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.