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Second Development Finance Project (Loan 1223-INO) in Indonesia by htt39969

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									Project Performance Audit Report




PPA: INO 26194
(Final)




Second Development Finance
Project (Loan 1223-INO)
in Indonesia




December 2004




Operations Evaluation Department

valuation Study
                                CURRENCY EQUIVALENTS
                                 Currency Unit – rupiah (Rp)

              At Appraisal        At Project Completion      At Operations Evaluation
              (February 1993)     (July 2001)                (March 2004)
Rp1.00 =      $0.00048            $0.00009                   $0.00012
 $1.00 =      Rp2,067             Rp11,400                   Rp8,530

                                      ABBREVIATIONS
ADB           –    Asian Development Bank
AMDAL         –    Analisis Mengenai Dampak Lingkungan
BALI          –    Bank Bali
BDNI          –    Bank Dagang Nasional Indonesia
BI            –    Bank Indonesia
BII           –    Bank Internasional Indonesia
CAMEL         –    capital adequacy, asset quality, management, earnings, and liquidity
CAR           –    capital adequacy ratio
DANAMON       –    Bank Danamon Indonesia
DFI           –    development finance institution
DFL I         –    Development Finance Loan
DFL II        –    Second Development Finance Loan
FX            –    foreign exchange
GDP           –    gross domestic product
IBRA          –    Indonesian Bank Restructuring Agency
IRM           –    Indonesia Resident Mission
LIBOR         –    London interbank offered rate
LIPPO         –    Lippo Bank
MOF           –    Ministry of Finance
NIAGA         –    Bank Niaga
NPL           –    nonperforming loan
OEM           –    operations evaluation mission
PCR           –    project completion report
PERMATA       –    Bank Permata
PFI           –    participating financial institution
PPAR          –    project performance audit report
RRP           –    report and recommendation of the President
SMEEDP        –    Small and Medium Enterprise Export Development Project
TA            –    technical assistance

                                           NOTES
       (i)    Throughout project implementation, the fiscal year (FY) of the Government
              ended on 31 March. Since FY2000, the FY has ended on 31 December.
       (ii)   In this report, “$” refers to US dollars.



Director General, Operations Evaluation Department               :       Bruce Murray
Director, Operations Evaluation Division 2                       :       David Edwards
Evaluation Team Leader                                           :       Tetsu Ito

                        Operations Evaluation Department, PE-653
                                          CONTENTS
                                                                                            Page

BASIC DATA                                                                                      iii
EXECUTIVE SUMMARY                                                                               iv

I.     BACKGROUND                                                                               1
       A.   Rationale                                                                           1
       B.   Formulation                                                                         1
       C.   Purpose and Outputs                                                                 2
       D.   Financing Arrangement                                                               3
       E.   Completion and Self-Evaluation                                                      3
       F.   Operations Evaluation                                                               4

II.    PLANNING AND IMPLEMENTATION                                                              4
       A.    Formulation and Design                                                             4
       B.    Achievements of Outputs                                                            5
       C.    Organization and Management                                                       11

III.   ACHIEVEMENT OF PROJECT PURPOSE                                                          12
       A.    Performance Indicators                                                            12
       B.    Project Outcomes                                                                  13
       C.    Sustainability                                                                    14

IV.    ACHIEVEMENT OF OTHER DEVELOPMENT IMPACTS                                                15
       A.    Socioeconomic Impact                                                              15
       B.    Environmental Impact                                                              15

V.     OVERALL ASSESSMENT                                                                      15
       A.   Relevance                                                                          15
       B.   Efficacy                                                                           15
       C.   Efficiency                                                                         15
       D.   Sustainability                                                                     16
       E.   Institutional Development and Other Impacts                                        16
       F.   Overall Project Rating                                                             16
       G.   Assessment of Executing Agencies and Asian Development
               Bank Performance                                                                16

VI.    ISSUES, LESSONS, AND FOLLOW-UP ACTIONS                                                  17
       A.    Key Issues for the Future                                                         17
       B.    Lessons Learned                                                                   18
       C.    Follow-Up Action                                                                  20



Tetsu Ito, evaluation specialist (team leader) was responsible for the preparation of this report,
and conducted document reviews, key informant interviews, and guided the fieldwork
undertaken by Barbara Palacios, evaluation officer, and two domestic consultants, Vita Diani
and Setiawan Noviarto.
ii


APPENDIXES
1.  Methodology of Data Collection on Subprojects                                     21
2.  Compliance Status of Key Loan Covenants on Participating Financial Institutions   25
3.  Characteristics of Subloans                                                       27
4.  Overview of Subprojects                                                           29
5.  Profile of Bank Permata (Formerly Bank Bali)                                      32
6.  Profile of Bank Internasional Indonesia                                           39
7.  Profile of Bank Danamon                                                           46
8.  Profile of Bank Lippo                                                             50
9.  Profile of Bank Niaga                                                             54
10. Profile of Bank Dagang Nasional Indonesia                                         60
11. Statistical Data                                                                  62
                                       BASIC DATA
                      Second Development Finance Project (Loan 1223-INO)

Project Preparation and Institution Building

 TA               Technical Assistance Name                    Type      Person-       Amount       Approval
 No.                                                                     Months        ($’000)         Date
1753      Review of the Banking System                        PPTA        4.00           100       17 Sep 1992
1755      Review of the Manufacturing Export Sector           PPTA        3.75           100       23 Sep 1992

Key Project Data ($ million)
                                                                As per ADB                              Actual
                                                              Loan Documents

Total Project Cost                                                    200.0                                  75.4
ADB Loan Amount/Utilization                                           200.0                                  75.4
ADB Loan Amount/Cancellation                                                                                124.6

Key Dates                                                  Expected                              Actual

Fact-Finding                                                                         11–26 Nov 1992
Appraisal                                                                          26 Jan–5 Feb 1993
Loan Negotiations                                                                     22–24 Feb 1994
Board Approval                                          30 Mar 1993                      30 Mar 1993
Loan Agreement                                                                            2 Aug 1993
Loan Effectiveness                                        2 Nov 1993                     14 Mar 1994
First Disbursement                                                                        8 Sep 1994
Loan Closing                                              2 Nov 1997                     14 Mar 1999
Months (effectiveness to completion)                         48                              60

Borrower                      Republic of Indonesia
Executing Agencies            Bank Bali
                              Bank Dagang Nasional Indonesia
                              Bank Danamon
                              Bank Ekspor Impor Indonesia
                              Bank International Indonesia
                              Bank Negara Indonesia
                              Bank Niaga
                              Lippo Bank
                              Panin Bank

Mission Data                                                     Number of             Person-Days
                                                                 Missions

Fact-Finding                                                            1                   32
Appraisal                                                               1                   66
Project Administration
    Inception                                                           1                   13
    Review                                                              9                   41
    Project Completion                                                  1                   71
    Operations Evaluation                                               1                   62
ADB = Asian Development Bank, PPTA = project preparatory technical assistance, TA = technical assistance.
                                        EXECUTIVE SUMMARY

        The Asian Development Bank (ADB) approved the Second Development Finance Loan
(DFL II) to Indonesia for $200 million on 30 March 1993, 15 months before the completion of the
Development Finance Loan. However, only $75.4 million of DFL II was disbursed to support 50
subprojects, while the remaining $124.6 million was canceled. The loan closed in March 1999,
16.5 months later than expected.

        DFL II, which was structured as an umbrella credit line to the Government, aimed to
develop export industries, and improve financial intermediation. The Government was to relend
the loan proceeds in dollars to nine participating financial institutions (PFIs). Export-oriented
private enterprises were eligible for subloans. DFL II was expected to finance 100 subprojects,
generating $350 million in exports (or $1.75 million per subloan of $1 million) per year and
creating 35,000 jobs (or 175 jobs per subloan of $1 million).

         Throughout implementation of DFL II, which became effective on 14 March 1994,
utilization was slower than expected. The Operations Evaluation Mission (OEM) attributed this
to (i) cumbersome subloan approval and disbursement procedures, and strict subproject criteria;
(ii) high relending rates relative to market interest rates for foreign exchange-denominated
loans; and (iii) the Asian financial crisis that began in 1997 and the subsequent bank
restructuring, which led to sluggish lending by PFIs. Three PFIs canceled their participation due
to the first two reasons. One PFI ceased operations following the deterioration of its portfolio
during the financial crisis.

        Of the 50 subloans, 32 were repaid to the PFIs on schedule or early; ten were
transferred to Indonesia Bank Restructuring Agency (IBRA); five are still active (of which four
were rescheduled); two were written off; and one remains on a PFI’s account as a
nonperforming loan (NPL).

       The OEM visited 12 subborrowers, of which ten had repaid on schedule or early and the
subloans of two had been transferred to IBRA. Eleven of these subprojects generated additional
exports of around $15.5 million ($0.88 million per subloan of $1 million) per year and created
1,600 jobs (or 91 jobs per subloan of $1 million). An estimated 90% of these project benefits
have been sustained.

       DFL II's contributions to financial intermediation were considered marginal based on five
observations by the OEM. First, the financial covenants added little value to the PFIs' operations,
because of weaknesses in their selection and enforcement. Second, no technical assistance was
attached to DFL II. Third, the loan’s relatively high interest rate was a financial burden for the PFIs.
Fourth, three of the nine PFIs withdrew their applications, and one closed its operations during
implementation. Fifth, the Project was not designed to catalyze improvements in financial
intermediation at a national level.

         DFL II was assessed as partly relevant. The development of export industries, one of the
two project objectives, was consistent with Indonesia's Five-Year Plan for FY1995–1999. This
continues to be an important element of the Government's development strategy. However, the
modality of ADB’s operations was not harmonized well with this objective. This was due to the
weak diagnostic assessment under two project preparatory technical assistance grants, which
failed to provide a comprehensive survey of credit market conditions. The other objective of the
project—to improve the financial intermediation process—should have specified what aspects of
financial intermediation would be targeted. These factors undermined the relevance of DFL II.
                                                                                                     v


         DFL II was assessed as less efficacious. The contribution of DFL II to the development of
export industries was marginal relative to the country's total exports, while its effect on financial
intermediation was not discernible. Weaknesses in design, aggravated by unfavorable market
conditions, were responsible for these discouraging results. The depreciation of the rupiah during
the financial crisis that started in 1997 affected many subborrowers positively because their
revenues in dollars exceeded their costs in rupiah. However, the PFIs' portfolios also deteriorated
significantly due to the crisis, bringing their investment lending to a standstill in 1998–2000. DFL II
had little activity during this period.

         DFL II was assessed as inefficient, for four main reasons. First, DFL II was underutilized
significantly, with only $75.4 million of the approved $200 million loan disbursed. Its revolving fund
was not utilized, thus generating no cash to offset the PFIs' interest payments. Second, DFL II
was costly to the PFIs, especially as the spread between ADB's pool-based dollar interest rate
and the London interbank offered rate widened from 2001 onwards. Third, neither the
Government nor ADB managed project-related information effectively and efficiently during and
after the crisis. Fourth, the OEM estimates that the project benefits in terms of increased exports
and jobs created per subloan of $1 million were far below what had been expected at the time of
appraisal.

       Sustainability of DFL II was assessed as likely. Nine of 12 subborrowers visited by the
OEM had maintained the higher export earnings that resulted from DFL II. The contribution of
DFL II to institutional development and other impacts was assessed as negligible, given that it
created fewer-than-expected jobs and contributed marginally to institutional strengthening of the
PFIs.

       Overall, DFL II was rated partly successful.

         Given the small number of subprojects, their performance did not reflect necessarily a
growth trend or the export potential of the respective subsectors. Rather, their experience
illustrated efforts by firms to improve competitiveness. Successful subprojects under DFL II
demonstrated the importance of innovation in organizational arrangement (e.g., marketing
contract, vertical coordination, and strategic alliance) and knowledge management (in product
design, production technology, consumer trends, marketing channels, and financial instruments)
in maintaining competitiveness in the export market. Firms’ capabilities in these areas were
considered crucial, particularly in the context of developing economies, where institutions for trade,
contract enforcement, communication, and information disclosure are weak. In this regard, the
Government’s export promotion policy should be designed to complement the weak market
institutions and support firms’ efforts to reduce transaction costs.

         Several aspects of the financial restructuring of the banking sector have been completed.
Major banks (including the remaining five PFIs) have (i) restored their capital adequacy to above
8%, (ii) brought their NPLs down to manageable levels, and (iii) become highly liquid and ready to
promote lending. The five PFIs posted profits during the first 6 months of 2003. IBRA sold its
majority stakes in four PFIs to foreign strategic investors, and recently launched the divestment of
the remaining one. The OEM reported that these PFIs have pursued good corporate governance,
and major operational reforms are underway. Their financial recovery has been noteworthy given
the depth of the financial crises that affected Indonesia. OEM also noted that the high spreads
between deposit and lending rates give banks some space to restructure their operations, though
such spreads cannot be expected to last as competition for new lending business increases. From
this perspective, the improvement in operational efficiency should be a priority for many banks.
vi


The OEM believes that improving banks' management and credit information systems would be
an important step in making their operations more efficient.

        The OEM noted that Indonesia’s legal framework, and its enforcement mechanism, are
not conducive to creating a sound financial system. A lack of transparency was evident in the
resolution of a couple of subloans under DFL II. The OEM also underscored the need to assess
the potential risk of moral hazard in the credit market following IBRA’s accomplishments in NPL
resolution in recent years.

       At appraisal of a development finance institution (DFI) loan, such as DFL II, a demand
assessment should be accompanied by a thorough review of market interest rates in a local
currency, interest rates and exchange rate volatility, liquidity position of banks, and the degree of
currency and maturity mismatches on banks' balance sheets. If a local currency is pegged to a
hard currency, the increased volatility of the interest rate for a local currency loan, as well as a
change in the risk profile of a foreign exchange loan on the peg being abandoned, should be
recognized as risk factors.

        In considering financial covenants for PFIs under a DFI loan, the central bank’s prudential
regulations, their enforcement status, and PFIs' corporate governance and risk management
system should be thoroughly reviewed. Based on such a review, financial covenants should be
included that complement PFIs' risk management and prudential guidelines. Compliance with the
covenants should be monitored regularly, and treated as a condition for ADB's approval or
confirmation of subloans. In this way, an enforcement mechanism for financial covenants can be
created.

        In 1994, ADB introduced the market-based lending (MBL) window using the London inter-
bank offered rate as the base interest rate for financial intermediary and private sector borrowers.
However, there were no guidelines governing the conversion of the pool-based interest scheme to
the MBL window, and therefore, eligibility criteria and approval procedures of the conversion were
not available. Presumably for this reason, no DFI loan was actually converted to the MBL from the
pool-based window. Moreover, many ADB project officers who handled DFI loans were not fully
aware of the merit of the MBL window, undermining the benefit of this innovation. As regards the
DFL II, the negative consequence of not converting its interest rate scheme to the MBL, in terms
of PFIs' extra interest payments as well as underutilization of the loan, could not be overstated.

        One of the common features of DFI loans was that their loan/project agreements did not
specify the type of data to be collected and the timing of their collection for the purpose of
monitoring and evaluating subproject benefits. Instead, their loan/project agreements broadly
assured ADB's right to "reasonably" request information relating to the accomplishment of the
project purpose. In most cases, ADB did not properly exercise this retained right. PFIs, on their
part, did not collect the adequate information on subproject benefits. These experiences suggest
the need for ADB to consider an alternative approach in creating a functional monitoring and
evaluation framework. One possibility is to specify required data and timing of data collection in a
loan/project agreement. Another option is to select sample subprojects in case their number is
large. What is important is a pragmatic solution for the purpose of developing an efficient and
effective monitoring and evaluation framework of a DFI loan in a way that does not impose
excessive administrative costs on the DFI.

       Relending agreements between a government and PFIs under a DFI loan should include
a prepayment clause similar to the one in a loan agreement between a government and ADB.
This would minimize the holding cost of the fund through the recovery of subloan principals, and
                                                                                              vii


mitigate the risk of the revolving fund becoming a financial burden for PFIs due to changes in
market conditions.

         The Asian financial crisis brought out governance issues regarding banks and corruption.
ADB should continue to address these issues in conjunction with the ongoing operations. At the
time that allegation of corruption surfaced, ADB would have been faced with a major public
relations challenge if there had been widespread public knowledge that ADB had lent money to
the concerned financial institutions. The lessons of this experience is that ADB's reputation and
credibility would be damaged if it lends money to institutions where weak governance could lend
itself to systemic risk of corruption. ADB must develop more stringent assessment procedures to
avoid becoming involved in such institutions.

       The Ministry of Finance (MOF) and Bank Indonesia should discuss with the PFIs possible
arrangements for prepaying the remaining balance under DFL II to MOF. MOF should inform the
Indonesia Resident Mission of the outcome by mid-2005. The Indonesia Resident Mission should
monitor the progress of this discussion.



                                                           Bruce Murray
                                                           Director General
                                                           Operations Evaluation Department
                                          I.       BACKGROUND

A.        Rationale

1.      At the beginning of the Fifth Five-Year Development Plan (REPELITA V FY1989–1994),
the Government of Indonesia initiated a comprehensive financial sector reform program
(PAKTO), encompassing deregulation of the banking sector and the capital market. As a result,
the financial system grew rapidly and competition among banks increased from 1988 to 1994.
The number of commercial banks rose from 111 to 240, while the assets of commercial banks
increased from 40% of gross domestic product (GDP) to 62%. Private banks' share of bank
assets doubled from about 25% to 50%. The market capitalization of the Jakarta Stock
Exchange rose from less than 1% of GDP to 27%. These developments fueled the expansion of
the manufacturing sector, which grew at more than 10% per year during the period.

2.     The Asian Development Bank (ADB), through its operational strategy for Indonesia,
supported the financial and manufacturing sectors during the implementation of REPELITA V.1
The Financial Sector Program 2 supported PAKTO and subsequent reforms, while the
Development Finance Loan (DFL I)3 established a credit line to expand term lending to the
growing manufacturing sector.

3.      The Report and Recommendation of the President (RRP) for the Second Development
Finance Loan (DFL II)4 indicated that sustained growth in Indonesia's non-oil exports would be
essential to reduce its current account deficit and strengthen its debt-service capability. This
required manufacturing investments supported by long-term loans, preferably in foreign
exchange (FX) as exporters would be able to hedge against currency risk associated with FX
loans, which generally carried lower interest rate than rupiah loans. It considered that long-term
FX loans for financing investments were in short supply, mainly because of a continued short-
term orientation of the financial system. Proposed participating financial institutions’ (PFI)
pipeline of export-oriented private manufacturing projects showed capital goods import
requirements of about $600 million, with further funding expected in 1993–1995. The $200
million loan under the Project was to provide FX for financing part of these investment
requirements.

B.        Formulation

4.      Encouraged by the satisfactory implementation of the Financial Sector Program and DFL I,
and their complementarity, the Government requested further assistance for the financial sector in
the early 1990s. Consequently, ADB extended the Second Financial Sector Program5 and two
project preparatory technical assistance (TA) grants (TA 1753-INO and TA 1755-INO)6 in
preparation for extending another credit line in 1992. On the basis of these TAs, as well as the

1
    ADB. 1987. Operational Strategy Study for Indonesia. Manila; and ADB. 1989. Bank Operational Strategy for
    Indonesia. Manila.
2
    ADB. 1998. Financial Sector Program. Manila (Loan 938/939[SF]-INO for $150 million, approved on 20 December
    1988).
3
    ADB. 1989. Development Finance Loan. Manila (Loan 981-INO for $200 million, approved on 31 October 1989).
4
    ADB. 1993. Second Development Finance Loan. Manila (Loan 1223-INO for $200 million, approved on 30 March
    1993).
5
     ADB. 1992. Second Financial Sector Program. Manila (Loan 1160-INO for $250 million, approved on 19 March
    1992).
6
    ADB. 1992. Review of the Banking System. Manila (TA 1753-INO for $100,000, approved on 17 September
    1992); and ADB. 1992. Review of the Manufacturing Export Sector. Manila (TA 1755-INO for $100,000,
    approved on 24 September 1992).
2


satisfactory utilization of DFL I,7 a fact-finding mission was conducted in November 1992 and an
appraisal mission in February 1993. Issues in the project preparatory TAs are discussed in
para. 15.

C.       Purpose and Outputs

5.     The objectives of DFL II were to develop export industries, and improve financial
intermediation.

6.       DFL II, which was structured as an umbrella credit line to the Government, aimed to fill
the gap in the long-term FX credit market.8 The Government was to relend the loan proceeds in
dollars to nine PFIs. Two state-owned PFIs, Bank Negara Indonesia and Bank Ekspor Impor
Indonesia, were to receive the funds directly from the Government. Bank Indonesia (BI), the
central bank, was to be the intermediary for the loans to seven privately owned PFIs—Bank Bali
(BALI), Bank Dagang Nasional Indonesia (BDNI), Bank Danamon (DANAMON), Bank
International Indonesia (BII), Lippo Bank (LIPPO), Bank Niaga (NIAGA), and Panin Bank. 9
BDNI, DANAMON, and BII also participated in DFL I. At approval of DFL II, these PFIs
represented a mix of the better state-owned and private banks with (i) significant size (about
40% of commercial banks’ assets), (ii) extensive branch networks (1,215 branches), and
(iii) experience in administering credit lines from external sources.

7.      Export-oriented private manufacturers were eligible for subloans. To qualify, borrowing
enterprises were expected to generate at least 50% of annual sales value attributable to the
investment financed by the subloans from exports. Direct FX expenditures10 between $100,000
and $4 million were eligible for financing. The free limit11 for subloans was $1 million, an amount
that was subsequently raised to $3 million (footnote 20). Subprojects were expected to comply
with national environmental laws and regulations, under which an environmental impact
analysis—or Analisis Mengenai Dampak Lingkungan (AMDAL)—was required for industrial
projects.12

8.      DFL II was expected to assist about 100 subprojects with investment of about $700
million, generating exports of approximately $350 million per year and creating about 35,000
new jobs.



