Banking analysts cast doubt over government plan

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)