Counting the years while banks recover<\/p>\n
Berni K. Moestafa
\nThe Jakarta Post
\nJakarta<\/p>\n
The country's banking sector entered the year 2001 limping
\nand, as the year comes to a close, it has yet to pick up the
\npace.<\/p>\n
Banks have barely lifted themselves above the lows they first
\nhit as the 1997 financial crisis swept the country.<\/p>\n
All this comes after having entered this year fully
\nrecapitalized at a staggering bailout cost of US$60 billion.<\/p>\n
This begs the question: What is impeding banks' recovery?
\nUndercapitalization surely could not be the reason.<\/p>\n
Actually it still is, however, and one of many reasons behind
\na slow recovery.<\/p>\n
In 1998, at the peak of the financial crisis, the government
\nbegan injecting banks with the so-called recapitalization bonds.<\/p>\n
These bonds replaced banks' non-performing loans extended to
\nindustries that, because of the crisis, were unable to repay
\ndebts.<\/p>\n
The costly recapitalization program was to save banks from
\nbeing shut down, which would have been even costlier, as the
\ngovernment must cover their third party liabilities.<\/p>\n
Banks face the liquidation axe if they fail to meet the
\nminimum four percent capital adequacy ratio (CAR).<\/p>\n
But now, after the recapitalization program has been
\ncompleted, a frail CAR is still haunting the banking sector.<\/p>\n
Using CAR, a bank's health is measured by the ratio of its
\ncapital against risked-weighted assets such as loans or bonds.<\/p>\n
The higher the CAR, the better a bank's capacity to cover the
\nrisks of its assets with capital.<\/p>\n
Recapitalized banks received zero-risk government bonds in
\nexchange for their highly risky bad loans.<\/p>\n
But when the recapitalization program was launched, the aim
\nhad been to secure banks' CAR to the minimum four percent demand.<\/p>\n
While that target was achieved late last year, Bank Indonesia
\nmoved to raise the minimum CAR level to eight percent by the end
\nof this year.<\/p>\n
At the same time, the country's economy improved little to
\nhelp banks secure a higher CAR or prevent it from falling.<\/p>\n
This drove banks again at risk of undercapitalization.<\/p>\n
As the year closes, six banks out of the country's some 150
\nbanks have failed to improve their CAR levels.<\/p>\n
Five of them are slated for merger, with another, Unibank,
\nshut down last November.<\/p>\n
Throughout the year, the five have been placed under the
\nIndonesian Bank Restructuring Agency (IBRA), along with six
\nothers.<\/p>\n
The six others being among the country's largest private
\nbanks, such as Bank Central Asia (BCA), Bank Danamon, Bank Lippo
\nand Bank Niaga.<\/p>\n
The fact that they remain hospitalized under IBRA speaks for
\nthe poor conditions banks are still in nearly five years since
\nthe financial crisis struck.<\/p>\n
While outside IBRA, the number of banks whose CAR levels are
\nvulnerable, tend to be on the rise.<\/p>\n
A major drag on banks' CAR is the double blow of rare capital
\nand a high, non-performing loan ratio.<\/p>\n
On the capital side, banks can no longer expect bailouts
\nfrom a new recapitalization program after it has been finalized.<\/p>\n
That leaves banks turning to the private sector for capital.<\/p>\n
Supply of fresh capital from local investors is scarce, which
\nwas the reason why the recapitalization program was brought in
\nthe first place.<\/p>\n
Most owners of large private banks ended up heavily indebted
\nto the state, and are in fact banned from re-entering their banks
\nuntil they pay up their debts.<\/p>\n
Foreign investors are in a better position to invest.<\/p>\n
But as they scan for prospective banks, the sector's grim
\noutlook on growth pose a major disincentive for coming here.<\/p>\n
Putting aside the equally discouraging investment climate of
\nthis country what, then, is the outlook on banks' recovery?<\/p>\n