7
   At the time of DFL II’s approval, 89% of DFL I had been disbursed. DFL I was closed 15 months after DFL II was
   approved.
8
   The consultant report of TA 1753-INO pointed out that the financial system in Indonesia oriented toward the short
   term: "many short-term deposits and loans were rolled over and over and turned out (ex post) to be quite long-term
   deposits and loans." The report also pointed out banks had difficulties obtaining financing for investment credits for
   exporters to buy capital goods, because long-term FX financing was not readily available in the market.
9
   The two state-owned PFIs and Panin Bank subsequently withdrew their application (para. 20), and BDNI
   suspended its operations and transferred its assets and liabilities to Indonesian Bank Restructuring Agency (IBRA)
   in 1998 (paras. 21 and 25).
10
   For local "off-the-shelf" procurement of imported goods or the local procurement of goods assembled or
   manufactured locally with imported components—where the FX cost cannot be accurately determined—25% of the
   civil works cost and 50% of the cost of the goods were also eligible for financing under the DFL II.
11
   Before requesting a withdrawal for subloans above the free limit from the DFL II fund, the PFIs were required to
   submit an application to ADB, with detailed information on subprojects, for approval. For subloans below the free
   limit, the PFIs were required to submit the simplified application documents for ADB's confirmation.
12
   Applications for subloans above the free limit were to include the English translation of the AMDAL certificate. For
   subloans below the free limit, the PFIs were to indicate the AMDAL status of subprojects at application, and were
   to submit the English translation of AMDAL documents only upon ADB's request.
                                                                                                        3


D.         Financing Arrangement

9.      On 30 March 1993, ADB approved DFL II for $200 million from ADB's ordinary capital
resources. The loan had a maturity of 15 years, including a grace period of 4 years, with the
interest rate determined by ADB's pool-based variable interest rate in dollars (6.63% at
approval). The Government was to relend the loan proceeds, in dollars, to the PFIs for 15 years,
including a grace period of 4 years, at ADB's lending rate to the Government plus 0.5%.

10.     The PFIs were to onlend the loan proceeds of DFL II, also in dollars, to export industries
in the private sector to finance the FX costs of their investments. Unlike DFL I, the subborrowers
under DFL II were to carry the FX risk.13 The required export-orientation of subprojects was
expected to help subborrowers neutralize the FX risk, and to make DFL II self-sufficient in FX.
Subloans were to be between $100,000 and $4 million. They were to be repaid to the PFIs
within 8 years, including a grace period not exceeding 2 years, at the market interest rate. The
PFIs were to recycle the funds from the repayment of the subloans to eligible enterprises,
pending the PFIs’ repayment to the Government. The Government was to pay ADB a
commitment charge on ADB's standard terms for ordinary capital resources loans. The PFIs
were to reimburse the Government for the commitment charge in proportion to their unutilized
allocations.

11.      The $200 million in loan proceeds were allocated equally among the PFIs for the first
year. Uncommitted allocations a year after loan effectiveness were to be pooled and opened for
utilization on a first-come, first-served basis, subject to a $40 million limit on commitments to
any PFI. The closing date for the submission of subloan applications for approval and
authorization for withdrawal was 3 years after loan effectiveness, and the closing date for
disbursements was 4 years from the same date.

E.         Completion and Self-Evaluation

12.     DFL II closed on 14 March 1999, 16.5 months later than projected. ADB approved two
extensions—one from November 1997 to March 1998, and the other from March 1998 to March
1999. The project completion report (PCR), which was circulated on 11 April 2002, rated DFL II
as unsuccessful, because the Project was inefficacious and inefficient with little institutional
impact. The PCR attributed the Project’s poor performance to serious shortcomings in project
design. While the PCR was comprehensive, including visits to subborrowers, its assessment of
project outcomes needs to be reviewed. It did not elaborate on the impact of the financial crisis
of 1997 onwards on the PFIs, subborrowers, and overall project performance.

13.     The PCR recommended that ADB (i) persuade Indonesian Bank Restructuring Agency
(IBRA) to expedite collections on the four subloans of BDNI; (ii) ensure that the five remaining
PFIs comply with the financial covenants of DFL II; (iii) discuss with the Government a time-bound
plan to divest its share in the five PFIs; and (iv) follow-up on the proposed merger of the PFIs with
other commercial banks, and ensure proper collection on the PFIs' outstanding subloans.




13
     Under DFL I, the loan proceeds were relent in rupiah, and the Government shouldered the FX risk.
4


F.       Operations Evaluation

14.     In considering the PCR findings, as well as the subsequent developments in bank sector
restructuring, 14 the Operations Evaluation Mission (OEM) focused on (i) the subprojects'
performance, including the impacts of the financial crisis on them; and (ii) the progress of the
PFIs' restructuring. This project performance audit report (PPAR) incorporates the OEM findings,
observations of concerned ADB staff, and a review of reports and documents related to DFL II.
The draft PPAR was circulated to the Government and within ADB. Comments received were
considered in finalizing the PPAR. Appendix 1 describes the methodology of data collection that
OEM used.

                                 II.      PLANNING AND IMPLEMENTATION

A.       Formulation and Design

15.     The consultant report prepared under TA 1753-INO thoroughly assessed the banking
sector in Indonesia and the operational performance of commercial banks that intended to
participate in DFL II. The report also estimated the capital import requirements of these banks'
104 pipeline projects at $563 million. However, the report did not assess the market interest rate
and its volatility in Indonesia relative to ADB's pool-based interest rate. TA 1755-INO's consultant
report was based mostly on macro- and sector-level data, and the assessment of investment
needs of export industries was weak.15 The assessment should have been based on micro-level
information—possibly from subborrowers of DFL I and companies listed in the DFL II's project
pipeline—to accurately appraise the demand for credit, including its sensitivity to loan pricing and
alternative financing options.

16.     DFL II’s objective to develop export industries, one of the loan’s two key objectives, was
consistent with Indonesia's sixth development plan, or Repelita VI, covering FY1995–1999. The
second objective—to improve the financial intermediation process—should have been more
specific on what aspects of financial intermediation were to be targeted. Given the relatively
rapid growth of Indonesian banks' assets from the end of the 1980s to early 1990s, ADB's
financial sector operations could have focused more on the efficiency and stability of financial
intermediation in addition to volume, liquidity, and profitability.

17.     The project objectives and design were not well harmonized. Relending and onlending in
dollars was well intentioned as a response to exporters’ growing demand for FX loans without
exacerbating the currency and maturity mismatches on banks' balance sheets. The relending
interest rate that DFL II offered, together with various loan requirements, was not competitive
enough to promote utilization of the line of credit. Not only could some large companies borrow
from foreign sources, many other companies could roll over banks’ working capital loans to
access investment funds. Moreover, some banks had the tendency to overlook market risks
because of the stability of the rupiah over many years, and offered FX investment loans with
competitive interest rates without a backup facility such as DFL II. The two project preparatory
TAs did not offer insightful information on these aspects. Furthermore, the RRP assumed that
"any significant fall in dollar lending rates in Indonesia in the near term appears remote, given the

14
   On 10 December 2003, the Government sent a letter of intent to the International Monetary Fund (IMF), marking
   the final review under an extended arrangement with the IMF, which concluded at the end of 2003. In the letter, the
   Government noted that "over the four-year period of the arrangement, macroeconomic stability has been restored,
   the banking system has been recapitalized, and most banks taken over during the crisis have been divested."
15
   The report estimated the investment needs of export industries based on projected export growth and estimates of
   incremental capital output ratios. It did not give the basis of these projections and assumptions.
                                                                                                                 5


shortage of foreign currency resources in the country." This assumption might not have been
realistic given the liberalization of capital account transactions in Indonesia at the time of appraisal.
The diagnostic assessment was inadequate, and the resulting weaknesses in demand projection
and project design undermined the efficacy of DFL II.

18.      The financial covenants of DFL II had some deficiencies (Appendix 2). First, the annual
cash collection ratio is not a performance benchmark commonly used by Indonesian banks.
Consequently, calculation of this ratio caused an administrative burden to PFIs, and the
accuracy of submitted data might have been compromised.16 The delinquency ratio, or other
equivalent indicators commonly used by BI and commercial banks, should have been identified.
Second, limiting group-loan exposure to 50% of equity was too accommodating and did not
reflect international best practice. In fact, BI's prudential guidelines limited group-loan exposure
at appraisal to 30%, which BI subsequently reduced to 20%. 17 Third, the requirement that
earning assets that BI classified as current “at a ratio of at least 95% in 1993” needed to be
clarified. Specifically, the denominator of this benchmark had to be consistent for all PFIs. The
OEM met some PFI representatives that used earning assets, including securities and other
non-loan assets, as the denominator. Other PFIs used only loan assets as the denominator in
accordance with BI's guidelines on loan classification. Fourth, DFL II's covenants should have
included limits on uncovered FX positions18 or some other equivalent benchmark to complement
the banks' market risk management. Fifth, DFL II also should have had covenants on
appropriate provisioning for nonperforming loans (NPLs), as well as on reporting requirements
on provisioning for subloans.

19.       Given that the export-orientation of subprojects was a key element of DFL II, the
requirement that at least 50% of income come from exports could be justified. However,
subproject criteria that ensure that projected net export revenues (considering expenses for
importing raw materials and intermediary goods) would fully cover the repayment of FX
liabilities, including a subloan under DFL II, would have been more prudent.

B.      Achievements of Outputs

        1.       Loan Utilization

20.     DFL II became effective on 14 March 1994, more than 4 months after the target date,
due to the Government’s late submission of legal documents. Utilization of the loan was slower
than expected throughout implementation. In November 1995, the Government requested
cancellation of $56.3 million in allocations that two state-owned PFIs did not utilize. At the same
time, three PFIs requested that their allocations also be decreased, while another asked for an
increase in its allocation. ADB approved the partial cancellation and revised allocation of DFL II
in January 1996 (Table 1). Subsequently, Panin Bank also applied for cancellation of its DFL II
allocation. In July 1998, an additional $53.5 million of the loan was canceled. At loan closing in
March 1999, another $14.8 million was canceled. Only $75.4 million, or about 38% of the
approved loan amount, was disbursed.19



16
   None of the PFIs’ representatives met by the OEM recognized the definition of this indicator.
17
   DFL II Loan Agreement defined the group loan exposure limit as "50%", whereas the RRP noted the limit merely
   "as BI prescribed" without specifying the figure.
18
   BI's prudential guidelines did not include this at approval of DFL II.
19
   The pre-financial crisis cancellations reduced the amount available for disbursement to $143.7 million, of which
   about 52% was disbursed.
6


              Table 1: DFL II Revised Allocation by Participating Financial Institutions
                                       (at end January 1996)
                                                 ($)
                                                         Original            Revised            Change in
              Item                                      Allocation          Allocation          Allocation

              Bank Bali                                  22,222,222          22,222,222                 0
              Bank Danamon                               22,222,222          22,222,222                 0
              Bank Niaga                                 22,222,222          22,222,222                 0
              Lippo Bank                                 22,222,222          10,000,000       (12,222,222)
              Panin Bank                                 22,222,222          12,000,000       (10,222,222)
              Bank Internasional Indonesia               22,222,222          15,000,000        (7,222,222)
              Bank Dagang Nasional Indonesia             22,222,222          40,000,000        17,777,778
              Bank Negara Indonesia                      22,222,222                   0       (22,222,222)
              Bank Ekspor and Impor Indonesia            22,222,222                   0       (22,222,222)

                     Total                             200,000,000a        143,666,666        (56,333,334)a

              Cancellation                                                   56,333,334
          a
           Components do not add up due to rounding off.
         Sources: Asian Development Bank project files.

21.      OEM attributed the slower-than-expected utilization to (i) cumbersome subloan
approval and disbursement procedures, and strict subproject criteria; (ii) high relending rates
associated with ADB’s loan products relative to market interest rates for FX loans; and (iii) the
financial crisis that erupted in 1997 and the subsequent bank restructuring, which led to
sluggish lending by the PFIs. Amendments to the Loan Agreement and project agreements in
April 1996, which simplified the subloan procedures and the eligibility criteria, briefly enhanced
loan utilization.20 The OEM found these amendments appropriate. A major disincentive to loan
utilization was ADB's pool-based dollar interest rate, which was the basis of the relending rate.
Since 1991, the pool-based dollar rate was consistently higher than the international
benchmark rate (Figure 1). Hence, the PFIs asked ADB to consider converting to the interest
rate scheme based on the London interbank offered rate (LIBOR) in 1995.21 This was never




20
   On 16 November 1995, the Government also requested that certain conditions of the loan be relaxed to facilitate
   loan utilization. The major changes were (i) an increase in the free limit from $1.0 million to $3.0 million, (ii) the
   replacement of the full report from the privately owned PFIs with BI’s compliance certificate under BI capital
   adequacy and other performance criteria, (iii) making the environmental compliance approvals a condition for
   subloan effectivity, and (iv) making subborrowers comply with loan covenants on debt-equity and debt service
   coverage ratios within 2 years of commencing new operations, and on the date of loan signing with the PFIs for
   existing clients. These amendments became effective 12 April 1996, upon the signing of all parties concerned.
21
    In 1994, ADB introduced the market-based lending (MBL) window using the LIBOR as the base interest rate
   applicable to financial intermediary and private sector borrowers. However, there were no guidelines (e.g., eligibility
   criteria and approval procedures) governing the conversion of the pool-based interest rate scheme to MBL window.
   Presumably for this reason, no development finance institution (DFI) loan was actually converted to the MBL from
   the pool-based window. In 2001, ADB introduced the LIBOR-based window (LBL) applicable to all borrowers. In
   introducing the LBL window, ADB prepared the detailed conversion guidelines for ongoing loans and actively
   disseminated the merit of this scheme internally and externally. Consequently, four DFI loans converted their
   interest rate scheme from the pool-based to the LBL window.
                                                                                                                                                                                                      7


acted on by ADB. OEM believes that ADB should have pursued this proposal. 22 Another
deterrent to loan utilization was the narrowing interest rate differential between the rupiah and
the dollar in 1994–1996 (Figure 2). A subsequent rise in the rupiah interest rate contributed to
a brief improvement in loan utilization. However, the financial crisis seriously affected the
PFIs' portfolio, resulting in the closure of BDNI in 1998. It also brought investment lending of
the five other PFIs to a standstill in 1998–2000.


                                                          Figure 1: Benchmark Interest Rates (%)
       8.0
       7.0
       6.0
       5.0
       4.0
       3.0
       2.0
       1.0
       0.0
                    D-91


                                   D-92


                                                   D-93


                                                                 D-94


                                                                               D-95


                                                                                             D-96


                                                                                                           D-97


                                                                                                                         D-98


                                                                                                                                       D-99


                                                                                                                                                     D-00


                                                                                                                                                                   D-01


                                                                                                                                                                                 D-02


                                                                                                                                                                                               D-03
             J-91


                           J-92


                                           J-93


                                                          J-94


                                                                        J-95


                                                                                      J-96


                                                                                                    J-97


                                                                                                                  J-98


                                                                                                                                J-99


                                                                                                                                              J-00


                                                                                                                                                            J-01


                                                                                                                                                                          J-02


                                                                                                                                                                                        J-03
                                                                        ADB Pool-based ($)                                6-month LIBOR ($)

             J = end of June, D = end of December.
             Sources: ADB Treasury Department and International Financial Statistics Yearbook 2003, International
             Monetary Fund.




                                          Figure 2: Annual Average Lending Rate for Rupiah (%)

       35
       30
       25
       20
       15
       10
         5
         0
                1991              1992            1993           1994          1995          1996          1997          1998          1999          2000           2001          2002

        Source: International Financial Statistics Yearbook 2003, International Monetary Fund.




22
     The PFIs proposed conversion to the MBL window in a meeting (chaired by the Ministry of Finance) with the project
     review mission that was fielded in March to April 1995. However, the mission did not agree to this proposal. The
     PCR gives the following reasons: "First, because that conversion necessitated ADB Board approval, which entailed
     a lengthy and time-consuming procedure. Second, ADB expected the loans from commercial sources to become
     more expensive than ADB's pool-based interest rate in the future." The PCR noted that "ADB should have acted on
     the Government and PFI request"; the OEM could not verify if the Government made a formal request.
8


22.     The abrupt drop in LIBOR in 2001 caused the spread between ADB's pool-based dollar
interest rate and LIBOR to widen. The holding cost of the funds generated from the recovery of
subloan principals (or the revolving fund) became a financial burden for the PFIs. At the OEM,
the five PFIs’ receivables from subborrowers totaled $6.4 million, while their combined payables
to BI under DFL II were around $27 million. The balance of more than $20 million, in the
revolving fund, did not generate enough revenue to offset the interest payment. Most PFIs
expressed a desire to prepay the loan to BI. The OEM noted that the relending agreements
between BI and the PFIs did not include a prepayment clause, despite the inclusion of such a
clause in the Loan Agreement between the Government and ADB.23 During the OEM, BI agreed
to discuss this matter with each PFI and the Ministry of Finance (MOF), and inform ADB's
Indonesia Resident Mission (IRM) of the outcome.

        2.       Characteristics and Performance of Subloans

23.     Appendix 3 summarizes the characteristics of the subloans. DFL II financed 50 subloans
for $75.4 million, including 15 subloans totaling $12.0 million (15.9% of the total) through BALI;
14 subloans for $31.1 million (41.2%) through NIAGA; eight subloans for $12.6 million (16.7%)
through BII; eight subloans for $7.9 million (10.5%) through DANAMON; four subloans for $7.8
million (10.4%) through BDNI; and one subloan for $4 million (5.3%) through LIPPO. Of the 50
subloans, eight24 were above the free limit at approval. In terms of disbursements, five subloans
were for $3 million or more, while 20 subloans were for $1 million or below. Ten subloans, or
28.7% of disbursements, had maturities of more than 5 years.

24.     Of the 50 subborrowers, 41 were on the island of Java, four in Sumatra, and the rest in
Sulawesi, Bali, Batam, and Bangka. DFL II's sectoral distribution was 15 subloans for $20.5
million to textiles and garments; 12 subloans for $17.5 million to chemical, rubber, and plastic
products; eight subloans for $13.3 million to processed food and beverage; four subloans for
$5.1 million to metallic mineral; three subloans for $1.2 million to wood products; and eight
subloans for $17.8 million to others (non-metal products, footwear, electronics, printing and
packaging, and fishing nets). Thirty-three subloans were for expansion, 13 were for new
projects, and four were for modernization.

25.     Subborrowers repaid 32 of the 50 subloans to the PFIs on schedule or early. Ten,
including four under BDNI, were transferred to IBRA;25 five are active (of which four were
rescheduled); two were written off; and one remains on a PFI’s account as an NPL (Appendix 4).

26.     OEM obtained some descriptive information on six subborrowers that failed to repay
their subloans on schedule. Four of these subborrowers were hurt by the financial crisis: two
were suppliers of construction materials, mainly for the domestic property market; one was a
textile exporter that relied heavily on imported raw materials; and one was a glass products
exporter that benefited from the depreciation of the rupiah, but was harmed by the financial
problems of affiliated companies. The problems of the remaining two subborrowers were
unrelated to the financial crisis: one was an exporter of mushrooms, which rode the temporary
boom in the export market; the other was an exporter of stamp metal components for electronic
equipment, which suffered from the global decline in demand.


23
   ADB reviewed the draft relending agreement but did not suggest to the Government that a prepayment clause be
   included in the agreement.
24
   Of the eight subloans, seven were approved prior to the amendment of the free limit on 12 April 1996.
25
   IBRA completed its tasks and closed its operations in February 2004. IBRA's remaining assets are being
   transferred to a transitional government agency.
                                                                                                                       9


27.     OEM confirmed that 44 subborrowers were still operational. Of the remaining six
subborrowers, two ceased operations, one is in litigation, and three were not accessible. Overall, this
is good performance, given the impact of the Asian financial crises on the Indonesian economy.

           3.       Performance of Participating Financial Institutions

28.     Appendixes 5–10 describe the six PFIs' organizational performance in complying with the
financial covenants, as well as their management of subloans under DFL II. The findings are
summarized in paras. 29–30.

                    a.       Before the Financial Crisis

29.     The combined assets of the six PFIs represented 21.3% of commercial banks’ assets as
of the end of 1996. From 1991 to 1996, their assets grew between 251% (BALI) and 521%
(DANAMON). By comparison, the growth of all commercial banks' assets was 250% in that
period. From 1994 to 1996, the six PFIs had returns on assets of more than 1.0%, except for
NIAGA in 1994, and DANAMON in 1995. The OEM confirmed that BI had rated NIAGA and BII as
sound based on its CAMEL26 rating system for 1993–1996. However, the OEM could not confirm
the ratings for BALI, DANAMON, LIPPO, and BDNI in 1993–1996. The capital adequacy ratios
(CAR) of all PFIs were above 8%, in accordance with BI's guidelines for this period. At least 97%
of gross loan assets for 1995–1996 of the five PFIs were classified as current. Since Indonesian
banks did not commonly use the collection ratio as a portfolio performance benchmark, only two
PFIs could offer information in this area. BALI and NIAGA kept single loan exposure below 20% of
equity, and group exposure below 50% during the period. BII, DANAMON, and LIPPO could not
confirm this information. As such, most PFIs could confirm only partial compliance with the
financial covenants of DFL II before the crisis period.27 This observation highlighted the weak
enforcement mechanism of the covenants and their marginal contribution, if any, to the
operational performance of the PFIs.

                    b.       During and After the Financial Crisis

30.     Box 1 summarizes the chronology of the PFIs’ restructuring. Predictably, the financial
covenants meant less to the PFIs during the crisis. The financial crisis seriously affected the six
PFIs' loan portfolios, resulting in negative CARs. Consequently, IBRA decided to liquidate BDNI
and take over the management of all other PFIs, except LIPPO, for varying periods. In the
process of restructuring, the remaining five PFIs transferred part of their NPLs to IBRA in
exchange for a capital injection. DANAMON completed a merger with nine banks in 2000, and
BALI merged with four banks under the new name Bank Permata (PERMATA) in 2002. These
five PFIs have been recovering financially, allowing them to resume lending operations, though
the pace of recovery varies. At the end of 2002, net NPLs of BII, PERMATA, and NIAGA were
negative, while those of DANAMON and LIPPO were slightly positive. The risk weighted CAR of
the five banks was above 8%, as each posted profits during the first 6 months of 2003. The
combined assets of the five PFIs represented 14.4% of commercial banks’ assets as of the end
of 2002. IBRA divested its majority share in BII, DANAMON, LIPPO, and NIAGA to foreign
strategic investors. In February 2004, IBRA launched the divestment of PERMATA.



26
     CAMEL stands for capital adequacy, asset quality, management, earnings, and liquidity.
27
     The PCR noted that four of the six PFIs did not submit long audited reports; five PFIs delayed their regular reports
     to ADB; three PFIs did not issue long-term bonds by December 1995; and two did not disclose BI’s CAMEL reports
     to ADB. This performance also represented partial compliance with the related loan covenants.
10




           Box 1: Chronology of Restructuring of the Participating Financial Institutions
 April 1998
 • Indonesia Bank Restructuring Agency (IBRA) announces the takeover of Bank Danamon
     (DANAMON) and Bank Dagang Nasional Indonesia (BDNI), together with four other private banks
     and Bank Exim. These seven banks had borrowed more than Rp2 trillion (15.6% of banks
     liabilities) and received more than 72% of liquidity support from Bank Indonesia (BI).

 August 1998
 • Among the six private banks, the assets of BDNI, together with two other banks, are frozen and
    their deposits transferred to designated state banks.
 • DANAMON is to be recapitalized to act as a bridge bank for a merger with other private banks.

 March–July 1999
 • The Government announces that nine banks, including Bank Internasional Indonesia (BII), Bank
    Lippo (LIPPO), Bank Niaga (NIAGA), and Bank Bali (BALI), are eligible for the recapitalization
    program. The Government offers these banks’ shareholders the option to inject 20% of the new
    capital required to attain a capital adequacy ratio (CAR) of 4% by 20 April. Seven, including BII
    and LIPPO, meet this requirement. NIAGA’s and BALI’s shareholders fail to meet this condition,
    and IBRA takes over these banks.
 • BII, LIPPO, and DANAMON are recapitalized with Government bonds in exchange for transferring
    bad assets to IBRA.

 December 1999
 • DANAMON completes a merger with another bank.

 May 2000
 • NIAGA is recapitalized with Government bonds in exchange for the transfer of its bad assets to
    IBRA.

 July 2000
 • DANAMON completes a merger with eight banks, supported by the Government’s capital
     injection.

 October 2000
 • BALI is recapitalized with Government bonds in exchange for the transfer of its bad assets to
    IBRA.

 July 2001
 • IBRA takes over BII due to a breach of BI’s lending limit and failure to meet the minimum 8% CAR.

 July 2002
 • BII is recapitalized further through outright issue, in which IBRA acts as a stand-by investor.

 September 2002
 • Supported by the Government’s capital injection, BALI completes a merger with four banks to form
    Bank Permata (PERMATA).

 2003–2004
 • BII, DANAMON, NIAGA, and LIPPO complete the divestment of their majority shares to foreign
    strategic investors.
 • IBRA launches the divestment of PERMATA.
                                                                                                                    11


31.     Allegation of corruption and the political scandal were associated with BALI. The scandal
evolved around the payment of commission by a BALI founder to a firm run by a leading figure
in the ruling Golkar party in 1999, delaying recapitalization and merger of BALI. The commission
was allegedly paid to recover non-performing loans (NPLs) owed to BALI by three insolvent
banks, which were later transferred to IBRA. The audit report on this scandal that was made
public in November 1999, pointed to fraud, noncompliance, irregularity, misappropriation, undue
preferential treatment, concealment, bribery and corruption during the processing and payment
of BALI's claims.28 Several Government officials and directors of BALI were prosecuted over this
scandal. However, only one party was found guilty, the former deputy chairman of IBRA.

C.       Organization and Management

32.   The amendments to the Loan Agreement and project agreements in April 1996 to
enhance the loan utilization were appropriate. However, it was inappropriate for ADB not to
have pursued the conversion of DFL II's interest rate scheme from one that was pool-based to
LIBOR-based despite the request from the PFIs.

33.     The PFIs selected subprojects in accordance with the eligibility criteria stipulated in the
Loan Agreement, though in some cases their actual export-orientation was doubtful.29 A review of
the project files confirmed that the PFIs submitted subloan application documents for ADB's
approval and/or authorization, but most did not provide the bases for their projected financial
internal rate of return. Most application documents included the AMDAL certificate, or indicated
the AMDAL status of subprojects. However, the OEM found some subborrowers that did not have
the AMDAL certificate before subloan approval, despite what was noted in the subloan application
documents the PFIs submitted.30

34.     A review of project files confirmed that the reporting by the Government and the PFIs, as
well as ADB's monitoring of project implementation were generally satisfactory before the
financial crisis. The project files do not include correspondence between the Government and
ADB on (i) IBRA’s takeover of the five PFIs, (ii) the recapitalization of the five PFIs, (iii) the
transfer of subloans of four PFIs under DFL II to IBRA, (iv) the liquidation of BDNI, (v) the
merger of DANAMON, (vi) the merger and renaming of BALI, (vii) the divestment of four PFIs,
and (viii) the financial arrangement between the Government and IBRA for 10 subloans
transferred to IBRA. This indicates weak project management by ADB during and after the




28
    The media questioned the appropriateness of donors' supervision of the rescue package in support of bank
   restructuring during the financial crisis, in relation to this scandal. In response, the IMF, World Bank, and ADB, as
   key contributors to the rescue package, called for a thorough investigation of this scandal. The IMF and World
   Bank formally suspended their support until the release of the external auditor's report, while ADB expressed its
   disappointment over this scandal. Under intense international pressure, the audit report was finally made public.
   Based on the audit report, the IMF official stressed the need for reforms at IBRA and BI.
29
   For instance, the subloan application documents for two did not give the bases for their overly optimistic
   projections of export earnings. These subborrowers were not able to achieve the export projections.
30
   Of the 12 subborrowers that OEM visited, three noted that they did not have to go through the AMDAL process.
   For two of these, the application documents from BALI indicated that the subprojects went through the AMDAL
   process. As for the other, ADB requested BII to ensure that the AMDAL certificate would be a condition for loan
   withdrawal. It appears that BII did not comply with this request.
12


financial crisis. Overall, ADB's management of information was inappropriate, 31 and its
subproject visits during implementation was inadequate.32

35.     Four subloans under BDNI were transferred to IBRA in 1998. A former IBRA staff member
reported that one subloan was restructured and active during OEM; IBRA sold two others to third-
party investors at a discount; and the remaining one had been fully repaid to IBRA. According to
BI, BDNI’s liabilities under DFL II were transferred to IBRA and blended with other liabilities of
BDNI. Therefore, BI could not identify its outstanding receivables for the four subloans BDNI
extended under DFL II.

36.     The OEM noted that the assets of one subborrower in default that had once been
transferred to IBRA, were returned to its original owner at a discount without going through
transparent legal procedures. OEM suspects that the restructuring of another subloan was not
accompanied by major financial contributions from its owners. These subborrowers do not have
major problems in securing banks' credit. These cases raise issues in governing the resolution
process of NPLs as well as in managing banks' credit information. OEM could not verify if the PFIs
made adequate provisions in a timely manner for subloans that were not repaid on schedule. The
information was insufficient to appraise PFIs' efforts in the recovery of such subloans, especially
those that eventually were transferred to IBRA. The difficulty in tracing such information at OEM
represents part of the weakness in project management.

37.      The OEM noted that most PFIs were not aware of the benefit monitoring and evaluation
clause in the project agreements. The PFIs regard collecting such information as an
unnecessary administrative cost. As a result, they kept little information on subprojects, except
when a business relationship33 continued between the PFI and the subborrower. The general
weakness in the credit information systems of most PFIs made subproject information even
scarcer. Accordingly, the PFIs did not update key performance indicators of subprojects, such
as the financial and economic internal rates of return, and failed to monitor the achievement of
DFL II's objectives and other expected project impacts. The DFL II Loan Agreement was not
explicit about the Government’s role as Borrower (vis-à-vis the PFIs as executing agencies) in
benefit monitoring and evaluation. Hence, BI and MOF appeared to pay little attention to the
project outcome and the development impact.

                               III.     ACHIEVEMENT OF PROJECT PURPOSE

A.       Performance Indicators

38.      The development of export-oriented industries slowed during and after the project. In
addition, the financial crisis that began in 1997 dealt a setback to financial intermediation, which
has not recovered yet. Performance indicators are shown in Table 2, while other relevant
statistical data are presented in Appendix 11.


31
   Nine project review missions totaling 41 person-days were fielded. As regards four of the nine missions, back-to-office
   reports/notes to file/aide memoirs are kept in the project files. Records to confirm the remaining five missions are not
   in the project files. Therefore, the OEM could not independently verify the number of review missions fielded as
   presented in the Basic Data. Five of the nine review missions listed are based on the information given in the PCR.
32
   Project files and the PCR suggest that all the review missions were conducted in one day except the ones
   conducted during 25 November to 23 December 1996 (29 person-days) and 9-13 January 1998 (3 person-days).
   Except for the three subprojects visited during the review mission of November-December 1996, there is no other
   record showing that review missions visited subprojects.
33
   Several PFIs argued that it was unrealistic to include a clause in their commercial loan agreements to ensure benefit
   monitoring after full repayment by subborrowers.
                                                                                                                       13


                                       Table 2: Performance Indicators
                                                      (%)

 Item                                                    1988–1992              1993–1997              1998–2002
 Exports of Industrial Products                            111.8                   52.5                   12.0
 (growth rate in $ value)
 Item                                         1988–1992           1993–1997               1998           1999–2002
 Depositsa/GDP                                 23.8–37.5           39.0–51.5              55.5            49.8–53.0
 Deposit Money Banks’ Claims                  26.0–45.5           48.9–60.8               53.2            20.5–21.9
 on Private Sector/GDP
 Item                                                    1988–1994              1995–1999c             2000–2003
 Interest Rate Spreadb                                    2.2–6.1                 1.8–2.2               3.0–6.4
GDP = gross domestic product.
a
  These include demand, time, savings, and foreign currency deposits.
b
  Based on the difference between the average interest rate offered by banks on 6-month time deposits and the
  average rate charged by banks on loans to the private sector for working capital. The former is weighted by deposit
  amounts, and the latter is weighted by loan amounts.
c
  This excludes 1998 when the interest rate spread was negative 6.9%
Source: Appendix 11.

39.     Textiles and garments led the strong export growth in 1988–1992, while machinery and
mineral products powered the continued export expansion in 1993–1997. Exports of most
industrial products slowed after 1997.

40.     Bank deposits and their claims on the private sector (both as % of GDP) progressively
increased as a percentage in GDP in 1988–1997, with the latter consistently outpacing the
former. External borrowing accounted for most of the difference. The financial crisis reversed
these trends. Deposits decreased from 55.5% of GDP at the end of 1998 to 49.8% at the end of
2002. Banks' claims on the private sector dropped from 53.2% at the end of 1998 to 20–22%
in 1999–2002. The disposal of a significant amount of NPLs, which were replaced by
Government securities, accounted for the sharp decrease in banks' claims on the private sector
during this period. Sluggish lending aggravated that decrease. Consequently, about one third of
banks' assets were in Government securities at the end of September 2003. Bank interest rate
spread were around 3.0–6.4% in 2000–2003, higher than the 2.2–6.1% in 1988–1994 and
1.8–2.2% in 1995–1999. These trends do not indicate an improvement in financial
intermediation volume and cost since the approval of DFL II.

B.       Project Outcomes

41.     Profiles of selected subprojects in Appendixes 5–10 illustrate the outcomes of 12 subloans,
totaling $17.6 million.34 Of the 12 subprojects, all but one contributed to additional exports of
around $15.5 million (or $0.88 million per subloan of $1 million) per year. About 90% of that export
expansion has been maintained.35 This estimate, together with the DFL II utilization rate of about
38% and the overall repayment performance (para. 25), suggests that the benefits of DFL II

34
   Of the 12 subloans, ten were repaid on schedule and two were transferred to IBRA and subsequently repaid or sold at
   a discount, as illustrated in Appendixes 5–9. These are not statistically representative samples.
35
   Of the 11 subborrowers that increased export earnings as a result of DFL II (among those visited by OEM), all but two
   (an electronics manufacturer and a textile manufacturer) have maintained their level of exports. One subborrower
   could not maintain its exports earnings, mainly due to the global decline in demand for its products. The other shifted
   sales of all its products to the domestic market in 2000 due to stiff competition emerging from other Asian countries in
   the export market.
14


projected at appraisal—incremental exports of $350 million (or $1.75 million per subproject of $1
million) per year—were overly optimistic.36 The OEM noted that most of these 12 subborrowers
had several funding options with interest rates comparable to subloans under DFL II.

42.      The OEM could not collect adequate information to reevaluate the financial and economic
rate of return of any subproject. Apart from the general weaknesses of the PFIs' credit information
systems, the OEM found that two major factors clouded the picture of the benefits, as well as the
financial and economic viability, of subprojects. First, because export volume was affected by a
variety of factors, any change in volume could not be attributed to one factor. Second, subloan
agreements under DFL II did not require subborrowers to submit any information to the PFIs after
completing their repayments, despite ADB retaining the right to request that the PFIs submit
post-project information. Understandably, some subborrowers were not willing to submit such
information to the PFIs or ADB at OEM.

43.      DFL II's contributions to financial intermediation were considered marginal based on five
observations. First, the financial covenants added little value to the PFIs' operations, because of
weaknesses in their selection and enforcement. Second, TA was not attached to DFL II. Third, the
relatively high interest rate was a financial burden on the PFIs, especially those that borrowed the
larger amount, such as NIAGA and BII. Fourth, three of the nine PFIs withdrew their applications,
and BDNI closed its operations during implementation. Fifth, the Project was not designed to
catalyze improvements in financial intermediation at a national level.

C.         Sustainability

44.     Nine subborrowers visited by the OEM have maintained the higher export earnings that
resulted from DFL II. Four of them were confident that they would remain competitive in the export
market. However, some subborrowers, especially those in the textile and electronics industries,
were uncertain of their prospects in the export market due to stiff competition emerging from other
Asian countries.

45.     The OEM noted the competitive strength of four particularly successful subborrowers. A
plastic products manufacturer acquired a foreign partner to form a subsidiary that serves as the
exclusive distributor of its products. A textile manufacturer enhanced the efficiency of its supply
chain by improving the vertical coordination with its affiliated companies (inputs supplier and
products distributor), allowing it to quickly react to changing consumer trends. A textile
manufacturer used its experience as a trading company to explore foreign marketing channels. Its
knowledge of trade finance and the availability of concessional loans from developed countries
also helped. Another textile manufacturer promptly shifted its sales focus from the domestic
market to exports, allowing the company to cushion the effects of the financial crisis. It forged a
strategic alliance with a European partner, which assisted in product design, and a Japanese
partner, which shared its production technology and marketing skills. Those moves improved the
textile manufacturer’s products, enabling a shift in focus to the export market. These four
subborrowers exemplified the importance of innovation in organizational arrangements (e.g.,
marketing contract, vertical coordination, and strategic alliances) and knowledge management (in
product design, production technology, consumer trends, marketing channels, and financial
instruments) in maintaining a competitive position in the export market.




36
     The PCR estimated the incremental exports of $135.9 million per year for 50 subprojects, without giving the basis for
     the estimate. The OEM feels that the PCR also overestimated export revenues generated by DFL II.
                                                                                                    15


                  IV.     ACHIEVEMENT OF OTHER DEVELOPMENT IMPACTS

A.     Socioeconomic Impact

46.    The 12 subprojects examined by the OEM created approximately 1,600 jobs (or 91 jobs per
subloan of $1 million), more than 90% of which have been maintained. This suggests that
estimates of the project impact at appraisal, including incremental job creation of 35,000 (or
175 per subloan of $1 million), were overly optimistic.

B.     Environmental Impact

47.    Although some subborrowers did not obtain the required AMDAL certificate, the OEM
reckoned that DFL II did not have any discernible environmental impact based on the information
provided by the PFIs and the sample subborrowers.

                                   V.     OVERALL ASSESSMENT

A.     Relevance

48.     DFL II was assessed as partly relevant. The development of the export industries, one of
the two project objectives, was consistent with Indonesia's Five-Year Plan for FY1995–1999. This
continues to be an important element of the Government's development strategy. However, the
modality of ADB's operations was not harmonized well with this objective. This can be attributed to
the weak diagnostic assessment under the two project preparatory TAs, which failed to provide a
comprehensive survey of credit market conditions. The other project objective—to improve the
financial intermediation process—should have specified what aspects of financial intermediation
would be targeted. These factors undermined the relevance of DFL II.

B.     Efficacy

49.      DFL II was assessed as less efficacious. The contribution of DFL II to the development of
export-oriented industries was marginal relative to the country's total exports, while the
improvement in financial intermediation was not discernible. Weaknesses in project design,
aggravated by unfavorable market conditions, were responsible for the discouraging results. Many
subborrowers benefited from the depreciation of the rupiah during the financial crisis because
their revenues in dollars exceeded their costs in rupiah. However, the PFIs' portfolios deteriorated
significantly due to the crisis, bringing their investment lending to a standstill in 1998–2000. DFL II
had little activity during this period.

C.     Efficiency

50.      DFL II was assessed as inefficient, for four main reasons. First, DFL II was underutilized
significantly, with only $75.4 million of the approved $200 million disbursed. Its revolving fund was
not utilized, generating no cash to offset the PFIs’ interest payments. Second, DFL II was costly to
the PFIs, especially as the spread between ADB's pool-based dollar interest rate and LIBOR
widened from 2001 onwards. Third, neither the Government nor ADB managed project-related
information effectively and efficiently during and after the crisis. Fourth, the OEM estimates that
the project benefits in terms of increased exports and jobs created per subloan of $1 million were
far below what had been expected at the time of approval.
16


D.         Sustainability

51.     The sustainability of DFL II was assessed as likely. DFL II’s design, which focused on
export-oriented companies, contributed to subloan repayment performance that surpassed the
overall portfolio performance of the PFIs. The majority of subprojects visited by the OEM had
maintained the positive project outcomes. However, the capability of some subborrowers to
adapt to the changing market conditions due to globalization is unclear (paras. 44–45).

E.         Institutional Development and Other Impacts

52.     The organizational and other impacts of DFL II are estimated to be negligible, given that
(i) its contribution to institutional strengthening of the PFIs was marginal, and (ii) its
socioeconomic impact in terms of job creation was considerably less than what had been
expected at the time of appraisal.

F.         Overall Project Rating

53.     DFL II was rated partly successful based on the evaluation of its relevance, efficacy,
efficiency, sustainability, and institutional development and other impacts.37

G.         Assessment of Executing Agencies and Asian Development Bank Performance

54.      The performance of the PFIs was assessed as partly satisfactory for two main reasons.
First, the PFIs were not fully functional as DFL II’s executing agencies in the later stage of
implementation as they became insolvent and were restructured during the financial crises. It is,
however, noted that the remaining five PFIs are currently pursuing governance and operational
reforms under their new management. Their financial recovery has been noteworthy, given the
depth of the financial crisis that affected Indonesia. Second, the PFIs only partially complied with
the loan covenants throughout implementation. The PFIs did not provide relevant information to
ADB on their financial restructuring. Most PFIs were not aware of the benefit monitoring and
evaluation clause in the project agreements. As a result, the PFIs kept little information on
subprojects unless they continued a business relationship with the subborrower. The general
weakness in the credit information systems of most PFIs made subproject information even
scarcer.

55.      BI and MOF paid little attention to the outcomes of DFL II. These agencies were not fully
responsive to the PFIs' desire to prepay the loan to the Government. Moreover, BI did not identify
its outstanding receivables for the four subloans transferred from BDNI to IBRA.

56.     The performance of ADB was assessed as partly satisfactory for five reasons. First,
ADB did not effectively monitor and enforce the PFIs' compliance with the financial
covenants. Moreover, an appropriate information management was not carried out. Second,
ADB was not responsive to the PFIs’ request in 1995 to convert DFL II from a pool-based
interest rate scheme to a LIBOR-based one. Third, ADB did not actively pursue information
on the PFIs’ restructuring and disposal of their assets, including subloans under DFL II. ADB
could have spent more resources for project review missions, including visits to


37
     The PCR assessed DFL II as inefficacious and its outcome as unlikely to be sustained. The OEM reviewed PCR’s
     assessment and upgraded the overall rating on the basis of some new information, including sustained exports and
     jobs created among subborrowers visited by the OEM (albeit at a level lower than expected at approval). Absent
     these developments, the rating would have remained unsuccessful.
                                                                                                                  17


subprojects.38 Fourth, ADB did not address proactively DFL II’s revolving fund, which did not
generate enough revenue for the PFIs to offset interest payments. Fifth, The DFL II Loan
Agreement was not explicit about the role of the Government as the Borrower (vis-à-vis the PFIs
as the executing agencies) in benefit monitoring and evaluation.

                         VI.      ISSUES, LESSONS, AND FOLLOW-UP ACTIONS

A.       Key Issues for the Future

57.    Given the small number of subprojects, their performance does not necessarily
represent a growth trend or the export potential of their respective subsectors. Rather, their
experience illustrated efforts by several firms to improve competitiveness. Successful
subprojects under DFL II exemplified the importance of innovation in organizational
arrangements (e.g., marketing contract, vertical coordination, and strategic alliances) and
knowledge management (in product design, production technology, consumer trends,
marketing channels, and financial instruments) in maintaining competitiveness in the export
market. Firms’ capabilities in these areas are considered crucial, particularly in the context of
developing economies where “institutions for trade, contract enforcement, communication,
and information disclosure are weak, exposing partners to a trade to opportunistic behavior.”39
The Government’s export promotion policy should complement the weak market institutions
and support firms’ efforts to reduce transaction costs.

58.      Several aspects of the financial restructuring of the banking sector have been completed.
Major banks (including the five PFIs) have (i) restored their capital adequacy to above 8%,
(ii) reduced their NPLs to manageable levels, and (iii) become highly liquid and ready to promote
lending. The five PFIs posted profits during the first 6 months of 2003. IBRA sold its majority
stakes in BII, DANAMON, LIPPO, and NIAGA to foreign strategic investors, and launched the
divestment of PERMATA. The OEM reported that these PFIs have been pursuing better corporate
governance, and major operational reforms are under way. Their financial recovery has been
noteworthy, given the depth of the financial crisis that affected Indonesia. A banking sector review
that ADB recently conducted pointed out that the high spreads between funding costs and lending
rates gives banks some space to restructure their operations. However, such spreads cannot be
expected to last as competition for new lending business increases. From this perspective, the
improvement in operational efficiency should be a priority for many banks, especially those
created through the merger of several banks during the crisis, such as DANAMON and
PERMATA. The OEM believes that improving banks' management and credit information systems
will be an important step in making their operations more efficient.

59.      The OEM noted that Indonesia’s legal framework, and its enforcement mechanism, are
not fully conducive to creating a sound financial system. A lack of transparency was evident in the
resolution process for a couple of subloans under DFL II. The OEM also underscored the need to
assess the potential risk of moral hazard in the credit market following IBRA’s accomplishments in
NPL resolution in recent years.




