Bank's negative spread may fall to zero this year

JAKARTA (JP): Bank Indonesia predicted that the negative spread which had been eroding banks' capital bases would decrease to zero this year, compared to an average of 27 percent last year.

"Their (banks) cost of funds may still be higher than their lending rates for the next few months but we hope the spread for the whole year will be zero," Soebardjo Djojosoemartono, a managing director at the central bank, said on Sunday night.

Spread is the difference between a bank's cost of funds and its lending rate. The spread becomes negative when the cost of funds is higher than the interest rates charged on credits.

"The banking industry will continue to suffer Rp 500 billion in daily losses from negative spread, as it did last year, if the government-sponsored recapitalization program is not completed in April as scheduled," he added.

He did not explain how the spread could increase so sharply when the central bank is expected to keep a tight rein on the money supply in a bid to stabilize the rupiah's exchange rate.

The central bank's benchmark interest rate now ranges between 35 percent and 37 percent.

Soebardjo argued that a successful bank recapitalization program would gradually restore public confidence in domestic banks, which in turn would help decrease banks' cost of funds.

The latest data from Bank Indonesia shows that negative spread and bad credits have eroded the equity capital of the more than 200 banks from Rp 10.8 trillion last September, when the central bank's benchmark interest rate rose to as high as 70 percent, to negative Rp 98.5 trillion at the end of last year.

The comprehensive due diligence conducted by foreign auditors on all domestic banks as part of the preparations for the recapitalization program concluded that more than 100 banks had a negative equity as low as below minus 25 percent.

The government has decided to recapitalize banks with equity ranging from minus 25 percent to less than 4 percent.

Soebardjo said the government would announce on Saturday those banks which did not need to participate in the recapitalization program because they had already met the minimum 4 percent capital adequacy ratio, those banks with negative equity which qualified them to join the recapitalization program and those banks which would be closed down and liquidated.

"But don't ask me now how many banks will fall into each of the three categories because the evaluations are still underway and changes in assets and other conditions of the banks occur day to day," he said.

The changes are happening so rapidly that the upcoming announcement may not include such details as the amount of recapitalization funds needed for each bank and the lineup of the banks' managements and shareholders, Soebardjo added.

"The amount of recapitalization funds to be injected into each of the banks in the program may be known only a few days after the Feb. 27 announcement, " he added.

He denied that the central bank was slow in assessing the banks.

"Over the last few months, we have been working seven days a week and often have to work until the early hours of the morning to assess banks," he said.

The government will provide up to 80 percent of the recapitalization funds needed by the banks in the program, with the banks' shareholders providing the other 20 percent.

Soebardjo estimated the government would need between Rp 250 trillion and Rp 300 trillion (about US$35.3 billion) for the recapitalization program. The government would raise the funds by issuing bonds, but he declined to give details on the bonds because the coupon rates and the mechanisms of trading were still being evaluated.

But the government has proposed to the House of Representatives that Rp 18 trillion of the 1999/2000 state budget be allocated for funding part of the Rp 34 trillion in bond interest to be paid to the recapitalized banks.

According to Soebardjo, once the recapitalization program is completed, the central bank will reassess the banks (around 65) not included in the program because their equity capital already exceeds 4 percent.

"We will ask these banks to submit business plans for further evaluation and will subject their managements and shareholders to the fit-and-proper test to assess their technical competence and integrity."

"This additional evaluation is necessary because these banks have previously been assessed only with regard to their capital standards," Soebardjo said.

He also said the central bank would soon shift its function from a regulatory agency, concentrating more of its resources on effective supervision to ensure that banks follow regulations.

"We will step up on-site examinations of banks, and to make them (examinations) more effective the target of inspection will never be notified before the arrival of the examination team," Soebardjo said.

Each examination team, he added, would comprise experts in foreign exchange, asset management, computer technology and credit assessment. (vin)