Banks propose fixed asset injection

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)