38
   Two project processing missions were fielded with 98 persons-days of inputs, and a PCR mission was fielded with
   71 person-days of inputs. In contrast, nine project review missions were fielded with only 41 person-days of inputs
   and visits to only three subprojects.
39
   Khanna, Tarun and Jan W. Rivkin. 2001. Estimating the Performance Effects of Business Groups in Emerging
   Markets. Strategic Management Journal 22:45–74.
18


B.     Lessons Learned

60.     At appraisal of a development finance institution (DFI) loan, a demand assessment should
be accompanied by a thorough review of market interest rates in the local currency, interest rates
and exchange rate volatility, banks' liquidity conditions, and the extent of currency and maturity
mismatches on banks' balance sheets. If a local currency is pegged to a hard currency, the
increased volatility of the interest rate for a local currency loan, as well as a change in the risk
profile of an FX loan if the peg is abandoned, should be recognized as risk factors. In such an
event, ADB and the concerned government should consider adjusting lending and relending terms
to maximize project benefits while reducing risks. Cancellation and/or prepayment of a loan would
be also a possible option, if desirable.

61.       When considering financial covenants for PFIs under a DFI loan, the central bank’s
prudential regulations (including those on loan concentration, intra-group lending, and asset-
liability management) and their enforcement status, and PFIs corporate governance and risk
management systems should be examined thoroughly. Based on this examination, financial
covenants should be included that complement PFIs' risk management and prudential guidelines.
Compliance with financial covenants should be monitored regularly and treated as a condition for
ADB's approval or confirmation of subloans. In this way, an enforcement mechanism for financial
covenants of a DFI loan can be created.

62.     In 1994, ADB introduced the market-based lending (MBL) window using the LIBOR as the
base interest rate for financial intermediary and private sector borrowers. However, there were no
guidelines governing the conversion of the pool-based interest scheme to the MBL window, and
therefore, eligibility criteria and approval procedures of the conversion were not available.
Presumably for this reason, no DFI loans were actually converted to the MBL from the pool-based
window. Moreover, interviews with ADB project officers suggest that many who handled DFI loans
were not fully aware of the merit of the MBL window, undermining the benefit of this innovation. As
regards the DFL II, the negative consequence of not converting its interest rate scheme to the
MBL, in terms of PFIs' extra interest payments as well as underutilization of the loan, could not be
overstated.

63.     Under DFL II, the PFIs were not aware of the benefit monitoring and evaluation clause in
the project agreements. As a result, the PFIs kept little information on subprojects except when
they had a continuing business relationship with a subborrower. This might have been expected
as such information is not needed for commercial purposes and would be viewed as an added
administrative cost by the PFIs. Subloan agreements under DFL II did not require subborrowers to
provide any information to the PFIs after completing repayments, despite ADB’s retaining the right
to request such information from the PFIs. A loan agreement for a DFI loan usually is not explicit
about the role of a government, as a borrower, in benefit monitoring and evaluation. Hence, BI
and MOF appeared to pay little attention to project outcomes and development impacts. To
strengthen the benefit monitoring and evaluation of an umbrella DFI loan, ADB should include (i) a
performance evaluation clause in a loan agreement—not only in project agreements with PFIs—
that clarifies the concerned government’s responsibility as a borrower; and (ii) a benefit monitoring
clause in subloan agreements, which define the responsibility of subborrowers. These would
complement the responsibility of PFIs for benefit monitoring and evaluation.
                                                                                                                19


64.     Several PPARs40 on DFI loans highlighted the weakness in monitoring and evaluation of
subproject benefits. A common feature among these DFI loans was that their loan/project
agreements did not specify the type of data to be collected and the timing of their collection.
Instead, their loan/project agreements broadly assured the ADB's right to "reasonably" request
information relating to the accomplishment of the project purpose. In most cases, ADB did not
properly exercise this retained right. PFIs, on their part, did not collect the adequate information on
subproject benefits. These experiences suggest the need for ADB to consider an alternative
approach in creating a functional monitoring and evaluation framework that balances to increased
administrative costs with the need for, and use of, the data collected. One possibility is to specify
required data and timing of data collection in a loan/project agreement. Another option is to select
sample subprojects in case their number is large. What is important is to come out with a
pragmatic solution for the purpose of developing an efficient and effective monitoring and
evaluation framework of a DFI loan. Considering these lessons learned, the benefits of the
ongoing Small and Medium Enterprise Export Development Project (SMEEDP) 41 are to be
monitored and evaluated by an oversight implementing bank based on sample subprojects.
Moreover, the loan agreement of the SMEEDP specifies the minimum data to be collected by the
implementing bank. OEM supports this approach. 42

65.     Because of the widening spread between ADB's pool-based interest rate and LIBOR
starting in 2001, the holding cost of the funds generated from the recovery of subloans principals
(or the revolving fund) was a financial burden for the PFIs under DFL II. Accordingly, most PFIs
requested to prepay the loan to BI. However, BI was not fully responsive to the PFIs' requests,
partly because the relending agreements between BI and PFIs did not include a prepayment
clause. In light of this experience, relending agreements between a government and PFIs under a
DFI loan should include a prepayment clause similar to the one in a loan agreement between a
government and ADB.

66.      The Asian financial crisis brought out governance issues regarding banks and corruption,
e.g., connected lending, behest lending, noncompliance, misappropriation, bribery, undue
preferential treatment, and concealment. ADB should continue to address these issues in
conjunction with ongoing operations. At the time that allegation of corruption surfaced, ADB would
have been faced with a major public relations challenge if there had been widespread public
knowledge that ADB had lent money to the concerned financial institutions. The lessons of this
experience is that ADB's reputation and credibility would be damaged if it lends money to
institutions where weak governance could lend itself to systemic risk of corruption. ADB must
develop more stringent assessment procedures to avoid becoming involved in such institutions.




40
   ADB. 1996. Project Performance Audit Report on the Third Development Financing in Pakistan. Manila; ADB.
   1998. Project Performance Audit Report on the Second Cook Islands Development Bank Project in the Cook
   Islands. Manila; ADB. 1999. Project Performance Audit Report on the Third Development Bank of the Philippines
   in the Philippines. Manila; and ADB. 2000. Project Performance Audit Report on the Shanghai Investment and
   Trust Corporation Project in the People's Republic of China. Manila.
41
   ADB. 2002. Small and Medium Enterprise Export Development Project. Manila (Loan 1978-INO for $85 million,
   approved on 17 December 2002).
42
   SMEEDP became effective on 18 May 2004. The progress on identification of subprojects is slow partly because
   its interest rate is not competitive. There has been little progress in determining the monitoring and evaluation
   framework. OEM believes that ADB and the implementing bank should formulate a sampling method, identify the
   required data and determine the timing of data collection for the purpose of facilitating the monitoring and
   evaluation framework.
20


C.    Follow-Up Action

67.    MOF and BI should discuss with the PFIs possible arrangements for prepaying the
remaining balance under DFL II to MOF. MOF should inform IRM of the outcome by mid-2005.
IRM should monitor the progress of this discussion.
                                                                                            Appendix 1   21


               METHODOLOGY OF DATA COLLECTION ON SUBPROJECTS

1.     A master list of subborrowers’ and addresses under the Second Development Finance
Loan (DFL II) to Indonesia was compiled using information in the project files. This served as
the population list for the survey that the Asian Development Bank conducted.

2.       A questionnaire (included in this appendix) was drafted to obtain information on the
subborrowers’ lines of business, the effect of DFL II on exports and job creation, and the impact
of the financial crisis on their companies. Forty-four questionnaires were sent to 36
subborrowers in Java, four in Sumatra, one in Sulawesi, and three on smaller islands. The
Operations Evaluation Mission (OEM) was unable to send out questionnaires to the remaining
six subborrowers under DFL II because (i) two borrowers had ceased operations, (ii) one was in
litigation, and (iii) the other three were inaccessible. The questionnaires were sent by fax in the
beginning of February 2004. Two participating financial institutions (PFIs) provided cover letters
to introduce the questionnaires.

3.      After repeated follow-ups by telephone, 52% (or 23 questionnaires) were returned by fax
within two weeks—18 from Java, two from Sumatra, one from Sulawesi, and two from the other
islands. Table A1 shows how the PFIs were represented.

                 Table A1: Distribution of Questionnaires and Respondents
                           by Participating Financial Institutions

                                               Questionnaires
                                 No. of          Sent Out                Respondents
             Item               Subloans      Number      %            Number     %

             BII                     8             7       87.5             7         100.0
             Bank Niaga             14            12       85.7             5          41.7
             Bank Bali              15            12       80.0             9          75.0
             Bank Danamon            8             8      100.0             2          25.0
             Bank Lippo              1             1      100.0             0           0.0
             BDNI                    4             4      100.0             0           0.0

             Total                  50            44       88.0            23             52.3

             BII = Bank Internasional Indonesia, BDNI = Bank Dagang Nasional Indonesia.
             Source: Operations Evaluation Mission.

 4.     The OEM attempted to meet with all the subborrowers in Bandung, Jakarta, and Medan.
Fifteen accepted—seven from Greater Jakarta, six from Bandung, and two from Medan. Of the
15 subborrowers interviewed, 12 offered relevant information. The OEM also obtained some
information from (i) the headquarters' staff of five PFIs in Jakarta, (ii) Bank Niaga's staff in its
Bandung and Medan branches, and (iii) a former staff member of Indonesia Bank Restructuring
Agency.
22    Appendix 1



                              ASIAN DEVELOPMENT BANK
                           OPERATIONS EVALUATION MISSION

                    QUESTIONNAIRE FOR SUBBORROWERS UNDER
                   LOAN 1223-INO: SECOND DEVELOPMENT FINANCE


1.    Name of company:       ____________________________________________________

2.    Office address:        ____________________________________________________

3.    Factory address:       ____________________________________________________

4.    Contact person:        ____________________________________________________
                             Phone No. _______ Fax No._______ Email_________________

5.    Type of industry/service:
             a.      Agriculture, forestry, and fishing   b.       Mining and quarrying
             c.      Food processing                      d.       Textiles
             e.      Wood products                        f.       Chemical, rubber and plastic
             g.      Nonmetallic mineral                  h.       Other, specify ___________

6.    Name of bank:
            a.      Bank Dagang Nasional Indonesia      b.         Lippo Bank
            c.      Bank Niaga                          d.         Bank Internasional Indonesia
            e.      Bank Bali (currently, Bank Permata) f.         Bank Danamon Indonesia

7.    Finance received was for?
            a.      Installation of new facility          b.       Expansion of existing facility
            c.      Modernization of existing facility    d.       Other, specify____________

8.    Total actual cost of the funded facility: US$ ____________

9.    Loan details:
            a.        Date of loan approval: ____________ Loan amount: US $____________
            b.        Loan interest rate: Fixed: ___% or Variable: LIBOR +____%
            d.        Loan maturity: ______ years including a grace period of ______ years
            e.        Disbursed (and canceled) loan amount: US$ _______(US$______)
            f.        What was used for collateral? ________________________________

10.   Repayment status:
           a.      Loan outstanding amount: US$_____________
           b.      Was the loan rescheduled/restructured? Yes__ No__ If yes,
                           - how much was rescheduled/restructured?: US$___
                           - how long was the extension?:__________
                           - what caused the problem in repayment?: __________________
           c.      Is/was the loan in arrears? Yes__ No__ If yes,
                           - how much was/is in arrears?: US$_____
                           - since when?: ______ until when?: _______
                           - what caused the problem in repayment?:___________________
                                                                                Appendix 1   23


11.   Did the funded facility/equipment become operational on schedule? Yes_ No_
             If no, how long was the delay and what was the reason for it? __________
             ______________________________________________________________
             ______________________________________________________________

12.   Was the cost estimate at loan approval accurate? Yes_ No_
            If no, how much was the cost overrun/underrun and what was the reason for it?:
            _________________________________________________________
            _______________________________________________________________

13.   Did your company encounter any problem in complying with the loan covenants?
      Yes_ No_ If yes, which covenants? _________________________________

14.   What specific benefits did the loan provide?
            a.       Sales of new products
            b.       Increased sales of existing products
            c.       Improved quality of existing products
            d.       Improved efficiency of production
            e.       Other, specify ______________________________________________

15.   What is the capacity utilization ratio of the funded facility at the moment? ___%

16.   Did the loan increase your business turnover? Yes_ No_
             If yes, how much on an annual basis?: Rp__________

17.   Did the loan increase your export? Yes__ No__
             If yes, how much on an annual basis?: US$ __________

18.   Did the loan lead to increased/decreased employment in your business?
             a.      Increase: full time equivalent: Men _____ Women_____
             b.      Decrease: full time equivalent: Men _____ Women _____
             c.      No change

19.   Did the financial crisis negatively affect your business? Yes_ No_
             If yes, why?
             a.      Difficulty in importing inputs.
             b.      Reduced demand in the domestic market.
             c.      Reduced demand in the foreign market.
             d.      Difficulty in securing finance.
             e.      Other, specify ______________________________________________

20.   Has the project benefit sustained to date? Yes__ No__
             If no, please describe the reason: ____________________________________
             ________________________________________________________________
             ________________________________________________________________
             ________________________________________________________________
24     Appendix 1



21.    Please fill out the following:
                                        (Rupiah)
                           1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Fixed Assets
Long-Term Liabilities
Current Liabilities
Share Capital

Total Revenue
  - of which, export
revenue
Interest Expense
Net Income (Profit after
Tax)



22.   Additional comments or requests to the Asian Development Bank, if any:
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
                                                                                 Appendix 2     25

                            COMPLIANCE STATUS OF KEY LOAN COVENANTS
                              ON PARTICIPATING FINANCIAL INSTITUTIONS

Covenants                                         BALI      BII     DANAMON   NIAGA     LIPPO    BDNI

1.   Qualified as a Foreign Exchange Bank
     1993                                          Yes      Yes        Yes     Yes       Yes     Yes
     1994                                          Yes      Yes        Yes     Yes       Yes     Yes
     1995                                          Yes      Yes        Yes     Yes       Yes     Yes
     1996                                          Yes      Yes        Yes     Yes       Yes     Yes
     1997                                          Yes      Yes        Yes     Yes       Yes     Yes
     1998                                          Yes      Yes        Yes     Yes       Yes      —
     1999                                          Yes      Yes        Yes     Yes       Yes      —
     2000                                          Yes      Yes        Yes     Yes       Yes      —
     2001                                          Yes      Yes        Yes     Yes       Yes      —
     2002                                          Yes      Yes        Yes     Yes       Yes      —

2.   Listed on the Jakarta Stock Exchange
     1993                                          Yes      Yes        Yes     Yes       Yes     Yes
     1994                                          Yes      Yes        Yes     Yes       Yes     Yes
     1995                                          Yes      Yes        Yes     Yes       Yes     Yes
     1996                                          Yes      Yes        Yes     Yes       Yes     Yes
     1997                                          Yes      Yes        Yes     Yes       Yes     Yes
     1998                                          Yes      Yes        Yes     Yes       Yes      —
     1999                                          Yes      Yes        Yes     Yes       Yes      —
     2000                                          Yes      Yes        Yes     Yes       Yes      —
     2001                                          Yes      Yes        Yes     Yes       Yes      —
     2002                                          Yes      Yes        Yes     Yes       Yes      —

3.   “Sound” rating in BI’s CAMEL rating system
     1993                                          —       Sound        —     Sound       —          —
     1994                                          —       Sound        —     Sound       —          —
     1995                                          —       Sound        —     Sound       —          —
     1996                                          —       Sound        —     Sound       —          —
     1997                                          —        —           —     Sound       —          —
     1998                                          —        —           —      Not        —          —
                                                                              sound
     1999                                          Not      —         Sound    Not      Sound        —
                                                  sound                       sound
     2000                                         Fairly    —         Sound   Fairly    Sound        —
                                                  sound                       sound
     2001                                         Sound     —         Sound   Fairly    Sound        —
                                                                              sound
     2002                                         Fairly    —         Sound   Fairly    Sound        —
                                                  sound                       sound

4.   Capital adequacy ratio at least 8% by
     31 Dec 1993 and maintain such ratio
     1993                                          11.4     12.9      10.3       8.5     11.1    14.8
     1994                                          10.2      8.4      11.6       8.4      9.3    12.8
     1995                                          11.4      9.6       9.4       8.3      8.8    10.3
     1996                                          10.9      8.7      10.3      10.8     13.2     8.5
     1997                                          10.8     11.7       9.2       9.4     10.4     —
     1998                                         (24.7)   (24.7)    (77.6)    (23.1)     —       —
     1999                                         (84.5)     4.4     (54.6)   (122.6)    16.3     —
     2000                                          13.6      7.6      58.0      21.3     21.1     —
     2001                                          (8.9)   (47.4)     35.5      16.6     23.9     —
     2002                                          10.4     33.2      25.6      12.7     21.1     —
      26      Appendix 2



Covenants                                             BALI          BII      DANAMON          NIAGA         LIPPO        BDNI

5.   Reduce single-loan exposure to 20% of
     equity and group exposure to 50% of
     equity by 31 Dec 1994 and maintain such
     exposure thereafter (1994 to date)
     1993                                              Yes          —              —            Yes            —           —
     1994                                              Yes          —              —            Yes            —           —
     1995                                              Yes          —              —            Yes            —           —
     1996                                              Yes          —              —            Yes            —           —
     1997                                              Yes          —              —             —            Yes          —
     1998                                              Yes          —              —             —            Yes          —
     1999                                              Yes          —             Yes           Yes           Yes          —
     2000                                              Yes          —             Yes           Yes           Yes          —
     2001                                              Yes          —             Yes           Yes           Yes          —
     2002                                              Yes          —             Yes           Yes           Yes          —

6.   Return on assets at least 1.0% from 1994
     onward
     1993                                              1.7         2.0           0.7            1.0           1.0          1.2
     1994                                              1.7         1.8           1.0            0.9           1.1          1.9
     1995                                              1.7         1.7           0.8            1.1           1.2          1.3
     1996                                              1.8         1.7           1.1            1.4           1.3          1.3
     1997                                              0.8       Negative        0.0            0.5           1.0          —
     1998                                            Negative    Negative      Negative      Negative      Negative        —
     1999                                            Negative    Negative      Negative      Negative      Negative        —
     2000                                            Negative      0.7           0.7            0.5           1.1          —
     2001                                              1.7       Negative        1.3         Negative         1.4          —
     2002                                            Negative      0.4           2.0            0.6        Negative        —

7.   Achieve annual cash collection ratio on
     DFL II portfolio of at least 80%
     1993                                              Yes         Yes            —              —             —           —
     1994                                              Yes         Yes            —              —             —           —
     1995                                              Yes         Yes            —              —             —           —
     1996                                              Yes         Yes            —              —             —           —
     1997                                              Yes         Yes            —              —             —           —
     1998                                              No          Yes            —              —             —           —
     1999                                              No          Yes            —              —             —           —
     2000                                              No          Yes            —              —             —           —
     2001                                              Yes         Yes            —              —             —           —
     2002                                              Yes         Yes            —              —             —           —

8.   Earning assets classified as current by
     Bank Indonesia at a ratio of at least 95%
     in 1993 and a ratio of at least 97% in 1995
     and thereafter
     1993                                              Yes         Yes            —             96.7          Yes          —
     1994                                              Yes         Yes           98.0           97.1          Yes          —
     1995                                              Yes         Yes           98.0           97.7          Yes          —
     1996                                              Yes         Yes           99.0           98.6          Yes          —
     1997                                              Yes         No            99.0           97.5          No           —
     1998                                              No          No            34.0           51.3          No           —
     1999                                              No          No            55.0           26.2          53.7         —
     2000                                              No          Yes           91.4           70.2          79.6         —
     2001                                              Yes         Yes           95.2           91.7          90.9         —
     2002                                              Yes         Yes           95.6           93.8          87.6         —

— = not available, BALI = Bank Bali, BII = Bank Internasional Indonesia, DANAMON = Bank Danamon Indonesia, NIAGA = Bank
Niaga, LIPPO = Lippo Bank, BDNI = Bank Dagang Nasional Indonesia.
Sources: Based on the information provided by the participating financial institutions to the Operations Evaluation Mission and
their Annual Reports.
                                                            Appendix 3           27


                    CHARACTERISTICS OF SUBLOANS

Table A3.1: Distribution of Subloans by Participating Financial Institutions

                                                Disbursed
                                                 Amount            Percent of
Item                                     Number    ('000)         Loan Amount

Bank Bali                                  15         11,987              15.9
Bank Niaga                                 14         31,116              41.2
Bank International Indonesia                8         12,572              16.7
Bank Danamon Indonesia                      8          7,935              10.5
Bank Dagang Nasional Indonesia              4          7,829              10.4
Lippo Bank                                  1          4,000               5.3

                 Total                     50         75,439             100.0

Source: Operations Evaluation Mission.

                           Table A3.2: Size of Subloans

                                                Disbursed
                                                 Amount            Percent of
Item                                     Number    ('000)         Loan Amount

$1 million or less                         20          7,857              10.4
$1 million–$3 million                      25         51,132              67.8
$3 million or more                          5         16,450              21.8

    Total                                  50         75,439             100.0

Source: Operations Evaluation Mission.

                         Table A3.3: Maturity of Subloans

                                                Disbursed
                                                 Amount            Percent of
                                         Number    ('000)         Loan Amount

Up to 3 years                              15         18,035              23.9
3–5 years                                  25         35,756              47.4
More than 5 years                          10         21,648              28.7

    Total                                  50         75,439             100.0

Source: Operations Evaluation Mission.
28           Appendix 3


                 Table A3.4: Geographic Distribution of Subloans

                                                 Disbursed
                                                  Amount            Percent of
Item                                      Number    ('000)         Loan Amount

Java                                        41        56,675           75.1
Sulawesi                                     1         1,522            2.0
Sumatera                                     4        12,739           16.9
Others                                       4         4,503            6.0

     Total                                  50        75,439          100.0

Source: Operations Evaluation Mission.

                  Table A3.5: Subsector Distribution of Subloans

                                                 Disbursed
                                                  Amount            Percent of
Item                                      Number    ('000)         Loan Amount

Textiles and Garment                        15        20,481           27.1
Chemicals, Rubber, and Plastic              12        17,493           23.2
Food Processing and Beverage                 8        13,374           17.7
Metallic Mineral Products                    4         5,064            6.7
Wood Products                                3         1,182            1.6
Other Manufacturing                          8        17,845           23.7

     Total                                  50        75,439          100.0

Source: Operations Evaluation Mission.

