Banking on justice

Although almost all agree that setting right the crippled banking industry is crucial to lead the economy out of its crisis, the government's bank recapitalization scheme is facing stiff opposition from most analysts and the House of Representatives. The proposed allocation of Rp 18 trillion of the 1999/2000 State Budget for the program has come under fire during deliberations in the House, even from the dominant Golkar faction noted mostly for simply toeing the official line.

It is extremely unfortunate that the element of the draft budget provoking the greatest controversy is the bank recapitalization plan so crucial for the eventual recovery of the economy.

But the voice of dissent in the legislature is understandable on a number of points.

The bone of contention against the recapitalization plan is not as much the amount of the costs as the botched handling of the banking crisis since early last year. It inevitably eroded whatever little public confidence remained in the government's ability to cope fairly and transparently with the moribund banking sector. The lack of public trust has made it extremely difficult for the government to make a better public case of the urgent need for recapitalizing ailing banks.

There are, we think, several perplexing questions which must first to be straightened out to make the proposal palatable to taxpayers who bear the brunt of recapitalization costs.

Foremost among them is why capital standards for the program were set so low -- covering institutions with capital adequacy ratios (CAR) ranging from minus 25 percent to 4 percent -- that more than 80 banks would qualify for a total recapitalization of about Rp 300 trillion.

This lenient standard will not likely bolster confidence, both domestic and foreign, in the recapitalized banks since the international minimum capital standard is already 8 percent. Quite the contrary, given the enormous risks inherent in the continuing political uncertainty and the questionable auditing standards in Indonesia, the minimum CAR should instead be set higher than the international level.

Moreover, in view of the extreme lack of technical competence in banking supervision, one of the main reasons behind the banking crisis in the first place, the number of banks should be made much smaller than current 200. The risk of failure in bailing out so many banks is surely much bigger than focusing limited resources on salvaging the few with strong management and high integrity.

The government may argue that raising the capital standard requirement would put most banks into liquidation at a huge cost and a big risk of triggering a new wave of massive runs on almost all banks, including those already with more than 4 percent CAR.

But pumping another Rp 300 trillion into so many ailing banks, on top of the Rp 116 trillion they still owe in emergency liquidity support from the central bank, would be a grave affront to the public's sense of justice. It raises the question whether the government is protecting depositors or simply bailing out bank shareholders, many of whom are accused of violating the legal lending limits and perceived to be engaged in underhanded relationships with political leaders or key officials.

The sense of justice also requires the government not only to disclose but deal firmly with those -- be they directors or borrowers -- responsible for bankrupting the six state banks now needing more than Rp 136 billion in recapitalization in order to survive.

Finance minister Bambang Subianto's warning that if the banks are not recapitalized the impact could be disastrous makes plain economic sense. But recapitalizing so many ailing banks, including those whose management and shareholders are notorious for their lack of integrity, is not only economically insensible and highly risky, but also a gross imposition on taxpayers ultimately footing the bill.