Analysts praise bank bonds issue

JAKARTA (JP): Analysts welcomed on Saturday the government's move to issue bonds worth Rp 103.83 trillion (US$12.82 billion) to recapitalize 23 ailing banks as a positive step.

But they cautioned that the challenging task of resolving the massive amount of problem loans and nonperforming loans (NPLs) in the banking industry still lay ahead.

"This is positive because it's a step which we've been waiting for after being delayed for some time," Ferry Y. Hartoyo, head of research at securities firm PT Vickers Ballas Tamara, told The Jakarta Post.

I Nyoman Moena, a senior banker and former Bank Indonesia director, also welcomed the step, saying it was part of the overall economic reform needed to rebuild the shattered economy.

The two, however, warned that settling the NPLs of the banking sector was much more crucial in rebuilding the battered industry.

Finance minister Bambang Subianto issued on Friday floating- rate bonds worth Rp 95.15 trillion, and fixed-rate bonds worth Rp 8.68 trillion to recapitalize 11 private banks and 12 provincial development banks.

Bambang also announced the issue of Rp 53.78 trillion index- linked bonds to repay Bank Indonesia loans, provided under the government deposit guarantee scheme, to depositors and creditors of the 48 banks closed in 1998 and 1999.

The government recapitalization program is designed to raise a bank's capital adequacy ratio (CAR) to the minimum 4 percent level for private banks, and to 8 percent for provincial development banks.

CAR is the ratio between capital and risk-weighted assets.

Indonesian banks' capital has severely deteriorated due to huge piles of NPLs and a negative interest rate spread resulting from higher interest rates offered for time deposits compared to interest charged on loans.

But Ferry said the banks would continue to suffer if the huge problem loans in the industry were not restructured.

"So the restructuring of the real sector is the key to a complete turnaround in the banking industry," he said.

The injected capital from the recapitalization program is to replace the NPLs transferred from the recapitalized banks into the Indonesian Bank Restructuring Agency (IBRA).

Moena said that resolving the huge amount of NPLs was particularly crucial to helping finance the huge cost of recapitalization.

The government has been under fire over the huge cost of the recapitalization program. The cost is much larger than initially estimated, particularly for private banks due to the persisting negative spread problem.

Moena said the huge cost of the recapitalization program would be a strain on the state budget.

Some analysts speculate that the government will have to drop various subsidy programs to pay for the greater recapitalization cost.

The government has allocated some Rp 34 trillion in the 1999/2000 fiscal year to finance the interest rate cost of the bonds issue.

The floating-rate bonds carry a market interest rate linked to the interest rate of three-month Bank Indonesia promissory notes (SBIs); fixed-rate bonds have a coupon rate of 12 percent and 14 percent depending on their maturities; and index-linked bonds have a coupon rate of 3 percent plus inflation.

Bambang said a restructuring program for the real sector would help resolve the problem of banks' nonperforming loans and would improve the banks' performance and provide revenue for repaying the government bonds.

"We want to improve the market value of the banks by improving their loan portfolio to allow the government to divest its interest in the banks (at profit)," Bambang said.

He also said the restructuring of NPLs by IBRA was expected to provide the government with additional income.

Bambang also said confiscated fixed assets of closed down banks and their loan portfolios would be the source for financing the index-linked bonds.

"So the restructuring program of the real sector is key to financing the bond issue," Bambang said.

But restructuring the real sector seems to be easier said than done, particularly as many of the businesses are in a dire straits due to the economic crisis.

Ferry said the recapitalization cost for the first 23 banks was not much, pointing out that it would cost much more to recapitalize the country's seven state banks in the future. It is currently estimated at Rp 244.8 trillion.

He also said the financial burden of recapitalization was expected to lessen as the interest rate of three-month SBI notes was declining.

He added that a longer maturity of the bonds would also lessen the fiscal strain.

"Most of the bonds are floating-rate instruments with coupon rates linked to three-month SBIs. And we're expecting an interest rate of around 20 percent by the end of the year," Ferry said. (rei)