Bailing out BII<\/p>\n
However the government defines it, state Bank Mandiri's plan
\nto acquire state-controlled Bank International Indonesia (BII) is
\nnothing but second-stage recapitalization using taxpayers' money.
\nThe term \"acquisition\" is being trumpeted only to create the
\nperception that the process of bailing out debt-ridden BII is
\nsimply a deal between two banks designed to build up strategic
\nsynergy. It is also designed to circumvent the requirement of
\nhaving to obtain prior approval from the House of Representatives
\nin the case of outright recapitalization having to be made.<\/p>\n
But as the acquisition will be made possible only after the
\nIndonesian Bank Restructuring Agency (IBRA) takes over US$1.2
\nbillion (Rp 13.6 trillion) worth of BII's bad debts by using
\ngovernment bonds, the direct cost of the transaction will be
\nborne by the state budget.<\/p>\n
Acquisition by Bank Mandiri seems to be the least-cost
\nalternative to save BII from bankruptcy. Liquidation will not
\nonly inflict tremendous costs as the government would have to
\nreimburse third-party deposits, estimated at about Rp 24
\ntrillion, under the blanket guarantee scheme. Such a drastic
\nmeasure would also have a devastating impact on public confidence
\nin six other recapitalized banks, not to mention the systemic
\nrisks to other solvent banks and the moral hazard of being \"too
\nbig to fail\".<\/p>\n
The financial distress currently faced by BII was caused by
\nthe forbearing attitude adopted by the government in 1999 when it
\nwent ahead with recapitalizing the bank even though it was found
\nto have violated the ruling on lending to affiliated parties.
\nTrue, the $1.2 billion in BII loans to the Sinar Mas Group,
\nformerly the controlling owner of the bank, was still current at
\nthat time.<\/p>\n
But it was simply mind-boggling to note how the government
\ncould have overlooked such a blatant violation of the legal
\nlending limit that had placed the bank at such huge risk. The
\nlending to the Sinar Mas Group alone accounted for more than 60
\npercent of its total loans. Tolerating such a breach of
\nprudential regulations has now turned out to be a time bomb that
\nthe government has to defuse by using taxpayers' money.<\/p>\n
True, part of the woes that have been responsible for the
\npredicament of BII and most other banks should be blamed on the
\npolitical uncertainty, which has increased overall economic risks
\nand made the condition inimical to banking operations.<\/p>\n
Bank Indonesia disclosed last week that BII was only one of
\nnine banks that had yet to meet the minimum 8 percent capital
\nadequacy ratio -- the ratio between capital and risk-weighted
\nassets -- by December, warning that they may have to be closed if
\nthey fail to meet the requirement either by merger or private
\nplacement.<\/p>\n
It is simply because of the government blanket guarantee on
\nbank deposits and claims that the nine banks, including BII, have
\nnot encountered massive runs despite such negative publicity.<\/p>\n
The question, though, is whether the government, already
\nburdened with Rp 61.2 trillion in interest costs of bank
\nrecapitalization bonds this year alone, could still afford to
\nreimburse depositors in case of another major bank failure. There
\nis now major concern that big depositors of a failed bank would
\nbe reimbursed only with government bonds, which, like the Rp 650
\ntrillion in recapitalization bonds, are entirely illiquid and
\nhave no secondary market.<\/p>\n
This concern has now markedly distinguished, at least in the
\npublic perception, two groups of banks with strikingly different
\nconditions: One group consists of domestic banks perceived to be
\nfragile and highly risky, and the other made up of foreign bank
\nbranches seen to be sound and strong as a safe haven for
\nfinancial assets.<\/p>\n
The wide difference in the risk factor has certainly placed
\ndomestic banks at a great disadvantage in raising funds and
\nattracting prime customers. It is this hostile environment that
\nhas caused domestic banks to remain fragile.<\/p>\n
Set against this inimical condition, the plan by Bank Mandiri
\nto acquire BII may put the state bank in great danger of
\nfinancial distress. It would not solve but only transfer the
\nproblems of BII to the books of Bank Mandiri, and these problems
\ncould become another time bomb within the state bank.<\/p>\n
This is the big risk that the government has to thoroughly
\nassess in the due diligence process, especially because Bank
\nMandiri, which is now the largest bank resulting from the merger
\nof four state banks in late 1999, is designed to become a core
\ndomestic bank, the anchor of the banking sector.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/bailing-out-bii-1447899208",
"image": ""
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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