Bank's negative spread may fall to zero this year<\/p>\n
JAKARTA (JP): Bank Indonesia predicted that the negative
\nspread which had been eroding banks' capital bases would decrease
\nto zero this year, compared to an average of 27 percent last
\nyear.<\/p>\n
\"Their (banks) cost of funds may still be higher than their
\nlending rates for the next few months but we hope the spread for
\nthe whole year will be zero,\" Soebardjo Djojosoemartono, a
\nmanaging director at the central bank, said on Sunday night.<\/p>\n
Spread is the difference between a bank's cost of funds and
\nits lending rate. The spread becomes negative when the cost of
\nfunds is higher than the interest rates charged on credits.<\/p>\n
\"The banking industry will continue to suffer Rp 500 billion
\nin daily losses from negative spread, as it did last year, if the
\ngovernment-sponsored recapitalization program is not completed in
\nApril as scheduled,\" he added.<\/p>\n
He did not explain how the spread could increase so sharply
\nwhen the central bank is expected to keep a tight rein on the
\nmoney supply in a bid to stabilize the rupiah's exchange rate.<\/p>\n
The central bank's benchmark interest rate now ranges between
\n35 percent and 37 percent.<\/p>\n
Soebardjo argued that a successful bank recapitalization
\nprogram would gradually restore public confidence in domestic
\nbanks, which in turn would help decrease banks' cost of funds.<\/p>\n
The latest data from Bank Indonesia shows that negative spread
\nand bad credits have eroded the equity capital of the more than
\n200 banks from Rp 10.8 trillion last September, when the central
\nbank's benchmark interest rate rose to as high as 70 percent, to
\nnegative Rp 98.5 trillion at the end of last year.<\/p>\n
The comprehensive due diligence conducted by foreign auditors
\non all domestic banks as part of the preparations for the
\nrecapitalization program concluded that more than 100 banks had a
\nnegative equity as low as below minus 25 percent.<\/p>\n
The government has decided to recapitalize banks with equity
\nranging from minus 25 percent to less than 4 percent.<\/p>\n
Soebardjo said the government would announce on Saturday those
\nbanks which did not need to participate in the recapitalization
\nprogram because they had already met the minimum 4 percent
\ncapital adequacy ratio, those banks with negative equity which
\nqualified them to join the recapitalization program and those
\nbanks which would be closed down and liquidated.<\/p>\n
\"But don't ask me now how many banks will fall into each of
\nthe three categories because the evaluations are still underway
\nand changes in assets and other conditions of the banks occur day
\nto day,\" he said.<\/p>\n
The changes are happening so rapidly that the upcoming
\nannouncement may not include such details as the amount of
\nrecapitalization funds needed for each bank and the lineup of the
\nbanks' managements and shareholders, Soebardjo added.<\/p>\n
\"The amount of recapitalization funds to be injected into each
\nof the banks in the program may be known only a few days after
\nthe Feb. 27 announcement, \" he added.<\/p>\n
He denied that the central bank was slow in assessing the
\nbanks.<\/p>\n
\"Over the last few months, we have been working seven days a
\nweek and often have to work until the early hours of the morning
\nto assess banks,\" he said.<\/p>\n
The government will provide up to 80 percent of the
\nrecapitalization funds needed by the banks in the program, with
\nthe banks' shareholders providing the other 20 percent.<\/p>\n
Soebardjo estimated the government would need between Rp 250
\ntrillion and Rp 300 trillion (about US$35.3 billion) for the
\nrecapitalization program. The government would raise the funds by
\nissuing bonds, but he declined to give details on the bonds
\nbecause the coupon rates and the mechanisms of trading were still
\nbeing evaluated.<\/p>\n
But the government has proposed to the House of
\nRepresentatives that Rp 18 trillion of the 1999\/2000 state budget
\nbe allocated for funding part of the Rp 34 trillion in bond
\ninterest to be paid to the recapitalized banks.<\/p>\n
According to Soebardjo, once the recapitalization program is
\ncompleted, the central bank will reassess the banks (around 65)
\nnot included in the program because their equity capital already
\nexceeds 4 percent.<\/p>\n
\"We will ask these banks to submit business plans for further
\nevaluation and will subject their managements and shareholders to
\nthe fit-and-proper test to assess their technical competence and
\nintegrity.\"<\/p>\n
\"This additional evaluation is necessary because these banks
\nhave previously been assessed only with regard to their capital
\nstandards,\" Soebardjo said.<\/p>\n
He also said the central bank would soon shift its function
\nfrom a regulatory agency, concentrating more of its resources on
\neffective supervision to ensure that banks follow regulations.<\/p>\n
\"We will step up on-site examinations of banks, and to make
\nthem (examinations) more effective the target of inspection will
\nnever be notified before the arrival of the examination team,\"
\nSoebardjo said.<\/p>\n
Each examination team, he added, would comprise experts in
\nforeign exchange, asset management, computer technology and
\ncredit assessment. (vin)<\/p>",
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"sponsor": "Okusi Associates",
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