                          Table A3.6: Purpose of Subloans

                                                 Disbursed
                                                  Amount            Percent of
Item                                      Number    ('000)         Loan Amount

New                                         13        21,999           29.2
Expansion                                   33        48,639           64.5
Modernization                                4         4,801            6.4

                                                                              a
     Total                                  50        75,439          100.0

a
 Components do not add up due to rounding off.
Source: Operations Evaluation Mission.
                                            OVERVIEW OF SUBPROJECTS

         Date        Sub-                                                                                                Interest
       of ADB's    borrower                                                                                Repayment      Rate at
     Confirmation/ (Dummy                  Amount ($ '000)                                        Maturity   Status      Approval
Seq.   Approval     Name) Location       Approved     Disbursed   Subsector         Purpose       (Years)   at OEM         (%)

A.   Bank Permata (formerly Bank Bali)
1    18 Nov 94        BA-1      Java         450.0        450.0    Rubber            New            3.0    IBRA-Sold     10.00
2    5 Jun 95         BA-2      Bali         335.0        335.0    Textiles        Expansion        5.0     Fully paid    9.50
3    7 Sep 95         BA-3      Java         300.0        300.0    Garment           New            5.0     Fully paid    9.50
4    10 Apr 96        BA-4      Java       1,500.0      1,500.0     Plastic          New            4.0    IBRA-Fully     9.00
                                                                                                              paid
5    12 Apr 96        BA-5     Java          300.0         30.0    Plastic         Expansion        5.0     Fully paid   10.00
6    2 Sep 96         BA-6    Sumatra      2,739.1      2,739.1    Rubber          Expansion        5.0     Fully paid    9.00
7    3 Sep 96         BA-7     Java        2,000.0      1,419.4     Metal          Expansion        4.0     Fully paid    9.50
8    28 Oct 96        BA-8     Java          525.4        477.6 Wood Products     Modernization     6.0     Fully paid    9.50
9    10 Dec 96        BA-9     Java          400.0        370.0     Metal         Modernization     5.0    IBRA-Fully     9.00
                                                                                                              paid
10   27 Dec 96       BA-10      Java         390.0        208.6 Food Processing    Expansion        3.0     Fully paid   10.00
11   30 Dec 96       BA-11      Java         250.0        250.0    Footwear          New            3.0     Fully paid   10.50
12   13 May 97       BA-12      Java       1,200.0      1,200.0     Textiles       Expansion        5.0   Restructured    9.00
                                                                                                             -Active
13   21 Jul 97       BA-13      Java         650.0        432.4    Textiles        Expansion        8.0     Fully paid   10.50
14   19 Aug 97       BA-14      Java       2,000.0      2,000.0    Plastic         Expansion        5.0    Fully paid-    8.25
                                                                                                             Prepaid
15   11 Dec 97       BA-15      Java         275.0        275.0     Metal          Expansion        3.0    IBRA-Fully     8.25
                                                                                                              paid

B.   Bank Danamon
16   14 Jun 95        D-1       Java       2,583.8      2,583.8   Textiles         Expansion        1.0     Fully paid    9.80
17   14 Jun 95        D-2       Java         594.0        588.4   Textiles         Expansion        1.5     Fully paid   11.00
18   16 Aug 95        D-3       Java         400.0        254.4 Wood Products     Modernization     6.0    IBRA-Fully    13.00




                                                                                                                                        Appendix 4
                                                                                                              paid
19   8 May 96         D-4      Java        2,500.0      1,988.9     Textiles       Expansion        4.0     Fully paid   10.00
20   23 May 96        D-5      Java          249.1        249.1     Plastic          New            4.0     Fully paid    9.80
21   15 Aug 96        D-6      Java          500.0        500.0     Textiles       Expansion        4.0     Fully paid   10.00
22   26 Aug 96        D-7      Java          800.0        247.8     Plastic        Expansion        3.0     Fully paid    9.80
23   24 Sep 97        D-8     Sulawesi     1,950.0      1,521.8 Food Processing    Expansion        5.0   Restructured   10.00
                                                                                                           -Fully paid




                                                                                                                                        29
                                                                                                               Continued on next page
                                                                                                                                     30
         Date        Sub-                                                                                             Interest
       of ADB's    borrower                                                                             Repayment      Rate at
     Confirmation/ (Dummy                  Amount ($ '000)                                     Maturity   Status      Approval
Seq.   Approval     Name) Location       Approved     Disbursed    Subsector       Purpose     (Years)   at OEM         (%)




                                                                                                                                     Appendix 4
C.   Bank Dagang Nasional Indonesia
24   16 Jun 94      BD-1       Java        4,000.0       4,000.0 Food Processing     New         8.0      IBRA -       8.00
                                                                                                       Restructured
                                                                                                        and active
25   28 Oct 96       BD-2       Java       4,000.0       1,019.4 Food Processing     New         8.0    IBRA-Sold      9.25
26   10 Dec 96       BD-3       Java       3,000.0       2,359.8    Porcelain      Expansion     5.0    IBRA-Sold      9.78
27   23 Jan 97       BD-4       Java         450.0         450.0 Wood Products     Expansion     5.0    IBRA-Fully     9.75
                                                                                                           paid

D.   Bank International Indonesia
28   27 Aug 96         BI-1     Bangka       148.8         148.8 Food Processing   Expansion     3.0    Fully paid      a

29   3 Sep 96          BI-2       Java     1,684.0       1,684.0     Textiles      Expansion     5.0    Fully paid      a

30   3 Sep 96          BI-3       Java     1,168.3         979.6    Beverage         New         5.0    Fully paid      a

31   7 Oct 96          BI-4    Sumatra     3,000.0   b   3,000.0   Electronics       New         5.5    Fully paid     9.40
32   27 Dec 96         BI-5       Java     1,000.0   c   1,000.0     Textiles      Expansion     3.0    Fully paid     9.40
33   28 Feb 97         BI-6       Java       310.0         310.0     Textiles      Expansion     4.0    Fully paid      d

34   14 May 97         BI-7       Java     3,000.0   e   3,000.0    Chemical       Expansion     3.7    Fully paid     9.29
35   10 Jun 97         BI-8       Java     2,716.0   f   2,449.7   Fishing Net     Expansion     5.0    Fully paid      d



E.   Lippo Bank
36   19 Feb 98        L-1       Java       4,000.0       4,000.0 Glass Products    Expansion     8.0   Restructured    8.50

                                                                                                            Continued on next page
         Date        Sub-                                                                                                                   Interest
       of ADB's    borrower                                                                                                Repayment         Rate at
     Confirmation/ (Dummy                             Amount ($ '000)                                             Maturity   Status         Approval
Seq.   Approval     Name) Location                  Approved     Disbursed         Subsector        Purpose       (Years)   at OEM            (%)

F.    Bank Niaga
37    5 Jun 95              N-1        Java              820.0            743.1     Rubber       Expansion           3.5       Fully paid   10.50
38    19 Jun 95             N-2        Java            3,000.0          3,000.0     Textiles     Expansion           2.5       Fully paid    9.75
39    30 Jun 95             N-3        Java            2,496.0          2,496.0 Food Processing    New               5.4      Written off   10.50
40    13 Dec 95             N-4        Java            3,000.0          3,000.0     Plastic      Expansion           7.0       Fully paid    10.0
41    13 Feb 96             N-5       Sumatra          3,000.0          3,000.0 Food Processing    New               5.0       Fully paid    10.5
42    23 May 96             N-6        Java            1,755.0          1,755.0    Footwear        New               3.2       Fully paid    9.75
43    11 Nov 96             N-7        Java            1,500.0          1,068.9     Plastic     Modernization        3.0       Fully paid   10.50
44    12 May 97             N-8        Java              900.0            843.5     Textiles     Expansion           5.0     Restructured    10.5
                                                                                                                                -Active
45    30 May 97             N-9         Java           3,000.0          2,464.5     Plastic         Expansion        6.0     Restructured     9.5
                                                                                                                                -Active
46    31 Jul 97            N-10        Java            2,715.0 g        2,715.0     Textiles        Expansion        3.0       Fully paid   10.25
47    4 Nov 97             N-11       Sumatra          3,000.0          3,000.0      Metal          Expansion        7.0      IBRA-Sold      10.0
48    19 Dec 97            N-12        Java            1,049.2 h        1,030.5     Printing,       Expansion        5.0       Fully paid    12.0
                                                                                   Packaging
49    25 Mar 98            N-13         Java           3,000.0          3,000.0     Gypsum           New             5.0      Written off   12.75
50    9 Jun 98             N-14         Java           3,000.0          3,000.0     Textiles      Modernization      5.0       Active        13.0

      Total                                           83,603.7         75,439.1

ADB = Asian Development Bank, IBRA = Indonesia Bank Restructuring Agency, OEM = Operations Evaluation Mission.
a
  Cost of funding plus 1.5% variable to be reviewed every 6 months.
b
  This includes approval of $1,800,000 as approved by ADB on 8 September 1995, and $386,943 as confirmed by ADB on 23 May 1996.
c
  This includes approval of $500,000 as confirmed by ADB on 13 February 1996.
d
  Cost of funding plus 2.5% variable to be reviewed every 6 months.
e
  This includes approval of $2,000,000 as approved by ADB on 8 April 1996.
f
  This includes approval of $2,000,000 as approved by ADB on 14 June 1995, and $280,979 as approved by ADB on 8 May 1996.
g
 This includes approval of $1,515,000 as confirmed by ADB on 29 August 1996.
h
 This includes approval of $413,0000 as confirmed by ADB on 20 May 1997.




                                                                                                                                                       Appendix 4
Sources: Asian Development Bank project files and Operations Evaluation Mission.




                                                                                                                                                       31
32     Appendix 5



                    PROFILE OF BANK PERMATA (FORMERLY BANK BALI)

A.     Organizational Performance

       1.      Before the Financial Crisis

1.      Key financial data for Bank Bali (BALI) for 1991–2000 and Bank Permata (PERMATA)
for 2001–2002 are provided in Tables A5.1 and A5.2. At the end of 1996, BALI was the sixth
largest private bank in terms of gross assets, with 2.1% of total commercial bank assets.
Between 1991 and 1996, BALI’s return on assets was consistently above 1.5%, while its assets
increased by 250%, at par with the overall growth rate for commercial banks. For this period, the
capital adequacy ratio (CAR) was maintained above 8%. During 1995-1996, more than 97% of
BALI’s total loan portfolio could be classified as current, while the claim on its affiliated
companies (Bali Financial Group) was below 50% of its loan portfolio. By and large, BALI
complied with the financial covenants of the Second Development Finance Loan (DFL II) to
Indonesia during the pre-crisis period.

2.      BALI's foreign exchange (FX) liabilities consistently exceeded its FX assets, though the
level of currency mismatch was kept within 10% of its total assets in 1993–1996. While FX
deposits usually exceeded FX borrowing, this trend was reversed in 1996. Long-term borrowing
from multilateral and bilateral agencies (through BI) was 4% of the total dollar liabilities at the
end of 1996.

       2.      During and After the Financial Crisis

3.      The financial crisis that began in 1997 caused the deterioration of BALI's loan portfolio,
resulting in significant operational losses in 1998–2000. In early 1999, BI reported BALI's CAR
to be –24.7%, and offered BALI's controlling shareholders the option to infuse 20% of the new
capital required for a CAR of 4%. At that time, BALI was negotiating with Standard Chartered
Bank for equity participation. However, this negotiation was unsuccessful. Consequently, BALI
could not fulfill the capital requirement, and the Indonesian Bank Restructuring Agency (IBRA)
took over BALI’s operations in July 1999.

4.     Subsequent to the takeover, the political scandal revolved around BALI's payment of
over $70 million as a commission to a firm run by a leading figure in the ruling Golkar party. The
commission was allegedly paid to recover non-performing loans (NPLs) owed to BALI by three
insolvent banks, which were later transferred to IBRA. This scandal resulted in a loss of
customers' confidence on BALI and delayed its restructuring process.

5.     With the new management in place at BALI, part of the bank's NPLs was transferred to
IBRA for resolution and replaced with Government bonds valued at Rp5.3 trillion in 2000. In
September 2002, BI approved the merger of BALI with four banks (Universal Bank, Arthamedia
Bank, Patriot Bank, and Prima Express Bank). IBRA increased the capital of the merged bank,
named PERMATA, with an investment valued at Rp4.6 trillion to maintain a CAR above 10%.
Following this investment, IBRA held 98% of PERMATA shares. In February 2004, IBRA
launched the divestment of PERMATA.

6.       After the merger, PERMATA became the fourth largest private domestic bank, with 2.5%
of total commercial bank assets. PERMATA posted an operational loss in 2002, mainly due to
expenses related to the merger and additional loss provisioning. PERMATA's gross NPL ratio
was 27.2% at the end of 2002, much higher than the top 17 banks' average NPL ratio of 7.8%.
                                                                                                  Appendix 5       33


PERMATA posted a profit in the first half of 2003, reflecting progress in loan assets
restructuring and improved operational efficiency. Further progress is expected in 2004.

B.        Subloan Performance

          1.       Overview

7.      Under DFL II, BALI approved 15 subloans to 15 subborrowers totaling $13.4 million, of
which $12.0 million was disbursed. Thirteen subborrowers were in Java (including six in Jakarta
and two in Bandung), one in Bali, and one in Sumatra (Medan). Nine subloans were for
expansion of production capacity, four were for new projects, and two were for modernization of
production facilities. All the subloans, except one, were below the free limit.1 Six subloans were
for chemical, rubber and plastic products; four for textiles and garments; two for metal products;
and one each for food processing, wood products, and car spare parts. Thirteen subloans had
maturities of 5 years or less, one had a 6-year maturity, and one had an 8-year maturity.

8.     Ten subborrowers repaid on schedule or early, one subloan was restructured and
remains active, and four were transferred to IBRA. Of the four subloans transferred to IBRA,
three were repaid in full, and one was sold at a discount. PERMATA continues to have a
business relationship with three subborrowers.

9.     At Operations Evaluation Mission (OEM), PERMATA’s receivables from subborrowers
DFL II were $790,000, while its payable to BI was around $4 million.

10.    The OEM visited six subborrowers (four in Jakarta and two in Bandung), of which four
offered relevant information. These four subborrowers were export-oriented companies,2 which
used the subloans to import production facilities to increase or maintain their export revenues.
One of these subborrowers could not maintain its export level, mainly due to declining global
demand for its products. This constrained the subborrower’s repayment capability, and the
subloan was transferred to IBRA. Of the other three subloans, two were repaid on schedule,
while one was prepaid 4 months before the loan maturity. The incremental annual exports from
these four subprojects were estimated at $5.7 million, and about $5 million has been
maintained. Meanwhile, the four subprojects created about 230 jobs, and around 50 have been
maintained.

          2.       Profiles of Selected Subprojects

                   a.       BA-10 (Food Processor)

11.     BA-10 was established in 1989 with the capacity to produce around 300 metric tons (mt)
of frozen shrimp and fish fillets monthly. BA-10 has exported its products to Japan; the Republic
of Korea; Hong Kong, China; Singapore; Europe; and the United States (US). Japan buys about
90% of its output.

12.   In 1996, BA-10 needed to procure additional machinery (blast freezer, flake ice
machines, and chillers) from Germany to diversify into cooked seafood. Unaware of DFL II,
BA-10 submitted a loan application for $400,000 to BALI. On 27 December 1996, the Asian

1
    The free limit was raised from $1 million to $3 million, effective 12 April 1996. ADB approved the subloan for $1.5
    million to BA-4 on 10 April 1996.
2
    In accordance with the Loan Agreement of DFL II, an export-oriented company is defined as one that is projected
    to generate export sales equivalent to 50% of its projected annual sales from the subproject.
34     Appendix 5



Development Bank (ADB) confirmed BALI's approval of the subloan for $390,000, of which
$208,630 was subsequently disbursed. The loan had a 3-year maturity with a variable interest
rate (10% at approval). BA-10’s other financing option was a dollar-loan with an equivalent
interest rate from another commercial bank that was not participating in DFL II. BA-10 chose
BALI because of its simpler procedures.

13.     The subproject resulted in about $500,000 in additional export revenues on an annual
basis, and 100 new jobs for female workers and 25 new jobs for male workers.

14.       The demand for BA-10's products continues to be robust. However, the financial crisis
caused problems with the supply of raw materials (shrimp) as suppliers encountered financial
difficulties and many had to close. As a result, BA-10 has difficulty fulfilling the demand,
producing only 90 mt of frozen shrimp and 60 mt of cooked products monthly. The workforce
has been reduced from about 1,200 immediately after loan approval to 900. Because of the
higher profits from the cooked products, BA-10 has maintained a strong financial position in
spite of the financial crisis. BA-10 fully repaid the subloan on schedule.

               b.     BA-13 (Knitting Clothing Manufacturer)

15.      Established in 1979, BA-13 produces sweaters. At subloan approval on 21 July 1997,
BA-13 had three individual stockholders with total capital of Rp800 million. BA-13 exports 53%
of its production to Europe, US, and Japan.

16.      ADB confirmed BALI’s approval of a subloan to BA-13 for $650,000, of which $432,400
was disbursed. The subloan was used to import 20 knitting machines for producing socks. The
loan had an 8-year maturity and carried a variable interest rate (10.5% at approval). BA-13
opted for a dollar loan as the interest rate was lower than that of a rupiah loan. BALI did not
require BA-13 to go through the environmental impact assessment process, or to secure a
certification from Analisis Mengenai Dampak Lingkungan (AMDAL). The management of BA-13
felt that the AMDAL certificate was costly to the company.

17.    The project completion report that BALI submitted stated that BA-13's sales increased
from Rp3,091 million in 1996 to Rp10,500 million in 2001. Annual export revenues generated by
this subproject were estimated at around $500,000. The survey and the field interview
confirmed that the investment did not generate additional jobs.

18.    The financial crisis did not harm BA-13's export performance, and BA-13 fully repaid the
subloan on schedule. However, its export revenues gradually decreased in the recent years due
to emerging competition from Bangladesh, the People’s Republic of China, India, Thailand, and
Viet Nam.

               c.     BA-14 (Plastic Products Manufacturer)

19.     BA-14 was established in 1980 as a family corporation, producing plastic cosmetic
containers. In 1996–97, 60% of its output was exported and the rest sold domestically. In May
2003, BA-14 acquired a foreign partner and formed a subsidiary to serve as the exclusive
distributor in the external market. Today, 80% of its output is sold to this subsidiary, with the
remaining 20% sold directly by BA-14 domestically. The subsidiary exports 90% of what it gets
from BA-14 and sells 10% domestically.
                                                                                  Appendix 5     35


20.    Unaware of DFL II, BA-14 applied for a dollar-based loan from BALI, as the interest rate
on the dollar loan then was much lower than on a rupiah loan. On 19 August 1997, ADB
confirmed BALI's approval of a subloan for $2 million to BA-14. The first disbursement was for
$1.65 million, and the second was for $350,000. Both installments carried variable interest rates
for a period of 5 years, including a grace period of 5 months. BALI did not require BA-14 to
secure AMDAL certification.

21.     Part of the subloan was used to purchase ten units of machinery, partly to construct the
office building and partly to finance the renovation of some areas of the factory. The office
building was offered as collateral. At about the same time, BA-14 secured a $1.3 million loan (at
9.5%) from a leasing company and another $2 million from another bank at a competitive
interest rate. However, both could be used only to purchase machinery.

22.    The DFL II loan to BA-14 resulted in a 40% increase in production capacity and an
increase in its number of employees from 500 to 550. The company now has about 600
employees working three shifts, and the capacity utilization is 100%. Annual export revenues
generated by this subproject were estimated at about $3.7 million.

23.     The financial crisis did not seriously affect BA-14’s operations. While domestic demand
dropped, export revenue continued to be robust. The higher export revenues offset the higher
cost of raw materials, which were mostly imported. BA-14 fully repaid the subloan in February
2002, 4 months before the maturity date. BA-14 no longer has a business relationship with
PERMATA. Foreign bank branches handle most of its requirements.

               d.      BA-15 (Metal Products Manufacturer)

24.    BA-15 was established in 1996 with an authorized capital of $1 million. A Malaysian
company owns 60% of BA-15, while the remaining 40% is owned by a local partner who serves
as the company’s president. It was established as a supplier of stamp metal component parts
for computers, tapes, and audiovisual equipment, exporting mainly to the United States and
Europe.

25.    BA-15, unaware of DFL II, applied for a $500,000 loan from BALI. On 11 December
1997, ADB confirmed BALI's approval of the subloan for $275,000 to BA-15. The subloan had a
3-year maturity term and carried a variable interest rate (8.25% at approval). The entire amount
was disbursed. The loan was used to finance the procurement from Malaysia of machinery,
which started operating 5 months after the loan was obtained. Annual export revenues
generated by this subproject were estimated at about $1 million. The subproject created around
50 additional jobs.

