Dilemma of Bank BII<\/p>\n
Before 1998, it would have been impossible to analyze publicly
\nthe distressed condition of a particular bank, let alone debate
\nwhether it would be better to simply liquidate or recapitalize
\nthat bank, without setting off massive runs and consequently
\naccelerating its failure.<\/p>\n
But a public debate is precisely what has surrounded Bank
\nInternational Indonesia (BII) over the last few weeks, following
\nthe announcement of its disastrously poor financial results for
\n2001, which showed a loss of Rp 4.13 trillion (US$435 million), a
\nnegative capital of over 47 percent and bad loans of almost 63
\npercent of total lending.<\/p>\n
However, the bank has been operating normally and has even
\ncontinued its aggressive advertising campaign for its products.
\nThere have not been any runs on the bank, and BII depositors
\nremain calm even though the bank is already technically bankrupt.<\/p>\n
This cool reaction should be attributed largely to the
\ngovernment's blanket guarantee on bank deposits and claims, which
\nwas set up in late January 1998, during the massive banking
\ncrisis. BII depositors and customers seem assured that whatever
\nmay happen to the bank, they will be fully reimbursed. They also
\nseem to reckon that as the sixth largest bank, with 75 percent
\nownership by the government, BII is too big to fail.<\/p>\n
But this \"superficial\" feeling of security is also the
\ndisadvantage of the blanket guarantee, as it leads to moral
\nhazards for a bank's management and hinders the market from
\nworking properly to screen out banks.<\/p>\n
The guarantee scheme, which has so far cost taxpayers billions
\nof dollars, has even distorted the market by allowing unqualified
\nplayers to join the market. The dilemma, though, is that without
\nthe guarantee program the national banking industry would have
\ntotally collapsed.<\/p>\n
The government stirred up a huge controversy earlier this week
\nby deciding to allow BII to go through with a rights issue in
\nJune to raise about Rp 4.33 trillion to beef up its capital
\nadequacy ratio to at least 8 percent, the minimum capital
\nstandard, contingent upon the House of Representatives' (DPR)
\napproval.<\/p>\n
Most analysts and House members obviously oppose the rights
\nissue, considering it simply another form of recapitalization
\nusing taxpayers' money, because the government will likely end up
\nas the lone buyer.<\/p>\n
The investing public, which holds the other 25 percent of BII,
\nis not going to be willing to invest more in the beleaguered
\nbank. They believe it is no longer worthwhile to maintain BII,
\ngiven its utterly poor performance after its first Rp 11 trillion
\nrecapitalization in March 1999, of which Rp 6.6 trillion was put
\nup by the government, and the second capital injection of Rp 14.4
\ntrillion made wholly by the government last year.<\/p>\n
Even the second recapitalization was sharply criticized as
\npreferential treatment for BII, since the financial distress was
\ncaused by a \"hidden\" $1.2 billion in doubtful loans to the Sinar
\nMas Group, the bank's founding shareholder, that turned bad last
\nyear.<\/p>\n
The government, however, argues that liquidating BII would
\ncost the taxpayers almost Rp 24 trillion, not to mention the
\ndamaging contagion effect on the banking industry and, most
\nimportantly, on the credibility of the entire bank restructuring
\nprogram.<\/p>\n
There are many troublesome questions that have to be examined
\nbefore the fate of BII is decided. What is BII's chance of
\nsurvival with so dismal an operational record and after such a
\npublic display of its distressed condition? Who will guarantee
\nthat the bank does not carry another \"ticking time bomb\" like the
\none that exploded last year? Is capital really the only problem
\nbesetting BII? Will customers remain loyal to and proud of
\nbanking with BII after its image has been so heavily damaged?
\nAfter all, a bank is a trust institution.<\/p>\n
It is worth recalling that state Bank Mandiri, which intended
\nto acquire BII last year, canceled the plan after completing a
\ndue diligence, even though BII's customer base, with around
\n500,000 cardholders, would have been a great synergy for Mandiri,
\nwhich is expanding its retail business.<\/p>\n
Bank Mandiri did not disclose the reason for the cancellation,
\napparently because of ethical considerations. But it can be
\nassumed that BII must have been extremely shaky structurally, to
\nforce Bank Mandiri to call off such a potentially strategic
\nacquisition.<\/p>\n
Moreover, banking operations in the country still carry
\nunusually great risks in view of the fragile economic situation,
\nhigh interest rates and huge corporate debt overhang. Banks will
\nnever grow soundly and robustly under inimical economic
\nconditions.<\/p>\n
In fact, the central bank admitted as recently as March that
\nit had put 14 recapitalized banks under special supervision,
\nmeaning that their conditions are still quite fragile. How can
\nBII, with such a battered condition and damaged image, survive
\nthe market competition? Wouldn't another capital injection only
\npostpone its failure?<\/p>",
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