Banks fail to meet CAR requirement

Banks fail to meet CAR requirement

JAKARTA (JP): Bank Indonesia Governor Sjahril Sabirin said
that several recapitalized banks might not be able to meet the
minimum 8 percent capital adequacy ratio (CAR) requirement by the
end of this year.

Sjahril recommended that the Indonesian Bank Restructuring
Agency (IBRA) merge such banks with higher-CAR banks to avoid
greater expense for the government.

"There are several (recapitalized) banks that may not be able
to meet the 8 percent CAR requirement by the end of 2001," he
told the House of Representatives' Commission IX on the state
budget and banking during a hearing late on Wednesday.

Sjahril did not name the banks but he said he was optimistic
that the four state banks, including Bank Mandiri, Bank BNI, Bank
BRI and Bank BTN could meet the year-end CAR requirement as their
CAR level was already over 8 percent.

The government has issued a massive Rp 430.4 trillion (US$42
billion) worth of bonds to help finance the recapitalization of
27 banks, including four state-owned banks, 11 private banks, and
12 smaller regional development banks.

The 11 private banks include the publicly-listed Bank Central
Asia (BCA), Bank Danamon, Bank Niaga, Bank Lippo, Bank
Internasional Indonesia, Bank Bali and Bank Universal, and non-
listed Bank Prima Express, Bank Artha Media, Bank Patriot and
Bank Bukopin.

Bank Indonesia has required all domestic banks to have CAR
level of at least 8 percent by the end of this year or risk
closure. This is part of the agreement with the International
Monetary Fund.

The government bank recapitalization program lifted the CAR of
the banks to beyond 4 percent. But as the banking environment
remains unfavorable, particularly due to continued increases in
interest rates and further falls in the value of the rupiah, some
banks are facing difficulties in meeting the year-end CAR
requirement.

Finance minister Prijadi Praptosuhardjo had earlier said that
the current rising interest rates could spell trouble for
domestic banks, which in turn could also force the government to
recapitalize the banks for the second time in order to avoid bank
closures.

But recapitalizing the banks for a second time would place an
even greater burden on the already strained state budget, which
covers the interest on bank recapitalization bonds. The interest
cost of the bonds is estimated at around Rp 3 trillion per month,
depending on the interest rate on Bank Indonesia SBI promissory
notes. The interest rate on part of the bonds is linked to the
rate on the SBI notes.

In a bid to help defend the ailing rupiah, which recently
dropped to a 30-month low, Bank Indonesia raised the interest
rate on its one-month SBI notes to 15.58 percent on Wednesday
from 15.24 percent.

Since the financial crisis started in the middle of 1997, the
government has cut the number of banks from 238 to 151 mostly by
closing them down.

Elsewhere, Sjahril said that the non-performing loan (NPL)
level of some banks was still quite high at more than 20 percent,
compared to the year-end target of not more than 5 percent.

Sjahril also said that the asset structure of most of the
recapitalized banks was still unbalanced due to the dominance of
government bonds compared to lending.

He said that 40-70 percent of the asset structures of the
state banks was in the form of government bonds.

He added that out of the 11 recapitalized private banks, three
banks had an unbalanced asset structure with more than 50 percent
being in the form of government bonds.

"This shows that the banking intermediary function is not
running well and that their business is very sensitive to
interest rate developments," Sjahril said, pointing out that the
government recapitalization bonds carry a fixed interest rate of
around 12 percent compared to the increasing interest rate on
time deposits. (rei)