26.     BA-15 reported that the financial crisis did not harm its operations. Rather, its operations
suffered after the crisis because of the global decline in demand for electronics since 2002, as
well as emerging competition from Malaysian and Thai producers. As a hedge, BA-15
diversified its products to target the domestic market, reducing its FX earnings. Consequently,
BA-15 was unable to repay the subloan on schedule, and it was eventually transferred to IBRA.
The OEM could not verify the extent of BA-15’s financial distress when the subloan was
transferred to IBRA, or BALI’s efforts to recover the subloan. Currently, BA-15 has 200
employees, compared with 300 in 2000.
36     Appendix 5



27.     In 2002, IBRA offered BA-15 debt relief through repayment of the remaining debt on a
discount basis. For this purpose, BA-15 received a soft loan from its mother company for bridge
financing as it awaited the approval of a loan from a foreign commercial bank, which it obtained
4 months later.
                                                              Table A5.1: Summary Balance Sheet-Bank Permata
                                                                               (as of 31 December)
                                                                     (Rp billion, unless otherwise specified)

                                                                                                         Actual
Item                                           1991       1992         1993      1994    1995    1996          1997    1998 a    1999      2000      2001 b    2002

Total Assets                                  3,185       3,445       4,140      4,983   6,331   8,000       12,593   10,103     6,427    11,944    26,614    28,028
    Loans Receivable-Net                      2,077       1,971       2,803      3,489   4,383   5,257        6,862    3,780     1,387     1,005     8,575     7,195
    Others                                    1,108       1,474       1,336      1,495   1,949   2,743        5,730    6,323     5,039    10,939    18,039    20,833
        Cash on Hand                             20          19          32         48      65      66          110      177       311       368       331       518
        Due from Bank Indonesia                  35          42          34         38      37     149          357      403       386       529     1,085     1,354
        Due from Other Banks                     22          26         272        427     522     825        2,279    2,585     2,067     2,223     1,417     2,711
        Other Assets                          1,031       1,387         999        982   1,325   1,702        2,985    3,158     2,276     7,819    15,205    16,249

Total Liabilities and Equity                  3,185       3,445       4,140      4,983   6,331   8,000       12,593   10,103     6,427    11,944    26,614    28,028
Total Liabilities                             2,885       3,123       3,794      4,600   5,781   7,364       11,724   11,778    10,116    11,441    27,195    26,831
    Deposits                                  2,071       2,070       2,648      3,317   4,298   4,927        7,835    9,245     7,505     9,012    22,449    21,894
         Demand Deposits                        409         396         439        479     559     661        1,651    2,330     1,602     1,580     4,068     4,172
         Savings                                368         407         460        545     912   1,195        1,775    1,719     1,535     1,466     2,884     2,731
         Time                                 1,294       1,267       1,749      2,292   2,827   3,070        4,409    5,196     4,368     5,966    15,498    14,991
    Fund Borrowing                              660         866         683        883   1,061   1,406        2,177    1,303     1,331     1,444     2,621     1,474
         Due to Bank Indonesia                   98         128         189        123     150     165          267      328       290        96       641       671
         Due to Other Banks                     562         738         494        760     911   1,241        1,910      975     1,041     1,348     1,980       803
    Other Liabilities                           153         186         463        400     422   1,032        1,712    1,230     1,280       985     2,124     3,462

Total Equity                                    300         322            346    384     550     635          869    (1,675)   (3,689)      503      (581)    1,197
    Equity                                       62         186            186    186     251     253          253       336       336       669       669     1,301
    Reserves                                    238         136            160    198     299     383          616    (2,011)   (4,025)     (166)   (1,250)     (104)

Memorandum Items
Total Foreign Exchange Assets                 1,036       1,164       1,324      1,569   1,848   1,721        4,015    5,135     3,431     3,234     5,453     4,529
    Loan                                        521         546         913      1,092   1,398   1,484        2,981    3,541     1,925       998     2,603     2,020
Total Foreign Exchange Liabilities            1,355       1,378       1,506      1,898   2,134   2,547        5,153    5,161     2,921     2,853     5,441     4,438
    Deposits                                    846         745         851      1,030   1,030   1,104        2,855    3,851     1,691     1,472     3,828     3,093




                                                                                                                                                                        Appendix 5
    Borrowing                                   509         634         599        756     997   1,341        2,088    1,207     1,139     1,238       699       604

Financial Ratios
Capital Adequacy Ratio (%)                     9.43       10.53       11.40      10.21   11.35   10.92        10.78   (24.66)   (84.48)    13.60     (8.90)    10.40

a
    Restatement in 1999 due to changes in accounting policy.




                                                                                                                                                                        37
b
    Restatement in 2002 due to Bank Bali's merger with four other banks.
Sources: Annual Reports 1991-2002, Bank Bali/Permata.
                                                               A5.2: Summary Income Statement-Bank Permata




                                                                                                                                                                      38
                                                                           (year ending 31 December)
                                                                      (Rp billion, unless otherwise specified)

                                                                                                         Actual




                                                                                                                                                                      Appendix 5
Item                                           1991       1992         1993       1994   1995    1996          1997    1998 a    1999      2000     2001 b   2002

Net Interest Income                             144         159            132     172    211      266          394     198      (464)     (267)       27      284
     Interest Income                            544         501            418     541    834    1,004        1,495   4,033     1,159       581     1,217    2,046
     Interest Expense                           400         341            285     369    623      738        1,101   3,835     1,623       848     1,190    1,762

Non-Interest Income                               68         79            120     119     96     136          339      762       191       193      512      360

Operational Expenses                            138         147            159     188    177     223          627    3,633     1,786     1,040       308    1,492
   Doubtful Debts                                36          28             13      18     43      38          237    2,888     1,289       563       342     (122)
   General Administrative                        53          55             67      79     90     118          190      264       238       224       237      295
   Salaries                                      43          54             62      73     85     104          137      154       160       174       189      294
   Others                                         6          11             17      18    (41)    (37)          63      327        99        79      (460)   1,025

Profit or Loss Before Tax                         74         91             93     103    130     179          107    (2,673)   (2,059)   (1,114)    231      (848)
Tax Expense or Benefit                            20         30             29      27     34      47           37       (10)      (34)      (40)      8       (46)
Profit or Loss After Tax                          54         60             64      75     96     132           70    (2,663)   (2,024)   (1,074)    223      (802)

Subsidiary's Income Purchased from
    Previous Owner                                                                                                                   0         0        0        0
Minority Interest Share of Income                  2           3             3       3      4       6            0       11          4         6       (7)      (7)

Net Income or Loss for the Year                   52         58             62      72     92     126           70    (2,674)   (2,029)   (1,080)    216      (808)


Financial Ratios
Return on Average Assets (%)                   1.74        1.83            1.74   1.69   1.70     1.84         0.80   (23.50)   (24.97)   (11.87)    1.70    (4.80)

a
    Restatement in 1999 due to changes in accounting policy.
b
    Restatement in 2002 due to Bank Bali's merger with four other banks.
Sources: Annual Reports 1991-2002, Bank Bali/Permata.
                                                                                   Appendix 6     39


                      PROFILE OF BANK INTERNASIONAL INDONESIA

A.     Organizational Performance

       1.      Before the Financial Crisis

1.      Key financial data for Bank International Indonesia (BII) are given in Tables A6.1 and
A6.2. At the end of 1996, BII was the third largest private bank in terms of gross assets, with
4.6% of total commercial bank assets. BII’s assets increased by 482% between 1991 and 1996,
almost double the overall growth rate for commercial banks (250%). The return on assets was
consistently above 1.5% during this period. Bank Indonesia (BI), the central bank, rated BII as
sound for 1993–1996. The capital adequacy ratio (CAR) was consistently above 8%, while more
than 97% of the total loan portfolio could be classified as current. The Operations Evaluation
Mission (OEM) could not verify BII's loan exposure to the group companies (Sinar Mas
Diversified Group).

2.    BII's foreign exchange (FX) liabilities and the FX assets were largely balanced during
1993–1996. The FX loan from BI, funded by multilateral and bilateral sources (including DFL II),
accounted for 1.6% of FX liabilities at the end of 1996.

       2.      During and After the Financial Crisis

3.      BII's loan portfolio deteriorated in 1998 due to the financial crisis. In early 1999, BI
reported BII's CAR to be –24.7%, and gave BII's majority shareholder (or the owner of Sinar
Mas group) the option to infuse 20% of the new capital required to attain a CAR of 4%. As the
Sinar Mas group's owner met the requirement, BII raised Rp11.1 trillion through an outright
share issue. The Government injected capital in exchange for Rp7.2 trillion in bad assets being
transferred to Indonesian Bank Restructuring Agency (IBRA). In July 2001, however, BI
classified BII as a "bank under rehabilitation" due to a breach of BI lending limits and a failure to
meet the minimum 8% CAR. Consequently, BI ordered BII to stop lending while IBRA formed a
supervisory team to take over its management. In April and July 2002, the Widjaya Family (and
by companies controlled by them) transferred their BII's shares and IBRA certificate of
entitlement to IBRA. In July 2002, BII raised Rp4.8 billion in additional capital through another
outright issue, with IBRA acting as a standby investor. In October 2002, BII renewed lending. In
2003, IBRA divested 51% of BII’s shares to the Sorak Consortium, a Singapore-based strategic
investor.

4.       BII is now the third largest domestic private bank, accounting for 3.3% of commercial
bank assets. BII's recovery in 1999–2001 was not smooth, as demonstrated by frequent
changes in the management team. With the gross NPL ratio reduced to 9.0% and CAR raised to
33.2% at the end of 2002, BII's operations appear to be back on track. The current management
prioritizes governance reform and strengthening risk management, while its loan portfolio is
being repositioned towards commercial and consumer sectors rather than the corporate sector.

B.     Subloan Performance

       1.      Overview

5.     Under DFL II, BII approved eight subloans to eight subborrowers totaling $12.8 million,
of which $12.6 million was disbursed. Six subborrowers were in Java (including three in Jakarta
and two in Bandung), one in Batam, and one in Bangka. Five subloans were for expansion of
40        Appendix 6



production capacity, two were for new projects, and one was to modernize production facilities.
All the subloans, except one, were below the free limit of $3 million.1 Three subloans were for
textiles and garments; two were for processed food and beverage; and one each for rubber
products, fishing nets and electronics parts. Four subloans had maturities of 4 years or less,
three had a 5-year maturity, and one had a 5.5-year maturity.

6.    The eight subborrowers repaid on schedule or early. BII continues to do business with
one subborrower. At OEM, BII's outstanding payable to BI under DFL II was around $5.2 million.

7.     The OEM visited three subborrowers in Jakarta, and two in Bandung. Of the five
subborrowers, four were export-oriented companies, while the other planned to gradually
increase its export. The five subloans were for the importation of production facilities to support
projected higher exports. Four subborrowers repaid the subloans on schedule, and one prepaid
midway through the subloan period. The incremental annual exports from these five subprojects
were estimated to be around $7.2 million, and about $6.6 million has been maintained. The five
subprojects created about 750 jobs.

          2.       Profiles of Selected Subprojects

                   a.      BI-2 (Textiles Manufacturer)

8.       BI-2 was established in Bandung in 1986 as a producer of grey polyester. In 1989, a
family-owned business group, which had several affiliated companies producing and marketing
textile products, took over BI-2.

9.      On 3 September 1996, the Asian Development Bank (ADB) confirmed BII's approval of a
subloan to BI-2 for $1.7 million. BI-2 obtained the Analisis Mengenai Dampak Lingkungan
(AMDAL) certification before subloan approval. The subloan had a 5-year maturity and carried a
variable interest rate. BI-2 knew that ADB was funding the loan. At subloan approval, BI-2 was
exporting 50% of its products to Japan. The subproject involved the acquisition of 32 units of
new machinery to increase production capacity from 500,000 yards per month to 710,000 yards
per month.

10.    The subproject generated about $600,000 in additional export revenue annually, and
created 70 jobs. The financial crisis did not significantly harm BI-2's operations, and the jobs
created under the subproject have been sustained. In 2000, BI-2 stopped exporting its products
to Japan, as manufacturers from the People’s Republic of China penetrated the market with
very competitive prices. Since then, BI-2 has sold all its products in the domestic market, with its
mother company purchasing 40%.

                   b.      BI-3 (Mineral Water Producer)

11.     BI-3, a company producing mineral and aerated water, was established in 1992 in Jakarta.
BI-3 had been inactive, and focusing on research, until it started the trial production in 1996. The
factory is in Cimelati, West Java on 30,000 square meters of land owned by the BI-3’s principal
shareholder. Before establishing this business, he manufactured candy. As a candy manufacturer,
he established a good credit standing with BII, leading to the subloan approval. As the production


1
    The free limit was raised from $1 million to $3 million effective 12 April 1996. ADB approved the part of BII's
    subloan to BI-4 for $1.5 million on 10 April 1996.
                                                                                                  Appendix 6       41


of mineral water was a pioneer industry at that time, other banks did not see favorable prospects
for this venture. BI-3 says it was the first Indonesian company to produce mineral water.

12.      ADB records show that a subloan for about $1.2 million was approved, and $979,555
was disbursed.2 BI-3 initially wanted to borrow in rupiah, because its early operations focused
on the domestic market. However, the interest rate of the dollar loan that BII offered was more
attractive (16% for a rupiah loan, compared with 11% for a dollar-loan). BI-3 was not required to
submit the AMDAL certification before subloan approval.

13.      The subloan was to finance BI-3’s startup operations, which included the purchase of
machinery and equipment from Italy and hiring 50 employees. The maximum capacity of this
facility was projected to be 12.5 million liters of mineral water year. During the first year of
production, utilization was projected to be 40%. BI-3 planned to sell 80% of the products
domestically in the first year, targeting hotels, restaurants, sports centers, and private clubs. In
the second year, it expected to sell 50% of its products to Brunei; Japan; Malaysia; Singapore;
and Taipei,China.

14.    Despite the adverse effects of the financial crisis on BI-3's initial operations, it has
increased dramatically its domestic sales in recent years and repaid the subloan on schedule.
BI-3 now is considering further investment to diversify its product lines. BI-3 sells 80% of its
products in the domestic market, with the rest exported to Singapore, Malaysia, and Europe. Its
export revenue is estimated to be $400,000 per year, and the number of employees remains
around 50. BI-3 hopes to increase the proportion of its exports to 80% of its total sales in the
next 10 years.

                   c.       BI-5 (Knitted Wear Manufacturer)

15.    BI-5 was established in 1992 as a family-owned company in Bandung, producing knitted
garments from cotton and polyester. All the products are exported to Europe and the United
States (US). Raw materials are bought locally, but are priced in dollars. It has 1,500 employees.

16.     On 27 December 1996, ADB confirmed BII's approval of the subloan for $1 million to
BI-5.3 The subloan, which had a 3-year maturity with a variable interest rate (9.4% at
approval), was for procuring ten units of knitting machines from Germany for additional
production of sweaters. As BI-5 previously borrowed in dollars at 13% from BII and another
bank, it found the interest rate of this subloan to be attractive. The new machines increased
production capacity and improved BI-5’s product quality. This subproject contributed to an
increase in export revenue from $8 million to $10 million, though it did not create any jobs.
The level of export revenues has been sustained.

17.     The depreciation of the rupiah during the financial crisis improved BI-5's export
performance. BI-5 repaid the subloan to BII on schedule, and subsequently received another
dollar loan for working capital with a variable interest rate (currently at 6%) from another
commercial bank. BI-5 does not have a business relationship with BII.


2
    BII records showed—and they insist on their accuracy—that the approved and disbursed amounts were $979.555.
    BI-3, on the other hand, insisted that they did not draw down the entire approved amount, whether it was $1.6
    million or $979,555. BI-3, however, recalled that the exact amount of the loan was in the ballpark figure of
    $800,000. The cost underrun was due to their inability to negotiate a lower price for the machinery when the import
    letter of credit was opened.
3
    This includes BII's earlier subloan approval for $500,000, which ADB confirmed on 13 February 1996.
42     Appendix 6



18.     Despite stiff competition from producers in the People’s Republic of China, BI-5
continues to operate at 100% capacity utilization, because of its specialized products. The
company does not plan to expand at present, opting to wait until 2005 when US and European
import quotas for Indonesian textiles will be reassessed. If that the quota is removed, BI-5 might
establish a marketing office in the US to maintain its exports.

               d.      BI-6 (Textiles Manufacturer)

19.     In 1978, BI-6 was established in Cimahi, West Java as an enterprise producing cotton
yarn, cotton grey, and printed material as finished products. In 1989, a family-owned business
group, which had several affiliated companies producing and marketing textile products, took
over BI-6. In 1995, BI-6's authorized capital was increased to Rp50 billion, and its paid-up
capital was Rp14 billion.

20.     On 28 February 1997, ADB approved BII's request to extend a $310,000 subloan to BI-6.
The subloan had a 4-year maturity and a variable interest rate (BII’s average cost of dollar fund
plus 2.5%). BI-6 obtained the AMDAL certification before subloan approval. At subloan approval,
BI-6 earned 30% of its revenues from exports to Canada; Hong Kong, China; the Middle East;
and Singapore. The subproject enabled BI-6 to acquire 12 units of weaving machinery from
Japan, increasing its production capacity and export revenues by 5–10%.

21.      BI-6’s exports to Latin America; the Middle East; and Taipei,China account for 40% of its
revenues. The subproject generated additional export revenue of around $2.5 million a year,
and created 75 jobs. The financial crisis hurt BI-6's domestic sales as well as its cash flow
because suppliers of raw materials demanded advance payment or cash on delivery. BI-6 now
fully utilizes its production capacity and employs 4,500 employees in three shifts in the factory.
The subproject's contributions in terms of export promotion and job creation have been
sustained.

22.     BI-6 prepaid the subloan midway through the loan period by obtaining a loan from a
foreign bank that carried a more competitive interest rate.

               e.      BI-7 (Rubber Products Manufacturer)

23.      BI-7 was established in Jakarta as a single proprietorship in 1988 at the height of the
AIDS epidemic. It produces latex and non-latex gloves for medical, industrial, and household
purposes. BI-7 is one of the two largest glove manufacturers in Indonesia, accounting for 35%
of all Indonesian glove exports. BI-7 exports 95% of its products, mainly to US and Europe. BI-7
uses imported raw materials as sourcing locally would be more expensive.

24.     On 14 May 1997, ADB confirmed BII's approval of a subloan for $3 million to BI-7. The
subloan had 3.7-year maturity with a variable interest rate (9.29% at approval). BI-7 submitted
the AMDAL certificate before subloan approval. Prior to the loan, BI-7 had a good business
relationship with BII. BI-7 learned about DFL II through BII.

25.    BI-7 used the subloan to purchase additional machinery for latex and vinyl gloves from
Taipei,China, which increased its production capacity by 50% and boosted export revenue by
about $1.7 million. It also created 500 jobs. The depreciation of rupiah during the financial crisis
improved BI-7's export performance. BI-7 repaid the subloan to BII on schedule, and the
                                                                           Appendix 6   43


subproject's contributions to the company’s export earnings and job creation have been
sustained. At OEM, BI-7 had 1,400 workers—80% of which were women—working in three
shifts.

26.    BI-7 continues to do business with BII, and is interested in obtaining a new loan to
increase its production capacity by an additional 25%.
                                                                                                                                                                    44
                                              Table A6.1: Summary Balance Sheet-Bank Internasional Indonesia
                                                                      (as of 31 December)
                                                            (Rp billion, unless otherwise specified)




                                                                                                                                                                    Appendix 6
                                                                                             Actual
Item                                  1991      1992      1993     1994     1995     1996             1997     1998       1999       2000       2001       2002

Total Assets                          3,674    4,897     7,139     9,329   12,899   17,707       24,698      34,847     40,185     37,209     30,754     36,343
    Loans Receivable-Net              2,884    3,638     4,606     6,710    8,159   11,474       16,479      10,977     10,047     16,664      4,689      5,258
    Others                              790    1,259     2,532     2,620    4,740    6,233        8,219      23,870     30,139     20,545     26,065     31,085

Total Liabilities and Equity          3,674    4,897     7,139     9,329   12,899   17,707       24,698      34,847     40,185     37,209     30,754     36,343
Total Liabilities                     3,327    4,465     6,619     8,484   11,892   16,454       22,142      43,919     38,249     34,870     32,954     33,366
   Deposits                           2,793    3,508     4,427     6,172    8,465   12,855       14,223      26,913     26,101     28,784     25,123     29,508
   Fund Borrowing                       291      314       455     1,115    1,841    2,610        5,119       5,785      5,102      4,195      3,974      2,113
    Other Liabilities                   243      643     1,737     1,197    1,586      989        2,799      11,221      7,046      1,891      3,857      1,745

Total Equity                            346      432       520      844     1,008    1,253        2,556       (9,072)     1,936      2,339     (2,199)     2,977
    Equity                              203      264       264      316       316      967        1,617        1,617     13,055     13,055     13,055     17,868
    Reserves                            143      169       256      528       691      286          939      (10,689)   (11,119)   (10,716)   (15,254)   (14,891)

Memorandum Items
Total Foreign Exchange Assets         2,475      922     1,183     1,419    2,024    2,263        4,846       8,527      4,726      5,031      7,600      7,201
    Loan                              2,417      781       924     1,347    1,742    2,159        4,651       7,527      3,955      4,101      5,048      4,608
Total Foreign Exchange Liabilities    1,027    1,133     1,216     1,598    2,247    2,595        4,908       6,043      4,252      4,211      7,399      6,358
    Deposits                            809      793       926     1,131    1,490    1,745        2,839       2,410      2,334      3,718      5,517      4,966
    Borrowing                           217      340       291       466      757      849        2,070       3,633      1,918        493      1,825        922

Financial Ratios
Capital Adequacy Ratio (%)             9.30    11.70     12.90      8.40     9.63     8.72        11.70       (24.65)      4.43       7.57     (47.41)    33.21

Sources: Annual Reports 1991-2002, Bank Internasional Indonesia.
                                              Table A6.2: Summary Income Statement-Bank Internasional Indonesia
                                                                  (year ending 31 December)
                                                             (Rp billion, unless otherwise specified)

                                                                                             Actual
Item                                  1991       1992     1993     1994    1995      1996             1997      1998      1999     2000     2001     2002

Net Interest Income                     150       186      258     317       444      578           950        (1,523)   (1,153)     768      20       (64)
   Interest Income                      655       660      745     937     1,545    2,086         3,499         7,007     4,783    3,538   3,311     3,073
   Interest Expense                     505       474      487     620     1,101    1,508         2,549         8,530     5,936    2,770   3,292     3,137

Non-Interest Income                      90       149      109     158      243       244             428      2,096       795      674      806      641

Operational Expenses                    164       213      197     273      417       453         1,019       12,345     1,699     1,061   4,154       446
  Doubtful Debts                         50        68       34      31      126        88           518       10,414       545        26   3,022      (597)
  General Administrative                 12         6        7      10      132       169           197          424       529       450     450       590
  Salaries                               50        54       68      85      101       131           177          189       211       255     312       310
  Others                                 52        85       88     147       58        65           126        1,318       414       330     370       144

Profit or Loss Before Tax                75       122      170     203      270       369              359    (11,772)   (2,058)    381    (3,328)    131
Tax Expense or Benefit                  (13)      (39)     (57)    (60)     (78)     (108)            (114)       (18)      (35)   (114)     (802)     (1)
Profit or Loss After Tax                 62        83      113     142      192       260              244    (11,791)   (2,093)    267    (4,131)    130

Financial Ratios
Return on Average Assets (%)           1.90       2.00     2.07    1.81     1.73     1.70        (39.60)       (36.00)    (5.55)    0.69   (12.13)    0.39

Note: Components may not add up due to rounding off.
Sources: Annual Reports 1991-2002, Bank Internasional Indonesia.




