Banks must have at lease 12% CAR in 2002

The Jakarta Post, Jakarta

Bank Indonesia will raise the minimum capital adequacy ratio (CAR) for banks to 12 percent this year from the current 8 percent level, according to a senior official at the Indonesian Bank Restructuring Agency (IBRA).

"The target of Bank Indonesia for 2002 is 12 percent," IBRA deputy chairman Soebowo Musa said on Tuesday.

CAR is the ratio between a bank's capital and its risk- weighted assets. The higher the CAR, the healthier the bank is.

The 1998 banking crisis had sent the CAR level of many of the country's banks into the negative territory, forcing the government to either close the banks or recapitalize them using taxpayer money.

The central bank required all banks to meet a minimum CAR level of 8 percent by the end of last year or risk closure or a merger with stronger banks.

But the 8 percent CAR is still below the international standard of at least 12 percent.

Bank Indonesia officials have also previously indicated that banks must have a minimum CAR of 12 percent by the end of this year.

The new minimum CAR requirement would force banks with a CAR below 12 percent to seek fresh cash to increase their capital level or seek a stronger partner for a merger.

Mergers are seen as one method to restructure the country's weak banking industry.

The government is now planning to merge five banks, four of which could not meet the 2001 year-end CAR requirement. The banks are Bank Bali, Bank Universal, Bank Artha Media, Bank Prima Ekspress, and Bank Patriot. Only Bank Bali has a CAR above 8 percent.

Soebowo said that under the IBRA-designed merger plan, the newly merged bank would need to have a CAR of more than 12 percent.

IBRA has said that the legal merger process of the five banks would be completed by the middle of this year.

Soebowo said that the agency would use the "recycled bonds" to help boost the CAR of the merged banks.

Recycled bonds are recapitalization bonds which have been redeemed from recapitalized banks by the agency. The government issued more than Rp 400 trillion worth of bonds between 1999 and 2000 to recapitalize ailing banks.

Elsewhere, Soebowo dismissed reports that the government would use funds from its account No. 519 at Bank Indonesia to finance the recapitalization of the five banks.

He said that the funds would only be treated as a back-up.

The funds are supposed to be only used to cover depositors money in banks closed down by the government as part of the government blanket guarantee program.