BI to assist mergers of 74 private banks

BI to assist mergers of 74 private banks

JAKARTA (JP): Bank Indonesia Governor Sjahril Sabirin said on
Wednesday the central bank would play a "matchmaker" role in
encouraging 74 private banks to merge into several larger banks
in a bid to further strengthen the country's beleaguered banking
industry.

He said Bank Indonesia (BI) already had studied and listed the
strengths and weaknesses of the 74 banks, which could be used as
a basis for matching banks for possible mergers.

"The program is currently being worked out," he said at a
luncheon organized by the Indonesian Executive Circle.

The government launched its bank restructuring program on
March 13 for the country's 128 private banks. Thirty-eight of the
banks were closed, seven taken over by the government and nine
qualified for the government's recapitalization program. A total
of 74 private banks were determined sound because their capital
adequacy ratios (CARs) were at least 4 percent.

CAR is the ratio between capital and risk-weighted assets.

The banking authority earlier grouped banks into three
categories based on their CAR levels. Banks with CARs equal to or
above the government-established minimum of 4 percent were put in
the Bank A category; banks with CARs between less than 4 percent
and minus 25 percent were placed in the Bank B category; banks
with CARs of less than minus 25 percent were grouped in the Bank
C category.

Banks grouped in the C category and those in the B category
which failed to qualify for the government's recapitalization
program have been closed.

However, experts said banks in the A category were mostly
small and there were too many of these banks to allow for sound
banking development. They urged the banking authority to
forcefully merge these banks because many of them still were
vulnerable to the current economic crisis.

Sjahril, however, stressed that the government would not force
banks into mergers.

"We're not going to force them (into mergers), it's up to
them. We're only making suggestions."

Under the state-sponsored bank recapitalization program in
which nine private banks are participating, the government will
provide up to 80 percent of recapitalization funding, while the
banks must raise the remaining funds.

Sjahril said the government would issue bonds to finance the
recapitalization program before April 21.

Interest rates

The government has not yet decided the interest rates on the
bonds but informed sources said they could be either a fixed 3
percent rate or a 3 percent plus inflation rate.

The cost of the bonds' interest rate for the 1999/2000 fiscal
year is expected to amount to Rp 34 trillion, of which Rp 17
trillion will be provided by the sale of bank assets taken over
by the Indonesian Bank Restructuring Agency (IBRA). The remaining
Rp 17 trillion will come from the state budget.

However, Sjahril said the government would not rush into
selling the assets seized from liquidated and nationalized banks
in order to get the optimum price for the assets.

He is optimistic the Rp 17 trillion target for the sale of the
assets will be reached despite the current economic crisis
because this figure is meager compared to the nearly Rp 200
trillion of bank assets currently being held by IBRA.

Sjahril also is heartened by improving macroeconomic
conditions, particularly a more stable exchange rate and
declining inflation.

He said stable macroeconomic conditions would provide more
leeway for interest rates to continue to decline, which would end
the negative spread from which most banks currently suffer.

Sjahril is confident inflation will continue to fall in April,
leading to lower interest rates, despite the upcoming June
general election.

Indonesia achieved 0.18 percent deflation in March. This is
the first month of deflation in the country since October last
year.

Bank Indonesia officials earlier projected interest rate
levels would reach about 30 percent in the near future. Interest
rates currently are hovering at about 37 percent.

"We've seen some encouraging signs. The road ahead may not be
smooth, but we at BI are cautiously optimistic," Sjahril said.

He pledged the central bank would continue to put the
stabilization of macroeconomic conditions, particularly lowering
inflation, at the top of its priority programs.

"Our role will not stop with the launching of the bank
recapitalization program. There's still much more to be done,
particularly with regards to the Bank A category and monetary
stability."

Under an agreement signed on Tuesday, the Reserve Bank of New
Zealand would advise BI on achieving a low-inflation economy.
(rei)