                                                                                                                                                              Appendix 6
                                                                                                                                                              45
46        Appendix 7



                                       PROFILE OF BANK DANAMON

A.        Organizational Performance

          1.       Before the Financial Crisis

1.      Key financial data for Bank Danamon (DANAMON) are given in Tables A7.1 and A7.2.
At the end of 1996, DANAMON was the second largest private bank in terms of gross assets,
with 5.7% of total commercial bank assets. Its assets increased by 521% between 1991 and
1996, more than double the overall growth rate for commercial banks (250%). DANAMON's
capital adequacy ratio (CAR) was consistently above 8% for 1993-1996, and more than 97% of
the total loan portfolio could be classified as current for 1995-1996. The Operations Evaluation
Mission (OEM) could not obtain the information for the pre-crisis period on the (i) CAMEL1 rating
for DANAMON by Bank Indonesia (BI), and (ii) claim on its affiliated companies (Danamon
Diversified Group). DANAMON's return on assets was below 1% in 1995. As such, DANAMON
only partially complied with the financial covenants of the Second Development Finance Loan
(DFL II).

2.      DANAMON’S foreign exchange (FX) liabilities and FX assets were largely balanced
during 1994–1996. The FX loan from BI (including DFL II) accounted for 3.0% of its FX liabilities
at the end of 1996.

          2.       During and After the Financial Crisis

3.      The financial crisis significantly affected DANAMON's loan portfolio, resulting in a CAR
of –77.6% at the end of 1998. In April 1998, the Indonesian Bank Restructuring Agency (IBRA)
took over DANAMON’s management and operations, along with one state bank and five other
private banks. By then, these banks had borrowed more than Rp2 trillion, and had received
more than 72% of the liquidity support BI had provided. In August 1998, the assets of three of
the six private banks, representing 5% of the total bank assets, were frozen. Because
DANAMON was to be a bridge bank—or a repository for assets and liabilities of other banks—it
was kept open under IBRA control. Two other banks (Private Development Finance Company of
Indonesia and Bank Tiara) were given three options: (i) to be recapitalized by their main
shareholder, (ii) merged with DANAMON, or (iii) closed. By May 1999, DANAMON detached
some of its nonperforming loans and recapitalized. In December 1999, DANAMON finalized its
merger with Private Development Finance Company of Indonesia, receiving a key mandate
from the Government. With new management in place after the merger, the Government
injected Rp28 trillion to allow DANAMON to finance succeeding mergers with eight banks, which
was completed in September 2000. In June 2003, IBRA completed the sale of 51% of its shares
of DANAMON to Asia Financial Indonesia Pte. Ltd. Asia Financial Indonesia now owns 61.9% of
DANAMON’s shares, while the Government holds 20.5%, and the public holds the rest.

4.     DANAMON is now the second largest domestic private bank, representing 4.2% of
commercial bank assets. While the impact of the financial crisis on DANAMON was immediate
and significant, its recovery during 2000–2002 was noteworthy. Its profits steadily increased; the
gross nonperforming loan ratio was reduced from 8.6% to 4.4%; and the CAR was kept above
20%. The management aims to improve its corporate governance and risk management with its
operational focus on consumer banking and small and medium enterprise credits.


1
    CAMEL stands for capital adequacy, asset quality, management, earnings, and liquidity.
                                                                                 Appendix 7    47


B.     Subloan Performance

       1.      Overview

5.       Under DFL II, DANAMON approved eight subloans to eight subborrowers totaling $9.6
million, of which $7.9 million was disbursed. Seven subborrowers were in Java (including five in
Bandung and one in Jakarta) and one was in Sulawesi (in Manado). Six subloans were for
expansion of production capacity, one was for a new project, and one was to modernize
production facilities. All the subloans were below the free limit. Four subloans were for textiles
and garments; and two subloans each were for plastic products and wood products. Six
subloans had maturities of 4 years or less, one had a 5-year maturity, and one had a 6-year
maturity.

6.     Six subborrowers repaid on schedule or early, one subloan was restructured and
remains active, and one was transferred to IBRA and repaid at a discount. DANAMON no
longer has any business relationship with the DFL II subborrowers. At OEM, DANAMON’s
outstanding payable to BI under DFL II was $2.9 million.

7.     The OEM visited one subborrower in Bandung (paras. 8–10).

       2.      Profiles of Selected Subproject: D-4 (Textile Manufacturer)

8.      In 1993, D-4 was established in Bandung as a trading company for textiles. In 1996, D-4
attempted to shift its operations from trading to manufacturing, especially dyeing and printing of
fabrics. To start this new business, D-4 needed financing for land acquisition, plant building
construction, procurement of machinery, and the wastewater treatment facility. D-4 approached
DANAMON for a loan to partly finance this investment. D-4 chose DANAMON on the basis of its
long-term business relationship before this loan.

9.     On 8 May 1996, the Asian Development Bank confirmed DANAMON's approval of a
subloan to D-4 for $2.5 million, of which $2.0 million was disbursed. The subloan had a 5-year
maturity, including a grace period of 1 year, and a variable interest (10% at approval). The
subloan was used to procure dyeing, drier, and printing machines from the Republic of Korea,
and other machines and spare parts from Germany, Japan, and the United States. D-4
purchased other machinery using a supplier's credit from the Japanese Government agency to
a Japanese trading company. The interest rate for the loan was Singapore Interbank Offer Rate
plus 2 percentage points, with a term maturity of 10 years, including 1-year grace period. At
about the same time, D-4 took out another loan from DANAMON in rupiah at concessional
terms, funded by the Overseas Economic Cooperation Fund of Japan, to establish the
wastewater treatment facility.

10.    The expansion that resulted from these loans created 580 jobs, and the estimated export
revenue in 1997 was $8 million. The depreciation of the rupiah during the financial crisis
improved D-4's export performance. D-4 now has 1,350 employees and exports 70% of its
products to the Middle East, the United States, Europe, and other Asian countries. D-4 buys
95% of its raw materials domestically, while the remaining 5% are imported from the People’s
Republic of China and the Republic of Korea.
                                                                                                                                                              48
                                                       Table A7.1: Summary Balance Sheet-Bank Danamon
                                                                         (as of 31 December)
                                                               (Rp billion, unless otherwise specified)




                                                                                                                                                              Appendix 7
                                                                                              Actual
Item                                        1991        1992     1993     1994     1995     1996     1997a     1998b      1999c     2000     2001     2002

Total Assets                               3,680       5,018     8,160   10,457   14,023   22,155   28,292   22,909     39,529     62,168   52,680   46,911
   Loans Receivable-Net                    2,951       3,581     5,666    7,386    9,923   16,511   24,440   12,482      4,784      5,081    9,783   16,626
   Others                                    728       1,437     2,494    3,071    4,100    5,643    3,852   10,427     34,745     57,087   42,897   30,285

Total Liabilities and Equity               3,680       5,018     8,160   10,457   14,024   22,155   28,292   22,909     39,529     62,168   52,680   46,911
Total Liabilities                          3,389       4,604     7,414    9,498   12,911   20,263   26,526   50,610     54,166     57,637   48,507   42,257
   Deposits                                2,962       3,813     6,482    7,905   10,825   17,587   14,166   12,803     38,764     30,644   41,362   35,366
   Fund Borrowing                            310         518       283    1,116    1,353    1,445   11,250   29,727     10,036     18,165    1,461    2,564
   Others                                    117         273       649      477      733    1,230    1,109    8,079      5,366      8,828    5,684    4,327

Total Equity                                 291         414      746      959     1,113    1,892    1,766   (27,701)   (14,637)    4,531    4,173    4,655
   Equity                                    112         112      224      448       448    1,120    1,120     1,120      2,422     3,562    3,562    3,562
   Reserves                                  179         302      522      511       665      772      646   (28,821)   (17,059)      969      611    1,092

Memorandum Items
Total Foreign Exchange Assets                747       1,276     1,271    3,330    4,628    7,339    7,834   11,707      5,243      5,688    8,038    6,357
   Loan                                      664       1,055       495    2,557    3,093    6,419    7,056   11,064      2,103      2,038    1,595    2,473
Total Foreign Exchange Liabilities           889       1,203     2,654    3,435    4,555    6,416    7,634    5,143      6,779      5,541    6,636    6,748
   Deposits                                  811       1,048     2,654    3,339    3,813    5,170    5,131    1,006      2,520      2,231    4,542    5,658
   Borrowing                                  63         139         0       95      706      855    2,293    4,137      4,259      3,309    1,932      909

Financial Ratio
Capital Adequacy Ratio (%)                  7.90        8.10     10.33    11.55     9.40    10.30     9.17    (77.56)    (54.59)    57.97    35.50    25.63

a
   Restated in 1999 due to changes in accounting policy.
b
   Restated in 1999 due to changes in accounting policy.
c
   Restated in 2000 incorporating the merger with eight banks.
Note: Components may not add up due to rounding off.
Sources: Annual Reports 1991-2002, Bank Danamon.
                                                     Table A7.2: Summary Income Statement-Bank Danamon
                                                                    (year ending 31 December)
                                                               (Rp billion, unless otherwise specified)

                                                                                                Actual
Item                                        1991        1992           1993   1994    1995    1996     1997a     1998b     1999c    2000    2001    2002

Net Interest Income                          134         148            168     288     328     633     844    (8,104)    (2,867)   1,173   1,538   1,737
  Interest Income                            628         840            901   1,129   1,676   2,538   4,353     6,107      3,560    4,952   6,957   6,561
  Interest Expense                           494         692            733     841   1,348   1,905   3,509    14,211      6,427    3,779   5,419   4,824

Non-Interest Income                          141           99           123    143     226     266      483       266       674      277     744     890

Operational Expenses                         229         196            230    311     360     617    1,309    20,033     3,016     1,143   1,527   1,638
  Doubtful Debts                              19          24             30     60      65     141      460    17,732     1,899       134       0     272
  General Administrative                      84          23             96    115     152     292      568     1,017       755       559     487     613
  Salaries                                    54          65             84    103     120     164      233       224       361       298     473     504
  Others                                      72          84             20     33      24      20       47     1,060         1       153     567     248

Profit or Loss Before Tax                      46          51            61    120     193     281       18    (27,871)   (5,208)    306     754     989
Tax Expense or Benefit                         10          11            13     22      61      80      (19)     2,167    (1,794)     34     (32)    (41)
Profit or Loss After Tax                       36          40            48     97     133     202       (0)   (25,705)   (7,002)    340     723     948

Financial Ratio
Return on Average Assets (%)                 1.10        0.80          0.70    1.00    0.80    1.12    0.00    (100.41)   (22.43)    0.70    1.30    2.00

a
   Restated in 1999 due to changes in accounting policy.
b
   Restated in 1999 due to changes in accounting policy.
c
   Restated in 2000 incorporating the merger with eight other banks.




                                                                                                                                                            Appendix 7
Note: Components may not add up due to rounding off.
Sources: Annual Reports 1991-2002, Bank Danamon.




                                                                                                                                                            49
50        Appendix 8



                                          PROFILE OF BANK LIPPO

A.        Organizational Performance

          1.       Before the Financial Crisis

1.       Key financial data for Bank Lippo (LIPPO) for 1991–2002 are given in Tables A8.1 and
A8.2. At the end of 1996, LIPPO was the fifth largest private bank in terms of gross assets, with
2.6% of the total commercial bank assets. Its assets increased by 328% during 1991–1996,
faster than the overall 250% growth rate for commercial banks. The return on assets was kept
above 1% during 1994–1996. LIPPO maintained its capital adequacy ratio (CAR) above 8%
during 1993–1996, and more than 97% of the total loan portfolio could be classified as current
for 1995-1996. The Operations Evaluation Mission could not obtain the information for the pre-
crisis period on the (i) CAMEL1 rating for LIPPO by Bank Indonesia (BI); and (ii) claim on its
affiliated companies.

2.     LIPPO's foreign exchange (FX) liabilities exceeded its FX assets during 1991–1995.
However, this was reversed in 1997 as LIPPO significantly reduced its FX borrowing, while its
lending increased in 1996.

          2.       During and After the Financial Crisis

3.      LIPPO's loan portfolio performance deteriorated in 1998 due to the financial crisis. In
early 1999, BI found LIPPO's CAR to be negative, and offered LIPPO’s majority shareholder the
option to inject 20% of the new capital required to attain a CAR of 4%. As the shareholder met
this requirement, the Government agreed on 28 May 1999 to inject Rp6.05 trillion2 in exchange
for the transfer of some of its bad assets. Meanwhile, LIPPO entered into a management
contract with ING Bank under which a team of senior ING bankers were seconded to LIPPO
starting in 1999. In February 2004, the Indonesian Bank Restructuring Agency completed the
divestment of its majority stake to Swiss Asia Group.

4.      LIPPO is now the fifth largest domestic private bank, representing 2.3% of commercial
bank assets. LIPPO’s recovery from the financial crisis that began in 1997 was relatively
smooth, as demonstrated by the LIPPO group's owner remaining as president commissioner.
As such, LIPPO continues to take advantage of the synergy from group affiliation. CAR has
been kept above 15% following the 1999 recapitalization, while the current gross nonperforming
loan ratio was at 8.8%. Although LIPPO posted an operational loss in 2002 due to the resolution
of its nonperforming loans, the bank’s financial health has been maintained largely due to
prudent liability management.

B.        Subloan Performance

5.     LIPPO found the relending interest rate under DFL II to be unattractive, and extended
only one subloan.

6.     The Asian Development Bank approved LIPPO’s subloan for $4 million to L-1 (a glass
products manufacturer) on 19 February 1998. The approved amount was fully disbursed. The
subloan had an 8-year maturity with a variable interest rate (8.5% at approval). L-1 has not fully

1
    CAMEL stands for capital adequacy, asset quality, management, earnings, and liquidity.
2
    The Government initially agreed to inject Rp7.7 trillion. This amount was subsequently reduced to Rp6.05 trillion,
    as the existing shareholders agreed to contribute an additional Rp1.65 trillion.
                                                                                  Appendix 8     51


met its debt obligation due to the financial problems of its affiliated companies. Noting that L-1’s
financial performance was sound, LIPPO offered to restructure the subloan in December 2000.
However, L-1 has been in arrears since 2002, and LIPPO has classified this subloan as
nonperforming. As of January 2004, L-1 still had an outstanding balance with LIPPO of $1.8
million.

7.     LIPPO has an outstanding balance with BI, under DFL II, of $1.6 million. Given the
decline in the market interest rate for the dollar, the revolving fund of $1.6 million carries a
negative spread. Hence, LIPPO hopes to prepay this amount if the Government agrees.
                                                                                                                                                  52
                                                  Table A8.1: Summary Balance Sheet-Bank Lippo
                                                                  (as of 31 December)
                                                        (Rp billion, unless otherwise specified)




                                                                                                                                                  Appendix 8
                                                                                     Actual
Item                                   1991     1992   1993     1994     1995    1996     1997       1998      1999     2000     2001     2002

Total Assets                          3,100    3,831   4,904   6,915    7,624   10,182   12,961    14,437     23,779   22,627   23,811   25,200
   Loans Receivable-Net               1,830    2,116   3,383   5,211    5,833    7,454   10,185     4,517      3,018    3,413    3,597    4,315
   Others                             1,270    1,716   1,522   1,704    1,791    2,728    2,776     9,920     20,762   19,214   20,214   20,886

Total Liabilities and Equity          3,100    3,831   4,904   6,915    7,624   10,182   12,961    14,437     23,779   22,627   23,811   25,200
Total Liabilities                     2,919    3,627   4,521   6,478    7,052    9,214   11,902    20,077     21,466   20,094   21,015   22,885
   Deposits                           2,460    3,080   4,047   5,861    5,892    8,714   11,200    18,549     18,066   18,692   20,040   22,081
   Fund Borrowing                       313      316     264     341      937      253      341       757        579      247       93       74
   Others                               146      231     209     277      223      248      360       770      2,820    1,156      881      729

Total Equity                            182      204    383      437      572     968     1,059     (5,640)    2,313    2,533    2,796    2,316
   Equity                                48      143    190      286      286     428       428        465       811      811      811      811
   Reserves                             134       61    193      152      286     540       630     (6,105)    1,502    1,721    1,985    1,504

Memorandum Items
Total Foreign Exchange Assets           363      408    767      874    1,144    1,937    2,117    (11,280)    4,627    5,066    5,592    4,631
   Loan                                 214      331    347      550      587      888    2,069      2,829     1,332    1,216    1,093    1,485
Total Foreign Exchange Liabilities      709      697    937    1,172    1,376    1,367    2,806      4,325     3,450    3,318    4,265    4,128
   Deposits                             571      596    822    1,017    1,125    1,334    2,696      3,669     2,956    3,289    4,238    4,093
   Borrowing                            139      101    116      155      252       33      111        656       495       29       27       35

Financial Ratios
Capital Adequacy Ratio (%)             9.20     8.90   11.10    9.31     8.82    13.23    10.35      —         16.33    21.08    23.90    21.10

— = not available.
Note: Components may not add up due to rounding off.
Sources: Annual Reports 1991–2002, Bank Lippo.
                                                Table A8.2: Summary Income Statement-Bank Lippo
                                                             (year ending 31 December)
                                                        (Rp billion, unless otherwise specified)

                                                                                    Actual
Item                                   1991     1992   1993    1994     1995    1996     1997      1998      1999    2000     2001    2002

Net Interest Income                     157      206    243     340      366     425      522    (1,269)   (1,108)     630    1,007     985
   Interest Income                      588      615    682     812    1,159   1,391    2,004     3,605     2,481    2,022    2,431   2,347
   Interest Expense                     432      409    439     472      792     965    1,482     4,873     3,589    1,392    1,424   1,362

Non-Interest Income                      20       36     60      84      104     160     188        611       161     164      455     380

Operational Expenses                    152      193    237     321      333     424     540       7,695      879      581    1,133   1,607
  Doubtful Debts                          8        7     37      62       52      74     127       6,456      (49)     163       83     306
  General Administrative                 60       77     98     134      140     166     201         328      320      356      435     495
  Salaries                               52       62     76      85      101     126     145         149      244      295      340     311
  Others                                 32       47     27      39       40      58      67         763      365     (233)     276     495

Profit or Loss Before Tax                25       49     66     104      137     161     171     (8,353)   (1,827)    212      329     (243)
Tax Expense or Benefit                    2       17     24      38       54      45      53          2      (187)    (34)      58      264
Profit or Loss After Tax                 22       32     42      66       84     117     118     (8,355)   (1,640)    246      271     (506)

Financial Ratios
Return on Average Assets (%)           0.85     0.93    0.99    1.11    1.15    1.31     1.02   (60.99)    (8.58)     1.10     1.40   (1.00)

Note: Components may not add up due to rounding off.




                                                                                                                                               Appendix 8
Sources: Annual Reports 1991-2002, Bank Lippo.




                                                                                                                                               53
54     Appendix 9



                                  PROFILE OF BANK NIAGA

A.     Organizational Performance

       1.      Before the Financial Crisis

1.      Key financial data for Bank Niaga (NIAGA) for 1991–2002 are given in Tables A9.1 and
A9.2. At the end of 1996, NIAGA was the sixth largest private bank in terms of gross assets,
with 2.0% of the total commercial bank assets. Its operational focus was on corporate banking.
NIAGA’s assets increased by 261% during 1991–1996, slightly higher than the overall growth
rate for commercial bank (250%). Its return on assets gradually increased from 0.6% in 1991 to
1.4% in 1996. The capital adequacy ratio (CAR) was kept above 8%, while Bank Indonesia (BI),
the central bank, rated NIAGA's operations as sound. More than 97% of its earning assets was
classified as current during 1993–1996. The loan exposure to its group of companies was kept
below 50% of its portfolio, in accordance with BI's prudential guidelines.

2.      NIAGA’S foreign exchange (FX) liabilities were consistently greater than its FX assets,
while the level of the currency mismatch was kept within 7% of its assets (or liabilities and
equity) during 1993–1996. NIAGA’s FX deposits consistently exceeded its FX borrowing for this
period.

       2.      During the Financial Crisis

3.      NIAGA’s portfolio deteriorated significantly in 1998 and 1999 due to the financial crisis.
In early 1999, BI found NIAGA's CAR to be –23.1%, and gave NIAGA's majority shareholder the
option to inject 20% of the new capital required to attain a CAR of 4%. As the shareholder failed
to provide sufficient capital, the Indonesian Bank Restructuring Agency (IBRA) took over
NIAGA’s management and operations in April 1999. IBRA transferred NIAGA's nonperforming
loans for resolution, while injecting Government bonds valued at Rp9.5 trillion in May 2000 to
increase the bank’s capital. In November 2002, IBRA completed sales of 51% of NIAGA’s
shares to Commerce Assets Holding Berhad, a leading Malaysian financial institution.

4.      NIAGA is now the sixth largest domestic private bank, representing 2.1% of
commercial bank assets. While the magnitude of the crisis’ impact on NIAGA was significant,
its recovery was noteworthy for several reasons: (i) outstanding loans exceed pre-crisis levels,
(ii) operations were profitable during 2000–2002, (iii) the gross nonperforming loan ratio
declined to 6.2%, and (iv) CAR was kept at 12.7% as of the end of 2002. The management
aims to improve its corporate governance and risk management, while shifting its strategic
focus away from corporate banking and towards small and medium enterprise and consumer
banking.

B.     Subloan Performance

       1.      Overview

5.       Under DFL II, NIAGA approved 14 subloans to 14 subborrowers totaling $32.2 million, of
which $31.1 million was disbursed. NIAGA was the largest user of DFL II, disbursing 41% of
total utilized funds. Twelve subborrowers were in Java (including four in Jakarta and three in
Bandung) and two were in Sumatra (Medan). Eight subloans were for expansion of production
capacity, four were for new projects, and two were to modernize the production facilities. All the
subloans were below the free limit of $3 million. Four subloans were for textiles and garments
                                                                                                Appendix 9    55


industry; four were for chemical, plastic and rubber; two were for processed food and beverage;
and one each was for printing, gypsum, footwear, and metal products. Eleven subloans had
maturities of 5 years or less, one had a 6-year maturity, and two had 7-year maturities.

6.      Eight subborrowers repaid on schedule or early; two were restructured and remain
active; two were written off and are under litigation; one is active without restructuring; and one
was transferred to IBRA and sold at a discount.

7.       The outstanding receivables of NIAGA from subborrowers under DFL II stood at $3.8
million, while its payable to BI was around $13.3 million as of the end of 2003. Of that $13.3
million, $1.29 million will be paid in 2004. NIAGA wanted to prepay its DFL II obligations, but BI
advised that this option was not available. NIAGA also had discussions with the Asian
Development Bank (ADB) regarding this possibility.

8.     The Operations Evaluation Mission visited three subborrowers (one in Bandung and two
in Medan), of which two (N-5 and N-10) offered relevant information. In addition, the Operations
Evaluation Mission obtained some background information on unsuccessful subprojects (N-3,
N-8, N-9, and N-13) from NIAGA's headquarters as well as its branches in Bandung and Medan.

