Bank recapitalization: Waiting for miracles<\/p>\n
The government is trying to salvage the banking industry
\nthrough a recapitalization program but economist Kwik Kian Gie
\nanticipates the impossibility of its success.<\/p>\n
JAKARTA (JP): The government is most likely to fail to salvage
\nthe ailing banking industry through a recapitalization program,
\nwhich is deceptive in nature. The measure is deceptive because it
\nwill introduce \"make-believe\" bonds that will earn \"real\"
\ninterest payments.<\/p>\n
The government, through this program, is apparently trying to
\ncover up the real state of the banking industry. Trying to cover
\nup real conditions is a typical habit of the New Order government
\nthat seems to be maintained by our highly educated bureaucratic
\ntechnocrats.<\/p>\n
The banking industry was neglected for a very long time in its
\nprocess of decay so that it is now very difficult for the country
\nto restore it to health. In 1994, for example, bad loans at
\ndomestic banks were estimated at about Rp 20 trillion (US$2.2
\nbillion at the current rate) but the government insisted that
\nthey reached only Rp 1.5 trillion. Then the government told the
\nHouse of Representatives (DPR) that bad loans were recorded at Rp
\n8.6 trillion only as of early 1998. But Minister of Finance
\nBambang Subianto indicated recently that the bad loans were now
\nestimated at between Rp 600 trillion to Rp 700 trillion.<\/p>\n
The minister did not frankly disclose those figures but said
\nthat the government might have to liquidate banks that failed to
\nrepay liabilities to their depositors unless it spent Rp 18
\ntrillion from its budget for fiscal 1999\/2000. The liabilities
\nare projected at about Rp 600 trillion to Rp 700 trillion, an
\namount that will never be covered by the sales of the banks'
\nassets.<\/p>\n
Because the banks cannot restore their cash flows, the
\ngovernment will be forced to provide them with Rp 34 trillion per
\nannum, of which Rp 18 trillion will be taken from its budget and
\nthe other Rp 16 trillion from the sales of the banks' assets. But
\nthis is inadequate and will not help much because Rp 34 trillion
\nwill account for only 5.6 percent of the total liabilities of,
\nsay, Rp 600 trillion, while the banks will have to pay 40 percent
\ninterest on them annually.<\/p>\n
The government's measure is apparently based on the assumption
\nthat the banks will be technically bankrupt and will not be
\nallowed to provide loans if their equities are negative.<\/p>\n
As soon as the equities are negative, depositors will run on
\nthe banks and the government, which guarantees the repayment of
\nbanks' liabilities, will have to provide no less than Rp 600
\ntrillion -- an amount that it, the government, cannot afford --
\nto repay the depositors.<\/p>\n
To make the equities look positive, the government will
\npretend to inject sums of fresh money into the banks, which will
\nhave to immediately use the money to buy \"government bonds\". Even
\nthough the banks will have no additional cash, they can record an
\nincrease in their equities.<\/p>\n
Furthermore, because they have bought the bonds, they will
\nhave the rights to receive annual interest from the government.
\nThe bond interest payments are expected to help improve the cash
\nflows of the banks, which, due to the non-performance of their
\nloans, cannot expect revenue from interest on their loans.<\/p>\n
But for how long will the government have to inject such funds
\ninto the banks? Until miracles occur. Only miracles will be able
\nto help the banks because the government's assistance will never
\nbe adequate to improve their cash flows.<\/p>\n
A government official has said that the banks will need only
\nRp 300 trillion, not Rp 600 trillion, to make their equities
\npositive, of which their shareholders are required to provide 20
\npercent or Rp 60 trillion, while the government will have to
\ncover the Rp 240 trillion balance. The fund will not be provided
\nin cash but in \"bonds\", whose interest will reach Rp 34 trillion
\nper annum.<\/p>\n
And yet, Rp 34 trillion will account for only 14 percent of
\nthe Rp 240 trillion, whereas the banks are required to pay annual
\ninterest of 40 percent on their liabilities to depositors.<\/p>\n
Furthermore, the government's expectation that the planned
\nsales of the banks' assets will reach Rp 16 trillion in 1999\/2000
\nis questionable in this time of economic crisis.<\/p>\n
Thus, it is clear from the discussion that the government will
\nnever succeed in its efforts to revive the ailing banks through
\nits recapitalization measure.<\/p>\n
And it is very difficult to look for an alternative measure.
\nBut it is irritating to learn that the government did not take
\nany measure when it was told that the banking industry was in its
\nprocess of decay. Now that the industry is about to die, the
\ngovernment is looking for a remedy. It is just impossible.<\/p>\n
The government and its foreign consultants think that they can
\nprolong the operations of the banks for another year by providing
\nfresh funds worth Rp 34 trillion, while waiting for miracles.<\/p>",
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