Banks propose fixed asset injection

JAKARTA (JP): Bankers have urged the government to allow undercapitalized banks to improve their capital adequacy ratios (CARs) by injecting their fixed assets into their capital structure.

The bankers said that using fixed assets to prop up the CAR position was the only alternative left because securing fresh capital amid the current economic crisis was almost impossible.

They also said that the one-month given to banks with a CAR of less than minus 25 percent to come up with fresh money to boost their CAR level to be eligible for the government's bank recapitalization program was unrealistic.

President of Bank IFI Harry Rachmadi said on Saturday that improving the CAR level through injections of fixed assets was the only practical way forward because bank owners were suffering such severe liquidity problems.

"If the capital enlargement is made through an asset injection, it is workable," he was quoted by Antara as saying.

He pointed out that many banks had buildings and other property assets which under normal economic conditions would have a good market value.

The government has required all banks to have a minimum CAR level of 4 percent by the end of this year, 8 percent by the end of 1999, and 10 percent by the end of 2000.

The CAR is the ratio between equity capital and risk-weighted assets.

A due diligence financial audit of all the country's more than 200 commercial banks was scheduled to have been completed on Saturday.

Bank Indonesia Governor Sjahril Sabirin recently indicated that most of the banks suffered an acute capital deficiency, with CAR levels of between minus 25 percent and plus 4 percent.

Under the government's recapitalization plan, these banks have to come up with at least 20 percent of the funding, while the government would provide the remaining 80 percent.

Banks with CARs of less than minus 25 percent have to inject fresh money in one month to boost the CAR level beyond minus 25 percent to qualify for the recapitalization program. The other alternative is to renegotiate their problem loans to reduce their cash requirements. Those failing to meet the requirement would be handed over to the Indonesian Bank Restructuring Agency (IBRA) which might force the banks to either merge with stronger banks, find new investors or even be liquidated.

"For bank owners, providing the fresh money in such a very short period in the current difficult situation is not a simple matter," said Bank Putera president Masyhud Ali.

"And the obligation is much more burdensome for banks with CARs of less than minus 25 percent if they don't want to surrender to IBRA."

Masyhud said; "During the current tight liquidity conditions, where will the bank owners find enough cash. Selling assets now will only get a very low return. Providing Rp 3 billion to Rp 4 billion may not be difficult, but if hundreds of billions of rupiah are needed, where will we get the cash?"

With such difficulties in recapitalizing the banks, one banker estimated that there would be only about 30 banks which could survive the recapitalization process.

A source at the National Private Banks Association (Perbanas) said, however, that the government might reduce the recapitalization requirements.

He said that at the Oct. 8 meeting between the association and the banking authorities, the government said it might consider getting bank owners to install the recapitalization fund in stages, but would not allow asset injections.

Bank recapitalization is seen as the most difficult and costly part of the country's bank restructuring efforts. Both bankers and analysts are still in the dark to how it will be financed.

Analysts have assumed bank recapitalization would cost some Rp 350 trillion to Rp 400 trillion. The government has said that it will finance 80 percent of the funding by issuing bonds but it is not clear who will buy the bonds and at what price.

Perbanas secretary-general Wibowo Ngaserin said that there would not be any fresh money injections through government funding because the bond issue was only meant to improve the banks' balance sheets.

"There won't be a single cent from the government. It's only for accounting purposes," he said, adding that the only cash would come from the bonds coupon rate which has yet to be decided by the government.

The government has said that it would take equity from the banks in exchange for the bonds. The bank owners have up to three years to redeem either part or all of the government's stake. After three years, the government will sell any remaining stake to new investors within two years. (rei)