          2.       Profiles of Selected Subprojects

                   a.       N-10 (Polyester Fabrics Manufacturer)

9.      N-11 was established in 1980 as a producer of interior fabrics for home furnishing, car
seats, hotels, offices, hospitals, and airports.

10.     On 31 July 1997, ADB confirmed NIAGA's approval of a subloan to N-10 for $2.7
million.1 When N-10 applied for the loan, the company was aware that the loan was funded
under DFL II. The Analisis Mengenai Dampak Lingkungan certification was obtained before the
subloan approval. The subloan had a 3-year maturity with a variable interest rate. N-10
approached NIAGA for the subloan because it had had a good relationship with the bank since
1980, and the interest rate offered was comparable to its other financing options.

11.    In 1995, N-10's annual sales were about Rp83 billion, of which 46% were export
revenues. N-10 used the subloan to purchase 20–30 units of machinery from Europe to expand
product lines and improve production efficiency. This subloan increased annual sales from
export between $700,000 and $1 million a year, and created 100 jobs. N-10 repaid the subloan
on schedule.

12.    The financial crisis did not harm N-10's operations, because the company (i) obtained
97% of its raw material requirements for its polyester products locally, and (ii) quickly shifted its
products from the domestic market to the export market. Support from foreign partners
connected through strategic alliances made refocusing on the export market possible. The
foreign counterparts included a European company in product design, and a Japanese
company in production technology and marketing.

13.    N-10 subsequently poured more investment into its production facility. In 2001, NIAGA
offered another dollar investment loan, not under DFL II, to partly finance these investments.
The loan had a 4-year maturity at a fixed interest rate of 6%. N-10's annual sales have reached

1
    This included NIAGA's earlier subloan approval for $1.5 million, which ADB confirmed on 29 August 1996.
56     Appendix 9



close to Rp200 billion. The share of its domestic sales has increased again to 80%, reflecting
the growing domestic demand for car interior fabrics. N-10's owner foresees further growth of
this market, and believes that N-10's competitive strength in the international polyester products
market will continue for some time.

               b.     N-11 (Steel Products Manufacturer)

14.    N-11 was established in 1986 as a trading company of steel products. In the middle of
1990s, N-11 started manufacturing steel products on a small scale, using mostly imported scrap
iron. N-11 applied for the subloan from NIAGA to expand its manufacturing facilities. The
company estimated that exports would account for 50% of its total sales in 4 years. ADB
records show that N-11 went through Analisis Mengenai Dampak Lingkungan process before
subloan approval.

15.    On 4 November 1997, ADB confirmed NIAGA's approval of the subloan for $3 million.
The entire amount was disbursed. Soon after subloan approval, the steel industry in Indonesia
collapsed due to a decline in the property market, putting N-11 in a precarious financial position.
The subloan was transferred to IBRA in September 1999.

16.     N-11 requested debt restructuring from IBRA. However, IBRA and N-11 could not reach
an agreement. N-11 was sold at a discount to a foreign security company, which subsequently
sold N-11 to a local investor, which in turn sold the company back to the original N-11 owners.

17.     In 2002, N-11 resumed producing steel products. N-11's annual sales are Rp400 billion–
500 billion, of which 10% comes from exports. N-11 reduced its workforce by 10% during the
financial crisis, and now has about 800 employees. Recently, N-11's owner acquired a company
that produces mineral water. N-11 also received loans for working capital and investment from
three commercial banks. Currently, N-11 does not have difficulty raising funds from bank loans.

               c.     Unsuccessful Subprojects

18.    On 30 June 1995, ADB approved the subloan to N-3 (mushroom grower and processor)
through NIAGA for $2.5 million. The entire amount was disbursed. When the loan was
approved, the market for mushrooms was in a temporary boom. The subloan was written off in
June 2002, and the subborrower is in litigation.

19.    On 12 May 1997, ADB confirmed the subloan through NIAGA for $900,000 to N-8
(garment manufacturer). The financial crisis hurt N-8 as its raw material was imported. The
subloan was subsequently restructured, and is still being repaid.

20.     On 30 May 1997, ADB confirmed NIAGA's approval of a $3 million subloan to N-9
(plastic products manufacturer). NIAGA's staff in its headquarters believes that the financial
crisis harmed N-9. However, NIAGA’s records do not show how N-9 was affected by the
financial crisis, and the reason for restructuring the subloan.

21.     On 25 March 1998, ADB confirmed the subloan through NIAGA for $3 million to N-13
(gypsum producer). The entire amount was disbursed. The loan was written off in September
2001. The prolonged slump in the property market after the financial crisis hurt most industries
linked to the property and/or construction sectors. N-13 stopped production in 1999. Aside from
stiff competition from countries such as the People’s Republic of China, N-13 also faced some
technical problems in production. N-13’s owners did not accept NIAGA’s offer to restructure the
                                                                              Appendix 9    57


subloan. The subloan subsequently was written off, and is in litigation. NIAGA’s records do not
show what collateral was used for this subloan.
                                                                                                                                                    58
                                                  Table A9.1: Summary Balance Sheet - Bank Niaga
                                                                   (as of 31 December)
                                                         (Rp billion, unless otherwise specified)




                                                                                                                                                    Appendix 9
                                                                                    Actual
Item                                 1991       1992    1993     1994     1995    1996     1997      1998       1999      2000     2001     2002

Total Assets                         3,011     3,346    3,985    4,898   6,587    7,872   10,965    12,274     6,651     18,699   22,957   22,838
   Loans Receivable-Net              2,417     2,551    2,872    3,712   4,718    5,712    8,869     9,522     3,767      5,297    8,380   11,215
   Others                              594       795    1,113    1,186   1,869    2,160    2,096     2,752     2,885     13,401   14,576   11,622

Total Liabilities and Equity         3,011     3,346    3,985    4,898   6,587    7,872   10,965    12,274     6,651     18,699   22,957   22,838
Total Liabilities                    2,857     3,152    3,774    4,647   6,279    7,236   10,245    15,416    15,083     17,609   21,738   21,355
   Deposits                          2,417     2,537    3,038    3,664   5,028    5,429    7,350    10,385    12,615     14,455   18,495   18,515
   Other Liabilities                   114       205      287      198     200      465      337       598       342        426    1,124    1,400
   Others                              439       615      736      983   1,252    1,807    2,894     5,031     2,468      3,154    3,243    2,840

Total Equity                           154       194     212      251      308     630      721     (3,142)    (8,431)    1,089    1,219    1,483
   Equity                               53        58      58       58      116     189      359        359        359       747      747      747
   Reserves                            102       136     154      194      192     440      361     (3,501)    (8,791)      342      472      736

Memorandum Items
Total Foreign Exchange Assets        2,475       922    1,183    1,419   2,024    2,263    4,846     8,527     4,726      5,031    7,600    7,201
   Loan                              2,417       781      924    1,347   1,742    2,159    4,651     7,527     3,955      4,101    5,048    4,608
Total Foreign Exchange Liabilities   1,027     1,133    1,216    1,598   2,247    2,595    4,908     6,043     4,252      4,211    7,399    6,358
   Deposits                            809       793      926    1,131   1,490    1,745    2,839     2,410     2,334      3,718    5,517    4,966
   Borrowing                           217       340      291      466     757      849    2,070     3,633     1,918        493    1,825      922

Financial Ratios
Capital Adequacy Ratio (%)            5.90      8.65     8.51     8.43    8.27    10.75     9.44    (23.11)   (122.61)    21.34    16.58    12.72

Note: Components may not add up due to rounding off.
Sources: Annual Reports 1991-2002, Bank Niaga.
                                                Table A9.2: Summary Income Statement-Bank Niaga
                                                             (year ending 31 December)
                                                        (Rp billion, unless otherwise specified)

                                                                                  Actual
Item                                 1991       1992   1993     1994    1995    1996     1997       1998      1999     2000     2001     2002

Net Interest Income                    118       136    147      170     213     286      387      (1,346)   (1,605)    (144)     153      452
  Interest Income                      575       524    461      495     796     981    1,329       2,610     1,420    1,613    2,355    2,720
  Interest Expense                     457       388    313      325     583     695      942       3,956     3,025    1,756    2,202    2,268

Non-Interest Income                     37        80     86      114     121     144     107         216       424       61      680      510

Operational Expenses                   127       178    180      219     242     289     418       2,873     4,423      (149)    756      884
  Doubtful Debts                        25        50     29       49      42      65     207       2,547     3,962      (655)      0       93
  General Administrative                43        50     35       39      52      62      78          79       125       135     142      179
  Salaries                              53        59     68       77      91     103     130         130       129       143     187      223
  Others                                 7        19     47       55      57      60       3         118       208       229     427      390

Profit or Loss Before Tax               28        38     53       65      93     140      75       (4,004)   (5,604)     67       77       77
Tax Expense or Benefit                  10        15     18       23      27      40      39            0         0      (0)     124       15
Profit or Loss After Tax                18        23     35       42      66     100      36       (4,004)   (5,604)     67      (47)      63

Financial Ratios
Return on Average Assets (%)          0.61      0.74    0.95    0.94     1.11    1.36    0.47      (34.30)   (59.22)    0.51    (0.37)    0.61

Note: Components may not add up due to rounding off.




                                                                                                                                                 Appendix 9
Sources: Annual Reports 1991-2002, Bank Niaga.




                                                                                                                                                 59
60       Appendix 10



                         PROFILE OF BANK DAGANG NASIONAL INDONESIA

A.        Organizational Development

           1.      Before the Financial Crisis

1.      Key financial data for Bank Dagang Nasional Indonesia (BDNI) are given in Table A10.1
and A10.2. At the end of 1996, BDNI was the fourth private bank in terms of gross assets, with
4.3% of total commercial bank assets. Its assets increased by 291% during 1991–1996,
exceeding the overall growth rate for commercial banks (250%). BDNI's return on assets was
consistently above 1%, and its capital adequacy ratio was kept above 8% during 1993-1996.
The Operations Evaluation Mission could not verify the Bank Indonesia’s (BI) CAMEL1 ratings
for BDNI, and the proportion of BDNI's loan portfolio classified as current during this period.
Most of BDNI's loans reportedly were to its affiliated companies, leading to a significant
deterioration of its portfolio during the financial crisis.

           2.      During and After the Financial Crisis

2.     The financial crisis damaged BDNI's loan portfolio significantly. In February 1998,
BDNI—with 53 other banks that had borrowed heavily from BI (more than 200% of their capital)
and had capital adequacy ratios below 5%—were placed under the supervision of the
Indonesian Bank Restructuring Agency (IBRA). In April 1998, IBRA took over one state bank
and six large private banks, including BDNI and Bank Danamon. By then, these banks had
borrowed more than Rp2 trillion, and had received more than 72% of the total liquidity support
BI had provided. In August 1998, the assets of three of the six private banks, including those of
BDNI, were frozen and their deposits were transferred to designated state banks. BDNI has
since been in liquidation.

B.        Subproject Performance

3.      Under the Second Development Finance Loan (DFL II), BDNI approved four subloans to
four subborrowers totaling $11.5 million, of which $7.8 million was disbursed. All the
subborrowers were in Java (three in Jakarta and one in Surabaya). Two subloans were for
expansion of production capacity, and the other two were for new projects. Two subloans were
above the free limit. Two subloans were for food processing, and one each was for wood
products and porcelain. Two subloans had maturities of 8 years, while the other two had 5-year
maturities.

4.       All the subloans under DFL II were transferred to IBRA in 1998. The subloan to BD-1
(shrimp processor) was restructured, and its repayment to IBRA had not been completed at the
Operations Evaluation Mission. BD-2 (palm oil processor), which was seriously hurt by the
financial crisis, ceased operations, and IBRA sold the subloan to a third party at a discount.
Little information was available on the condition of BD-3 (porcelain manufacturer) when IBRA
sold the subloan to a third party. BD-4 (wood products manufacturer) repaid the subloan. BI
reported that IBRA did not distinguish between BDNI's debt obligations to BI under DFL II and
BDNI's other liabilities to BI. Therefore, BI could not identify BDNI’s outstanding receivables
from the four subloans extended under DFL II.


1
    CAMEL stands for capital adequacy, asset quality, management, earnings, and liquidity.
                                                                                Appendix 10      61



             Table A10.1: Summary Balance Sheet-Bank Dagang Nasional Indonesia
                                       (as of 31 December)
                             (Rp billion, unless otherwise specified)

                                                                 Actual
Item                                1991      1992       1993      1994       1995      1996    1997

Total Assets                        3,194     4,285     6,196        8,894   12,436   16,651     —
    Loans Receivable-Net            2,731     3,095     4,211        6,696    9,861   12,490     —
    Others                            463     1,190     1,985        2,198    2,575    4,161     —

Total Liabilities and Equity        3,194     4,285     6,196        8,894   12,436   16,651     —
Total Liabilities                   2,923     3,993     5,443        7,885   11,333   15,573     —
    Deposits                        2,102     2,994     4,150        6,257    7,875   11,517     —
    Others                            821       999     1,293        1,628    3,458    4,057     —

Total Equity                          271      292        752        1,009    1,102    1,078     —
    Equity                            136      235        352          469      821      821     —
    Reserves                          135       58        401          540      281      257     —

Financial Ratios
Capital Adequacy Ratio (%)          —           8.3      14.8         12.8     10.3      8.5     —

— = not available.
Note: Components may not add up due to rounding off.
Sources: Annual Reports 1991-1996, Bank Dagang Nasional Indonesia.

          Table A10.2: Summary Income Statement - Bank Dagang Nasional Indonesia
                                 (year ending 31 December)
                            (Rp billion, unless otherwise specified)

                                                                 Actual
Item                                1991      1992       1993      1994       1995      1996    1997

Net Interest Income                   147      163        169         288       295      347     —
   Interest Income                    549      647        700         876     1,448    1,962     —
   Interest Expense                   402      484        530         588     1,153    1,615     —

Non-Interest Income                     22       29        64          98      268       254     —

Operational Expenses                  116      134        157         189      365       330     —
   Doubtful Debts                      24       19         17          29       23        48     —
   General Administrative              53       61         74          98      118       152     —
   Salaries                            36       46         61          80      100       119     —
   Others                               4        8          5         (19)     124        11     —

Profit or Loss Before Tax              53        57        76         198      198       271     —
Tax Expense or Benefit                (19)       (9)      (14)        (57)     (57)      (80)    —
Profit or Loss After Tax               34        48        62         140      140       191     —

Financial Ratios
Return on Average Assets (%)        —          1.29      1.18         1.86     1.31     1.31     —

— = not available.
Note: Components may not add up due to rounding off.
Sources: Annual Reports 1991-1996 Bank Dagang Nasional Indonesia.
   62         Appendix 11



                                                      STATISTICAL DATA

                                                 Table A11.1: Summary of Exports (Value)
                                                                ($ million)

                                                                   Petroleum
                                                  Industrial          and
                                  Year            Products            Gas                  Others          Total

                                  1988                 9,262              7,682            2,275          19,219
                                  1989                11,028              8,679            2,452          22,159
                                  1990                11,879             11,071            2,725          25,675
                                  1991                15,068             10,894            3,180          29,142
                                  1992                19,613             10,671            3,683          33,967
                                  1993                22,944              9,746            4,133          36,823
                                  1994                25,702              9,694            4,657          40,053
                                  1995                29,328             10,465            5,625          45,418
                                  1996                32,125             11,722            5,968          49,815
                                  1997                34,985             11,623            6,836          53,444
                                  1998                34,593              7,872            6,383          48,848
                                  1999                33,332              9,792            5,541          48,665
                                  2000                42,003             14,367            5,754          62,124
                                  2001                37,671             12,636            6,014          56,321
                                  2002                38,730             12,113            6,316          57,159

                                  Sources: Indonesian Financial Statistics, several editions, Bank Indonesia.

                                     Table A11.2: Exports of Industrial Products (Value)
                                                                ($ million)

                                                               Wood, Article                         Machinery and
      Prepared                                                   of Wood                              Mechanical
      Foodstuff,                  Products of      Plastics,   Wickerwork,                             Appliance,
     Beverages,                   Chemical or       Rubber      and Other             Textiles and     Electrical
       Spirits,       Mineral       or Allied     and Articles   Plaiting               Textiles      Equipment,
Year and Tobacco      Products     Industries       Thereof     Materials               Articles      Part Thereof   Others    Total

1988           346         425             300          1,352                 2,981         1,442              85     2,331    9,262
1989           415         657             481          1,171                 3,494         2,123             198     2,489   11,028
1990           520         765             528          1,063                 3,376         2,866             290     2,471   11,879
1991           618         958             753          1,164                 3,631         3,984             652     3,308   15,068
1992           797       1,493             711          1,356                 4,206         6,012           1,293     3,745   19,613
1993           754       1,466             656          1,286                 5,410         5,971           1,561     5,840   22,944
1994           953       1,794             906          1,659                 5,270         5,698           2,092     7,330   25,702
1995         1,048       2,805           1,266          2,819                 5,089         6,330           3,600     6,371   29,328
1996         1,218       2,709           1,244          2,822                 5,105         6,069           4,701     8,257   32,125
1997         1,374       3,424           1,752          2,709                 5,294         8,008           4,679     7,745   34,985
1998         1,484       3,647           2,105          2,365                 3,721         7,380           4,290     9,601   34,593
1999         1,345       2,999           1,844          2,104                 3,796         6,955           5,218     9,071   33,332
2000         1,223       3,779           2,277          2,566                 3,721         8,265          10,150    10,022   42,003
2001         1,166       4,239           2,073          2,227                 3,163         7,274           8,769     8,760   37,671
2002         1,456       4,333           2,296          2,588                 3,014         6,842           9,480     8,721   38,730

Sources: Indonesian Financial Statistics, several editions, Bank Indonesia.
                                                                                         Appendix 11    63


                Table A11.3: Key Indicators on Deposit Money Banks
                        (Rp billion, unless otherwise specified)

                                                                                     Memorandum
                                     Key Indicators                                     Item
        Claims on                                 Lending Deposit
          Private  Claims on  Total    Foreign      Rate   Rate
Year      Sector  Government Deposits Liabilities   (%)     (%)                            GDP

1988       38,809            1,069      35,570        1,159        22.1      17.72         149,395
1989       58,404              960      50,433        3,193        21.7      18.63         179,608
1990       97,145              933      75,325       12,645       20.83      17.53         210,866
1991      114,453            1,027      89,799       11,935       25.53      23.32         249,969
1992      128,521            3,541     105,776       16,206       24.03       19.6         282,395
1993      161,273            4,004     128,459       20,448       20.59      14.55         329,776
1994      198,311            2,843     152,990       24,885       17.76      12.53         382,220
1995      243,067            4,165     197,459       26,952       18.85      16.72         454,514
1996      295,195            5,727     254,980       29,744       19.22      17.26         532,568
1997      381,741            8,571     322,952       70,434       21.82      20.01         627,695
1998      508,558           10,230     530,535       97,842       32.15      39.07         955,754
1999      225,236          274,551     582,873      100,375       27.66      25.74       1,099,732
2000      270,301          439,177     669,971       92,675       18.46       12.5       1,264,919
2001      298,901          423,735     767,535       68,406       18.55      15.48       1,449,398
2002      352,378          393,338     801,739       51,895       18.95       15.5       1,610,012
2003      426,685          361,397     859,526       31,458       16.94      10.59            —

— = not available, GDP = gross domestic product.
Sources: International Financial Statistics, Yearbook 2002 and May 2004, International Monetary Fund.
     MANAGEMENT RESPONSE TO THE PROJECT PERFORMANCE AUDIT REPORT
        ON THE SECOND DEVELOPMENT FINANCE PROJECT IN INDONESIA
                            (Loan 1223-INO)



        On 1 March 2005, the Director General, Operations Evaluation Department, received the
following response from the Managing Director General on behalf of Management:


       1.     Management finds the report well prepared and contains a thorough
       analysis. The issues and lessons are pertinent to development finance
       operations as a whole, not just those seeking to support the export sector.

       2.     The Project Completion Report rated this operation unsuccessful. The
       PPAR rates this operation partly successful (para. 53). It is noted that, in the
       context of the reduced size of the operation and the successive loan
       cancellations, at least 44 of the 50 enterprises that were assisted are still
       operational and generating export revenues. This is despite the intervening
       period of financial, economic, and political crisis, and represents some
       achievement. Nevertheless, it is acknowledged that there were deficiencies in
       both design and implementation, from which lessons have been taken.

       3.       The report points to inadequate initial analysis of the demand for such
       lending and the price competitiveness of the offered funds. There was indeed an
       optimistic view of the likely growth in demand for this product. Moreover, the
       operation was impacted when the financial crisis occurred half way through
       implementation, and sub-borrowers found difficulty in maintaining supplies from
       other affected enterprises. Though ADB was slow to act on the request of
       converting pool-based lending to LIBOR-based lending, it is now more keenly
       aware of the competitiveness of its products, with respect to both lending terms
       and other transactions costs, and is actively considering adjustments at the
       institutional level. Recent loan approvals are now routinely LIBOR-based, which
       takes account of the capital market access of borrowers at the global level,
       especially for middle-income countries.

       4.      The operation passed the foreign exchange risk onto the participating
       financial institutions (PFIs). However, PFIs (some of which underwent
       restructuring) have built up a revolving fund from sub-loan payments. The report
       points out (para. 65) that the re-lending agreements did not contain a clause for
       prepayment of loans, similar to the one in the loan agreement between ADB and
       the borrower. As indicated (para.67), ADB will follow up through the resident
       mission (IRM) on government internal discussions on possible arrangements for
       PFIs to prepay their remaining balances.

       5.       Analysis of the impact of this operation was inhibited by a lack of
       awareness by PFIs on the benefit monitoring and evaluation (BME) clause in the
       project agreements. Information kept on sub-borrowers was sufficient only to
       facilitate the commercial transactions with them, and did not cover impact
       indicators, such as job creation. The report notes (para. 64) that this is a common
       problem with development finance operations, partly because of the cost
implications. Paragraph 63 recommends that ADB should include a performance
evaluation clause in a loan (rather than project) agreement to underscore the
government’s responsibilities for BME, and a clause in sub-loan agreements
defining the responsibilities of sub-borrowers. However, as noted in Paragraph
64, the approach has been already taken in the ongoing Small and Medium
Enterprise Export Development Project in Indonesia. In this project, BME is being
undertaken by an oversight implementing bank based on sample subprojects,
and the loan agreement specifies the minimum data to be collected.
Management believes this is a practical approach to the BME, and paragraph 64
notes OED’s support to this approach.

								
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