Bank Mandiri may take 10 years to dispose off recap bonds

The Jakarta Post, Jakarta

State owned Bank Mandiri said it could release at best Rp 15 trillion (about US$1.5 billion) in recapitalization bonds a year, a pace that would take the bank over 10 years to cut its dependency on revenue from the government funded bonds.

Bank Mandiri president E.C.W Neloe said that massive, or fast disposals, of its Rp 153.49 trillion in recapitalization bonds were unlikely.

"On the average we may be able to dispose off Rp 15 trillion a year, so that we will need some 10 years to complete it (bond disposal)," Neloe told a media briefing late Tuesday.

Bank Mandiri is the country's largest bank in terms of assets, as well as the largest recipient of recapitalization bonds.

Income from government bonds have been the lifeline for most banks following their recapitalization in the wake of the 1997 financial crisis.

The bonds were aimed at keeping the banks afloat after the government took over their bad loans, which earned the banks no interest income.

The bonds issued to bail out the banking sector amounted to Rp 630 trillion, excluding interest payments.

They have become a constant drain on the state budget.

Last year Rp 61 trillion was spent on bond interest payments to banks, with about one third going to Bank Mandiri.

This year the payments may hit Rp 59 trillion, or nearly 40 percent of total government spending.

That tops spending on development worth Rp 52 trillion, which covers, among other things, health, welfare and education expenditure, besides being the only spending that could drive economic growth.

But as the economy continues to sputter, the banks have been slow to replace the bonds with higher earning loans.

Bank Mandiri's 2001 interest income from recapitalization bonds stood at Rp 23.14 trillion -- three times the earnings the bank made from interest on loans and other sources.

Its interest income from government bonds in 2001 fell only slightly to 73.5 percent from 75.3 percent in 2000.

Neloe said finding attractive investments to replace the bonds was hard given the need to abide by prudential lending principles.

Most economic sectors remain in the doldrums five years after the economic crisis struck, forcing banks to invest their funds in the previously ignored small and medium enterprises, or Bank Indonesia promissory notes.

Otherwise, the banks are reliant on income from government bonds.

Bank Mandiri's chief financial officer K. Keat Lee said the bank would retain Rp 114 trillion in bonds until their maturity dates, meaning they would not be offered for sale this year.

This, he said, would avoid the bonds' fall subject to market valuation, which might lower their value and hence hurt the bank's asset position.

Bank Mandiri is offering the bond market Rp 8 trillion of its bonds, with another Rp 31.17 trillion kept on standby offer.

Last year the bank sold around Rp 15 trillion of its bonds.