent professionals, with strong backgrounds and expertise in law, finance, and economics. To perform its tasks, the OC may appoint independent experts, auditors and consultants.

The OC has played a particularly important role in ensuring that restructurings of IBRA’s largest debtors meet the Corporate Debt Rescheduling Principles (Box 2). In the Principles the OC was instructed by the FSPC to conduct an independent review of each restructuring transaction above Rp 250 billion that has not been legally closed and that involves single obligors with outstanding debts to IBRA of Rp 750 billion and above. The result of the OC’s review is submitted together with IBRA’s Executive Committee recommendation to the FSPC. The OC’s recommendations are non-binding.

More recently, the OC has assumed a central role in connection with the government’s new policy of enforcing the shareholder settlement agreements. In particular, it will review the determinations made by the legal team tasked with assessing shareholders’ compliance with the settlement agreements.


This chapter was prepared by Andrea Richter Hume (APD) in collaboration with World Bank staff.


This estimate includes all assets transferred (loans, noncore assets, and bank equity) or pledged (under the shareholder settlement agreements) to IBRA through end-2001. Government holdings in banks are estimated at book value.


The Rp 703 trillion stock of domestic bonds issued as a result of the financial crisis is composed of Rp 43.5 trillion in bank recapitalization bonds and Rp 267 trillion in inflation indexed bonds (indexed principal amount as of January 25,2002) issued to Bank Indonesia to fund the government guarantee scheme for bank liabilities.


From 2002 onwards, income from deposit guarantee payments will no longer be counted toward IBRA’s cash collection targets.


Transfer of assets to IBRA was still ongoing through end-2001.


This represents the principal amount of loans transferred to AMC since 1998. In total, loans with a principal of Rp 320 trillion have been transferred to IBRA (including the November 2001 transfer of Sinar Mas Group loans from Bank BH to IBRA); Rp 51 trillion of these have gone to AMI as part of the shareholder settlement program with former bank owners, while the remainder is with BRU or IBRA’s Treasury.


The fee is based on a monthly payment of roughly Rp 1,000,000 per account plus a success fee of 3.5 to 5 percent of the amount collected.


Originally, the plan had been for the shareholders to transfer the assets directly to IBRA. However, due to concerns related to the notion of government being seen to nationalize assets, holding companies were established instead.


“Memorandum of Economic and Financial Policies” of September 7, 2000.


IBRA’s quasi-judicial powers are set out in Article 37A of the Indonesian Banking Law (1999).


PP17 vests EBRA with the authority “to control and/or sell the goods or assets which have been transferred to obtain compensation in respect of the [..] fault, negligence, and/or improper transaction [on the part of bank shareholders, directors, and commissioners]. Such persons [are personally liable and] may be subject to criminal sanctions as stipulated in Article 50 of the Banking Law.”


A notable case in which this occurred was for the petrochemical company Chandra Asri, which had total debts of $ 1.2 billion, of which $460 million was owed to IBRA. The initial proposal entailed IBRA converting 89 percent of its debt into equity, whereas the foreign creditor would convert 14 only percent of its debt into equity, thus significantly weakening IBRA’s position as a secured creditor.


The Financial Sector Policy Committee (FSPC) is a cabinet-level committee chaired by the Coordinating Minister for Economic Affairs. In addition to other responsibilities, it is ultimately responsible for IBRA policy.


However, the recovery rate would have been 53 percent if all bids made had been accepted.


Although IBRA recovered a net Rp 6.6 trillion in recap bonds in 2001, none of the transactions behind this result were outright sales. Bank Mandiri remitted Rp 5.2 trillion in recap bonds to IBRA as a repayment for excess recapitalization; Bank Danamon returned Rp 15.1 trillion in bonds in repayment of various outstanding claims; and Bank BE received a net Rp 13.7 trillion from IBRA as part of the SMG loan swap.


The introduction of this policy represented a significantly enhanced commitment towards enforcing the agreements, compared in particular to an earlier FSPC decision (December 2001), since revoked, under which agreements would have been open to revision (longer maturities and lower interest rates).


This section focuses on BRU’s program of bank equity divestment. The staff report provides a discussion of the performance of banks under IBRA control.


In late 2001, the government’s holdings in bank Bukopin were fully divested following the exercise of share option rights by the original owners.


Outstanding problems in verifying loan documentation have meant that IBRA’s audited financial statements contained exceptions in both 1999 and 2000.