On 26 January 1998, in an effort to support the ailing Indonesian banking sector, then President Suharto announced a State Guarantee program covering the liabilities of Indonesian commercial banks. The relevant Presidential Decree foreshadowed the publication of Guidelines which would define the circumstances in which the State Guarantee was available.
These Guidelines, first outlined in a Decree of the Minister of Justice on 28 January, have now been promulgated in detail by a Joint Decision of the Board of Executive Directors of Bank Indonesia (the Indonesian central bank), and the Chairman of the recently established Indonesian Bank Restructuring Agency (IBRA). The Guidelines address many of the questions which have been foremost in the minds of many foreign parties lending to Indonesian commercial banks since January.
Scope of State Guarantee
The Minister of Finance had indicated in his Decree that the scope of liabilities of commercial banks to be covered by the State Guarantee would be broad, subject to a number of specific exclusions. The Guidelines confirm that the State Guarantee covers all liabilities of domestic and foreign branches of Indonesian commercial banks owing to their domestic and foreign creditors, in rupiah as well as foreign currency, whether arising before, on or after 27 January 1998. Liabilities specifically mentioned as covered by the State Guarantee include deposit liabilities (including time deposits, savings and other on call deposits), bonds and negotiable papers (including floating rate notes and medium term notes), letters of credit (including standby letters of credit) and bank guarantees. Liabilities must be evidenced by usual and appropriate documentation.
The liabilities to be excluded from the State Guarantee program are set out in more detail in the Guidelines. For example, certain loan capital, which is recognized by Bank Indonesia as being included in the calculation of a bank's compulsory minimum capital, is excluded from the State Guarantee program.
More subjectively, certain deposits made after 28 January 1998 on "inappropriate financial terms and conditions" and other liabilities arising out of "unsound banking practices" or the bad faith of creditors are also excluded from the State Guarantee program. Clearly, the credibility of the State Guarantee program depends on these exclusions being applied sparingly.
Another exclusion from the State Guarantee program which the Minister of Finance had foreshadowed are liabilities to parties "related" to the bank. The Guidelines make it clear that such "related" parties include (i) bank directors and shareholders holding 10% or more of the bank's share capital, and their respective families; (ii) bank officers; (iii) companies acting in the interests of any of the foregoing; and (iv) persons having power to directly or indirectly influence the management of the bank.
Subsidiaries or joint ventures of the relevant bank or bank shareholders are not considered to be "related" to the bank. Still, there have been a number of cases in the past six months of joint ventures between bank shareholders and foreign multinationals which have been restricted from withdrawing funds of the joint venture from deposit accounts held with the relevant bank without prior consent from IBRA.
One anomaly in the Guidelines relates to the position of derivatives. The Minister of Finance had previously indicated that derivatives would be included in the State Guarantee program. However, the Guidelines contradict this position, excluding liabilities arising from derivative transactions, except for swap transactions "on the basis of clear and proper agreements with documents generally effective in such transactions". Even for swaps, it appears that the State Guarantee will not apply until the Government has issued prudential guidelines for risk management governing swap transactions.
The Minister of Finance had published a long list of banks which were supposed to be covered by the State Guarantee. It seems, however, that this list may no longer be a reliable indicator of the coverage of the State Guarantee program.
As a prerequisite to participation in the State Guarantee program, the Guidelines now require banks to deliver statements to IBRA signed by bank directors and substantial shareholders (meaning shareholders with 10% or more of the bank's share capital), who must each accept personal responsibility for any default or negligence in the management of the business operations of the bank. Some directors and substantial shareholders may naturally be unwilling to sign the relevant statements. Their failure to sign will result in their bank being excluded from the State Guarantee program.
In addition, there is a procedure for joint venture banks to opt-out of the program where the joint venture shareholders agree to provide guarantees to creditors on similar terms to the State Guarantee. Indonesian banks whose business permit was revoked prior to 27 January 1998 are also excluded from the program.
The foregoing may mean that creditors should not simply assume that their bank is included in the State Guarantee program, but should, as a matter of prudence, independently verify this with IBRA.
Registration of Liabilities
Certain liabilities must be registered to be eligible for the State Guarantee program. Liabilities (except for savings deposits) are registrable if they exceed 10 billion rupiah or (for foreign currency liabilities) 2 million U.S. dollars. Liabilities existing prior to 6 March 1998 had to be registered by 6 May 1998. Liabilities arising after 6 March 1998 must be registered within 60 days of the date on which they arise.
The Guidelines do not make clear when a liability is considered to "arise". For example, is it when a loan agreement is signed, when the loan funds are advanced, or when the loan becomes due for repayment? As a matter of prudence, registrable liabilities should be registered as early as possible. Indeed, foreign lenders may wish to make registration of loans a conditions precedent to drawdown.
Procedure for Claims
The first step in submitting a claim on the State Guarantee is for the creditor to forward a demand for payment of the due and payable liability to the relevant bank. If the bank expects to be unable to make the payment demanded, the bank must notify IBRA within three days of the maturity of the relevant liability. The bank must enclosed the original supporting documentation with its notification to IBRA, and quote the registration details of any registrable liabilities.
The next step is for IBRA to remit the guaranteed amount to the relevant bank, which must then disburse the amount to the creditor. The Guidelines provide for administrative and criminal sanctions for banks failing to disburse such amounts to creditors.
The disbursement by IBRA to the bank, and by the bank to the creditor, will be in rupiah. For non-U.S. dollar foreign currency liabilities, the liability is first converted into U.S. dollars at the relevant exchange rate quoted by Bank Indonesia on the maturity date of the liability. Such foreign currency liabilities (together with U.S. dollar liabilities) are then converted to rupiah at the exchange rate quoted by Bank Indonesia on the date the funds are remitted by IBRA to the relevant bank. Clearly, this involves a potentially significant degree of currency risk for creditors.
Disbursements to creditors must be reported back to IBRA by the relevant bank, which must include signed confirmation letters from the relevant creditor. The confirmation letters include an acknowledgment of receipt, as well as an assignment of rights with respect to the liability from the creditor to IBRA.
In the case of a dispute between a bank and its creditor, the creditor is permitted to file a request directly with IBRA (together with original supporting documentation). It seems that IBRA will be entitled to decide whether the liability in question is valid, and whether it is covered by the State Guarantee. However, the Guidelines contain no provisions affording creditors an opportunity to make representations to IBRA or to respond to assertions made to IBRA by the relevant bank.
Clearly, the litmus test of the Indonesian State Guarantee program will be its practical operation. The relatively straightforward procedures detailed in the Guidelines are helpful to creditors. There are, however, potential hazards created by the exceptions to the State Guarantee program, notably the possibility that certain participants, such as bank directors and substantial shareholders, will fail to participate in the process. Creditors may need to await the resolution of these possible pitfalls before they can rely with assurance on the effectiveness of the State Guarantee program.