Banking analysts cast doubt over government plan

JAKARTA (JP): Analyst have cast doubt on the feasibility of a plan to recapitalize 70 of the country's 166 commercial banks, saying that neither the government nor the banks would be able to afford such a costly program.

Rijanto Sastroatmodjo, a former senior official in Bank Indonesia, told a banking forum that it would be hard to raise the funds required to finance the recapitalization program, which has been costed at Rp 257.5 trillion (US$34.3 billion).

"The only source of funds available now is the government because we can no longer place our hopes on foreign capital. Private banks are unlikely to come up with the money themselves," he said.

The government-sponsored recapitalization program is intended to revitalize the ailing banking sector by increasing banks' capital adequacy ratios (CAR) to 4 percent. The capital adequacy ratio is the ratio between equity capital and risk weighted assets.

The government will provide 80 percent of the funds needed to recapitalize banks with capital adequacy ratios of between 4 percent and negative 25 percent, with the banks themselves responsible for providing the remaining 20 percent.

Banks with ratios below negative 25 percent do not qualify for the program and must inject fresh capital within 30 days or risk closure for failing to meet the minimum requirement.

Rijanto said that some banks had no chance of raising the necessary funds and would definitely not be able to participate in the program.

He said that others might not be interested in contributing a 20 percent share of the required funds because of doubts over the program's feasibility.

"Those which could provide 20 percent of the required funds may think twice because they would be able to earn larger profits by depositing the money rather than committing it to a dubious program," he said.

He also said the House of Representatives might object to the government's plan to finance the recapitalization program.

To finance the program, the government will issue bonds to the participating banks. Interest payments on the bonds will be drawn out of the state budget.

Window dressing

Economist Laksamana Sukardi said the program was merely a "window dressing" and criticized the government for not taking an holistic approach to the banking sector.

"This window-dressing approach is against the principle of prudence," he said.

The requirement to increase capital adequacy ratios to at least 4 percent was merely for book-keeping purposes, he said, adding that no real inflow of capital would result.

He said banks would give their book keeping a make-over rather than indulging in a massive overhaul, further damaging their standing in the eyes of the international community.

Laksamana said the government should instead take stern measures to kick start the country's banks, even at the risk of inflicting further pain on the blighted sector.

"All undercapitalized banks which are unable to come up with the cash must be nationalized temporarily and then merged," he said, adding that banks which are totally insolvent should be closed down.

Rijanto said that daily bank transactions had slumped to Rp 12.5 trillion, down from around Rp 30 trillion before the crisis began last year.

Non-performing loans at private banks now average 63 percent, a figure expected to rise to 80 percent by the end of the year, he added. (das)