Sat, 12 Feb 2000

BI sticks with quarterly evaluations of banks' CAR

JAKARTA (JP): Bank Indonesia will continue to evaluate the country's commercial banks every three months to ensure they meet the eight percent capital adequacy ratio (CAR) requirement by end 2001, according the central bank deputy governor Subarjo Djojosumarto.

Subarjo said on Friday that the banks' non-performing loans (NPLs) must also be less than five percent by the set deadline.

"All banks must already be healthy by the end of 2001," he told reporters.

He said that a healthy banking sector was a prerequisite to sustain the country's economic recovery.

He said that as of now banks must already have a CAR level above four percent.

He said that if a bank's CAR drops below four percent, the owners would be asked by the central bank to inject more cash to improve its capital condition.

He said that if the owners failed to come up with fresh money, the central bank would transfer the banks to the Indonesian Bank Restructuring Agency to be either closed down or merged with other healthier banks.

The central bank has recently closed down Bank Putera Multikarsa after its owner failed to come up with fresh money to improve the capital condition of the bank which had dropped to minus 48.15 percent.

Bank Indonesia has said that it's still investigating the source of cash injected to two other private banks which also had suffered a capital deterioration.

The investigation is needed to ensure that the fresh capital doesn't come from illegal businesses or loans.

Indonesia's banking sector suffered disastrously during the country's economic crisis that started in the middle of 1997 sending most of the banks' CAR level into negative territory and inflated the level of their NPLs. So far, the government has closed down 66 private banks and nationalized 13 others.

The government also has sponsored the recapitalization of seven private banks to lift their CAR to four percent.

But the capital condition of some banks could still deteriorate amid slow progress in the recovery of bad loans, and the remaining macroeconomic uncertainty due to the country's unstable political situation.

Subarjo said that the quarterly evaluation would also focus on ensuring that banks have strong liquidity, and meet the five percent minimum reserves requirement at the central bank.

He said that key management of the banks must also pass Bank Indonesia's "fit and proper test" to ensure that the banks were not run by bad bankers.

"All these measures are needed to prevent a similar banking crisis from reoccurring in the future," he said.

Subarjo said that the central bank would create a better "environment" for the banking industry by creating a deposit insurance system.

"We have completed the draft (deposit insurance system), and we're in the process of socializing it," he said.

The insurance deposit system is expected to prevent depositors from panicking if a bank is closed down.

The liquidation of 16 private banks in November 1997 led to widespread panic among depositors, threatening the country's overall banking system.

The government launched a costly blanket guarantee system in early 1998 to curb the panic situation and save the banking system from a complete breakdown.

The insurance deposit system will replace the government blanket guarantee.

Subarjo also said that preparations were on the way to create a new institution to take over the banking supervision role of the central bank.

He said that according to the initial plan, the supervision role was expected to be handed over to a new institution in 2002, but the central bank had no objection to the suggestion that the transfer should be accelerated.

He said that the central bank's mission in the future would mainly be to ensure price stability. (rei)