BI claims 20 banks run risk of closure

BI claims 20 banks run risk of closure

JAKARTA (JP): Around 20 domestic banks face the risk of
closure this year as they seem unable to meet the year-end
minimum 8 percent capital adequacy ratio (CAR) requirement, Bank
Indonesia (BI) director for research and regulation Djoko Sarwono
said on Friday.

But Djoko said that the cost to the government would only be
"small", at between Rp 5-10 trillion (US$465-$930 million), if
the banks were either closed down or recapitalized.

"According to the BI stress test, it is apparent that there
would be around 20 banks with a CAR of less than 8 percent by the
end of this year," he told a news briefing, in unveiling the
latest development in the banking sector.

Djoko said that three of the 20 banks were under the control
of the Indonesian Bank Restructuring Agency (IBRA), a unit of the
finance ministry. He declined to name the banks.

BI has required all banks to have a minimum 8 percent CAR by
the end of this year or be closed down. Banks which can meet the
requirement can either merge with stronger banks or their
shareholders may inject cash to recapitalize them.

If the banks are closed, the government will have to meet
their obligations, including those to depositors, under the
government's blanket guarantee for bank deposits.

IBRA has majority ownerships in 11 private banks, after the
government financed their recapitalization in 1998 and 1999.

The government has issued around Rp 430 trillion worth of
bonds to finance the recapitalization of 27 banks, including four
state-owned banks, several regional development banks, and the 11
private banks.

The state budget covers the interest costs of the bonds.

BI has recently warned that several of the IBRA banks might
fail to meet the year-end CAR requirement, and urged the
government to merge the banks to avoid the greater costs that
would result from the bank closure alternative.

But Finance Minister Prijadi Praptosuhardjo said on Thursday
that merging banks was not an easy process due to the complexity
of the banks' problems.

Bankers and government officials said earlier that the steady
increase in the interest rate of the central bank's SBI
promissory notes could spell trouble for banks as they could
suffer negative spread problems, which in turn could degrade
their capital standard.

BI has allowed its SBI rate to increase steadily since January
to almost 15.80 percent now to help defend the rupiah. But the
increase in the SBI rate could trigger an increase in time
deposit rate, and as banks are still reluctant to channel their
funds into lending with higher interest rates amid the overall
economic problems, the banks could suffer negative spread.

Djoko, however, said that in general the condition of the
country's banking sector had been improving.

He said that total assets as of the end of February grew by
7.1 percent to Rp 1,103.4 trillion compared with the level at the
end of last year.

He said that third party funds increased by 3.2 percent to Rp
721.3 trillion at the end of February, from Rp 699.1 trillion at
the end of last year.

But he said that lending grew only by 2 percent or around Rp
6.4 trillion to Rp 328.6 trillion. Worse still, only Rp 5.8
trillion of the increase was considered new lending.

He said that profits before tax increased to Rp 5 trillion
from Rp 3 trillion.

Djoko added that gross non-performing loans (NPLs) declined
slightly to 18 percent from 18.8 percent.

He said that the net interest margin, the difference between
the interest revenue of a bank and its interest cost, increased
to Rp 8.1 trillion at the end of February from Rp 7.6 trillion at
the end of January.

Djoko also denied reports that BI would loosen the year-end
CAR requirement.

"BI will stick with the 8 percent CAR requirement," he said
even though some banks had demanded that BI extend the deadline
or loosen the requirement.

But Djoko said that BI was willing to loosen the initial
requirement of a maximum NPL of not more than 5 percent by the
end of this year.

Enforcing the initial target would have greater consequences
to banks as they would have to write off around Rp 45 trillion of
their loan portfolio.

He said that BI would not close banks which failed to meet the
year-end NPL requirement. (rei)