As is apparent by now, there is little confidence in recovery
\nif the question of CAR, and with it banks' survivability, remains
\non the forefront of the sector's problems.<\/p>\n
Throughout the year, banks' recovery has been somewhat slack
\nbecause new loans are scarce. Several factors lead to this.<\/p>\n
One is that demand for new loans is low, and will remain so
\nunless the domestic economy picks up.<\/p>\n
True, the economy grew by 4.8 percent last year and is likely
\nto grow by 3.5 percent this year, but it did so mainly on
\nutilizing production capacity that went idle since the 1997
\ncrisis.<\/p>\n
Industries took advantage of an upswing in domestic
\nconsumption and export sales to finance the growth in output.<\/p>\n
But now, since export earnings have been falling and with high
\ninflation likely to eat into consumer spending soon, a drop in
\ndemand for output will further curtail appetite for banks' loans.<\/p>\n
While demand is low, there is actually no incentive for banks
\nto extend new loans amid a sluggish economy.<\/p>\n
Here the aforementioned non performing loan (NPL) springs back
\nto mind: a high NPL ratio impinges upon efforts to improve CAR.<\/p>\n
Loans on which interest payments are 90 days overdue are
\ncategorized as non performing loans. The NPL ratio measures a
\nbank's non-performing loans against its total loans.<\/p>\n
With the economy still in the doldrums, the amount of NPLs
\nhave remained high despite efforts to restructure them.<\/p>\n
A weak rupiah compounded on the rise of foreign denominated
\nNPLs.<\/p>\n
Worse still, Bank Indonesia's bid to defend the rupiah by
\nraising interest rates undermines many companies' debt payment
\nability, and jacks up the risk of new NPLs.<\/p>\n
Rising NPL means banks earn less. On top of that, new capital
\nis needed to cover the risk of non payment; or CAR falls.<\/p>\n
Recapitalized banks, however, still earn interest payments
\nfrom the zero risk government bonds.<\/p>\n
But to such an extent that the majority of the country's banks
\nrely on government bonds; coming at the expense of taxpayers.<\/p>\n
This is to say that, after pouring $60 billion into banks, the
\ncash-strapped government must spend more on interest payments.<\/p>\n
Plans to merge weak banks, five thus far, will entail the re-
\nuse of recapitalization bonds, dashing hope of retiring them.<\/p>\n
The merger plan for next year however does allay concerns of
\ndropping CAR levels and bank closures -- at least for now.<\/p>\n
A relapse of dropping CAR levels is potential unless stern
\nmeasures are taken to reform the banking sector.<\/p>\n
Singapore-based research firm IDEAglobal.com warned the
\nbanking sector could be heading for another collapse amid signs
\nthe government is wavering on banking reforms.<\/p>\n
Reforms here call for more bank mergers to squeeze out the
\nsick, tougher prudential regulations, and for expediting loan
\nrestructuring.<\/p>\n
But bank closures and mergers can be painful since they add up
\nto the bailout cost, and jeopardize a shaky public confidence in
\nthe banking sector.<\/p>\n
Ultimately, it will take from the government a strong will to
\nignore the pain when pushing the banking sector to stop limping
\nand start walking.<\/p>\n
For eyebox<\/p>\n
Key indicators of banks performance as of Sept. 2001<\/p>\n
Banks CAR NPL Credit growth*<\/p>\n
BCA 36.72% 3.99% 7.88%
\nBukopin 22.47% 3.24% 3.68%
\nDanamon 39.01% 7.00% 7.55%
\nLippo 23.25% 23.91% 2.54%
\nNiaga 18.70% 9.75% 10.12%
\nBali 13.01% 15.53% 12.53%
\nPrimex 7.09% 18.09% 14.11%
\nPatriot 6.10% 5.40% 5.00%
\nBII 14.14% 17.93% 5.52%
\nMedia 5.32% 17.02% -20.50%
\nUniversal 4.07% 10.60% 2.94%<\/p>\n
average 17.26% 12.04% 4.67%<\/p>\n
*monthly credit growth from August to September 2001<\/p>\n
Source: IBRA<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/counting-the-years-while-banks-recover-1447899208", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }