BI limits bank purchase of IBRA assets

BI limits bank purchase of IBRA assets

The Jakarta Post, Jakarta

Bank Indonesia is restricting the amount of loans banks may
purchase from the Indonesian Bank Restructuring Agency (IBRA)
under a new ruling protecting them against bad debts.

However, the restrictions could slow IBRA's asset disposal
program.

Bank Indonesia regulation No. 4/7/2002 on the principle of
frugality in purchasing IBRA credits, restricts IBRA asset
purchases to 50 percent of a bank's core capital. The ruling took
effect on Sept. 27.

"We feel this (restriction) is necessary to maintain banks'
health," Bank Indonesia governor Sjahril Sabirin told reporters
on Friday as quoted by Antara.

Core capital refers mainly to a bank's capital belonging to
its owners. Sjahril said the 50 percent limit is based on the
discounted purchase value of the debts and not their book value.

The ruling limits banks exposure to IBRA's bad debts, many of
which are being sold unrestructured.

Set up in 1998, the agency is in charge of restructuring loans
it has taken over from banks that were hit by the 1997 economic
crisis. Replacing the banks' non performing loans are government
funded recapitalization bonds.

To date the agency controls around Rp 273 trillion (about
US$30 billion) worth of non-performing loans.

IBRA is suppose to restructure then return the loans to pull
out recapitalization bonds from the banks' balance sheets.

But a prolonged sluggish economy has made loan restructuring
difficult, forcing IBRA to start selling them unrestructured.

Although offered at heavily discounted prices, unrestructured
loans are non performing ones, meaning banks must waive interest
earnings until they can secure a restructuring deal with debtors.

This situation risk banks' already weak capital adequacy ratio
(CAR).

CAR measures a bank's capital against its risk weighted
assets, consisting mainly of loans. If a bank's CAR falls below
eight percent, Bank Indonesia may shut it down.

Five years after the crisis and after around $60 billion was
spent recapitalizing banks, low CAR levels remains the biggest
threat simmering across the banking sector.

Bank Indonesia's latest ruling seeks to protect banks from
accruing new bad loans that would further stress their CARs.

Bank analyst Elvyn Masassya however warned the ruling could
hurt banks by hampering efforts to seek new loans.

He added an article requiring banks to make provision for the
book value instead of the discounted purchase value of the loans,
would also discourage them to seek IBRA credits.

For IBRA the central bank ruling effectively cuts the amount
of loans it can return to the banking sector and thus
recapitalization bonds it can pull out.

"This clearly works against IBRA's asset disposal program,"
said Elvyn.

But Sjahril dismissed the notion that the central bank's new
ruling was undermining banks' capacity to absorb IBRA assets.

At 50 percent of banks capitals, he said, there was still
plenty of cash left to purchase many IBRA assets.