BI considers new measures to support bond swap policy

JAKARTA (JP): Bank Indonesia (the central bank) is seeking ways to support the government's plan to swap bank recapitalization bonds for restructured loans under the management of the Indonesian Bank Restructuring Agency (IBRA), a senior central bank official said here on Wednesday.

Bank Indonesia deputy governor Achwan said measures would be needed to ensure that conversion of the bonds into loans would not cause the breaching of banking prudential regulations such as the requirements on capital adequacy ratio (CAR) and legal lending limits.

He said that at present it would be difficult for banks to join the program because an increase in their loans as a result of such a swap could cause their CAR and legal lending limits to fall into the red.

"We are still studying ways to resolve this problem, but we'll not relax the existing prudential ruling," he said at a hearing with the House of Representatives Commission IX on banking and the state budget.

The government plans to allow recapitalized banks to exchange some of their recapitalization bonds for the restructured bank non-performing loans currently managed by IBRA starting next year to help ease the burden on the state budget and provide cash for the banks to resume lending activities.

Achwan pointed out that while government bank recapitalization bonds were relatively risk-free, the IBRA loans should be assigned a 100 percent risk in the calculation of a bank's CAR according to international standards.

CAR is the ratio between a bank's capital and its risk- weighted assets including loans. Exchanging zero risk government bonds for 100 percent risk IBRA loans would automatically lower banks' CAR levels.

The current minimum CAR is 4 percent compared to the international standard of 8 percent. Bank Indonesia has stipulated that all banks must reach the international standard by the end of next year.

Achwan explained that although the recapitalized banks already had CARs of more than 4 percent, it would still be risky to allow them to exchange the government bonds for IBRA loans because of their relatively weak condition.

He said that Bank Indonesia could relax the CAR calculation by assigning, for instance, an 80 percent risk to the IBRA loans. This would, however, be against international standards.

"The credibility of our banks will be damaged if we relax the rules," he said.

"So the bond swap plan can only be applied to banks with a quite high CAR level," he added.

Achwan pointed out that another impeding factor was the legal lending limit ruling.

He explained that allowing a certain bank to exchange its recapitalization bonds for the IBRA loans could cause the bank to violate the legal lending limit.

But Achwan said that this ruling could be softened, particularly if a bank was forced to violate the limit due to a sharp plunge in the value of the rupiah against the U.S. dollar.

Achwan stressed that in order to realize the bond swap plan, the central bank would have to arrive at a policy "breakthrough."

He said that without such a policy breakthrough, only 1 or 2 banks were ready to swap the bonds for IBRA loans.

"And this will not be significant in reducing the burden on the state budget," he said.

The government has issued more than Rp 400 trillion worth of bonds to help finance the country's bank recapitalization program.

The state budget covers the interest rate cost of the bonds.

The successful implementation of a bond swap policy is important considering that part of the bonds will start maturing in 2002.

The development of the domestic secondary bond market is also crucial to help resolve the debt problem resulting from the huge bond issue.(rei)