Saving Bank BII<\/p>\n
The Indonesian Bank Restructuring Agency (IBRA) has opted for
\nwhat seems to be the least costly and least risky option to
\nprevent publicly listed Bank Internasional Indonesia (BII) from
\ngoing under, consequently putting out a spark that could have
\ntriggered a new banking crisis.<\/p>\n
By guaranteeing Rp 12 trillion (US$1.2 billion) in BII credits
\nto the Sinar Mas Group, instead of swapping the intragroup loans
\nfor government bonds, the agency in one stroke bolstered the
\nbank's prospects for sound growth and, at the same time, saved
\nthe government a large amount of additional interest costs.<\/p>\n
Not much information was immediately available on the
\nagreement, as the complete details are still being worked out.
\nBut an earlier plan for IBRA to take over BII's loans and swap
\nthem for government bonds would likely have exacerbated BII's
\nproblems. Such a debt-resolution scheme would have met strong
\nopposition from the House of Representatives, as the bonds to be
\nexchanged with the loans would have further increased the
\ninterest on domestic debts, which for the current fiscal year
\nalready reach almost Rp 53.5 trillion.<\/p>\n
Even if the plan was eventually approved by the House after
\nlengthy and heated debates, BII might already have been too sick
\nto be cured. The fate of the bank has been hanging in the balance
\nover the past few weeks, and an increasing number of depositors
\nhave closed their accounts at the bank as the debt restructuring
\nprocess became a public issue.<\/p>\n
But the most damaging effect of the debt-bond swap would
\nlikely have been BII losing the largest source of income. The
\nlatest data shows the Sinar Mas debts account for more than 75
\npercent of the bank's outstanding loans that are classified by
\nthe central bank as current credits (with interest payments on
\nschedule). Taking out the loans, which charge more than 18
\npercent interest a year, and exchanging them for government bonds
\nthat pay an average of 12 percent obviously would have slashed
\nthe bank's income at a time when it badly needs the revenue to
\nreplenish its capital to reach the minimum 8 percent capital
\nadequacy ratio later this year.<\/p>\n
At stake in BII is the government (taxpayers)'s investment of
\nRp 6.5 trillion, or the equivalent of 57 percent ownership of the
\nbank, which was acquired when the bank was recapitalized in May
\n1999. Should the bank fail, the government not only would lose
\nthat investment but also would have to reimburse, under the
\ngovernment's blanket guarantee, third-party deposits at the bank,
\nwhich recently were estimated at Rp 27 trillion.<\/p>\n
However, because the government decided to guarantee the
\nloans, BII will retain its earning capacity without having to put
\nup a large sum of provisions, because government-guaranteed loans
\ncarry virtually no risk. While this scheme is not without risk to
\nthe government, the risk is much smaller than that inherent in
\nthe debt-bond swap arrangement. Sinar Mas core business--pulp,
\npaper and palm oil--, though facing depressed international
\nmarket at present, remain the most promising industry in
\nIndonesia. Hopefully, the market would start to pick up before
\nthe whole debt has to be settled in 2003.<\/p>\n
But by guaranteeing the loans, the government automatically
\nassumes the credit risk, meaning that the government will pay the
\ndebts to BII if the Sinar Mas Group defaults. No wonder the
\ngovernment is asking for collateral from Sinar Mas worth 150
\npercent of the loans, including personal guarantees from the
\ngroup's founders, the Widjaya family.<\/p>\n
The trickiest problem, though, is how the government will
\nscrutinize through a due-diligence audit any assets pledged by
\nSinar Mas to ensure the highest rate of recovery in case of
\ndefault.<\/p>\n
The Sinar Mas Group has been on the front pages of major
\nnewspapers in Indonesia and overseas almost every day over the
\npast two weeks. The stories focus on the group's $1.2 billion in
\ndebt to BII and the $10 billion to $12 billion in foreign debts
\nof Asia Pulp & Paper Co. (APP), the Sinar Mas holding company for
\nits pulp and paper subsidiaries in Indonesia, India and China.<\/p>\n
Though one of its paper-making units, PT Kertas Tjiwi Kimia,
\ndid make an eleventh hour bond-coupon payment of $30 million on
\nTuesday, thereby averting a possible default, the complex cross-
\nguarantee arranged by APP for its debts still requires closer
\nscrutiny. Analysts have warned that a default of one unit could
\ntrigger a cross-default of APP, bringing down all its
\nsubsidiaries and sister companies.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/saving-bank-bii-1447899208",
"image": ""
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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