Bank owners told to inject more cash

JAKARTA (JP): Owners of eight major private banks in the government-sponsored recapitalization program are required to inject additional cash by June 30, as the initial recapitalization cost estimates have increased, according to a government document.

If the bank owners could not provide additional contributions, the government would cover the shortfall by commensurately increasing its own equity share in the banks.

"Safeguards to protect the rights of the government and the private bank owners have been incorporated into the recapitalization agreements which will be signed by May 28," the government said in its supplementary Memorandum of Economic and Financial Policies (MEFP) sent to the International Monetary Fund (IMF) on Friday.

The MEFP document was an attachment to the new letter of intent to the IMF signed on Friday by the Coordinating Minister for Economy, Finance and Industry Ginandjar Kartasasmita.

The new agreement with the IMF would pave the way for the release of about US$1 billion from both the IMF and Japan's Miyazawa fund for troubled Asian nations before Indonesia's landmark elections set for June 7.

The government said in the document that it would issue bonds to recapitalize the eight banks on May 28, and another bond issue for the additional funding requirements would occur on June 30.

The eight major private banks joining the government recapitalization program are publicly listed Bank Bali, Bank Lippo, Bank Internasional Indonesia, Bank Universal, and non- listed Bank Artha Media, Bank Bukopin, Bank Prima Express, and Bank Patriot.

Nine banks initially were to join the program, but owners of Bank Niaga did not provide the 20 percent funding, prompting the government to take over the publicly listed bank.

The initial recapitalization cost estimate for the eight banks, based on the December 1998 due diligence audit, was about Rp 21 trillion (US$2.7 billion). But as interest rate revenues lower than the cost of funds has continued to eat into banks' working capital, the recapitalization funding requirement has increased to around Rp 34 trillion.

Under the bank recapitalization program, bank owners have to contribute at least 20 percent of the total cost, while the government would finance the remaining 80 percent by issuing bonds. This will end up with the government controlling 80 percent of the recapitalized banks.

The government recapitalization program is designed to lift the capital adequacy ratios of banks to a minimum level of 4 percent. CAR is the ratio of capital to risk-weighted assets.

In addition to the eight major banks, the government would also provide 100 percent financing -- through the issuance of bonds -- for the country's seven state banks and 12 banks, including Bank Niaga, that the government has assumed control of.

The government is also funding 80 percent of the recapitalization costs of 12 provincial development banks.

The total cost to repair the country's banking industry is estimated to inflate to Rp 500 trillion.

The government originally took over four banks in 1998: Bank Central Asia (BCA), Bank Danamon, Bank PDFCI, and Bank Tiara. The other eight banks were taken over in March, when a further 38 banks were closed down.

"Progress in the restructuring of the four originally taken- over banks is being accelerated ... Acceptable business plans for these banks will be finalized by June 30," the government said.

It added that BCA and Bank Danamon were being prepared for sale during the second half of 1999/2000.

"We will recapitalize these banks to 4 percent CAR in line with operational restructuring, or when the banks have a firm prospective buyer," the government said.

The government also said that Bank PDFCI would be operationally merged into Bank Danamon in September.

It added that Bank Tiara would shortly enter into an agreement with an international bank. If it fails, the bank would be merged into Bank Danamon.

To ensure a successful recapitalization program, the government wants to quickly recover their massive non-performing loans.

The MEFP document said that the priority for recovering the loans should focus on the 20 largest debtors of each bank.

Banks in the recapitalization program have transferred their non-performing loans to the Indonesian Bank Restructuring Agency's (IBRA) asset management unit.

Non-performing assets transferred to IBRA are estimated to reach more than Rp 220 trillion, including those of the 38 closed private banks and state banks.

"The government has instructed the state banks, taken-over banks and the IBRA to accelerate their restructuring efforts and maximize the expected asset recovery values," it said.

IBRA is expected to raise about Rp 17 trillion from recovered loans and the sale of bank assets to help finance the recapitalization costs in the 1999/2000 fiscal year.

But efforts to recover the non-performing loans from the 20 largest debtors have been very slow, largely because the main debtors of the state banks are well-connected businessmen.

The MEFP document said that a restructuring agreement with those major debtors must be reached by Aug. 30 or the government would take legal action, including filing bankruptcy claims against them. The initial deadline was April 30.

The government said it would announce in June the names of bad debtors who do not cooperate with efforts to reach a resolution over their outstanding debts.

The government also said in the document that preliminary indicators suggest the economy was bottoming out.

As already announced, it gave a first-quarter GDP rise of 1.3 percent, and predicted that the 12-month inflation rate would fall to below 10 percent towards the end of 1999/2000.

It noted that the rupiah had been more stable recently within a range of about Rp 8,000 to the dollar, and said it should strengthen further.

On interest rates, despite the recent falls in benchmark rates, the government said real interest rates remain high. It said it would seek to continue to allow rates to fall without harming the rupiah's level or inflation. (rei)