BI urged to set rules for unhealthy banks

BI urged to set rules for unhealthy banks

JAKARTA (JP): Bank Indonesia, the central bank, should
establish rules to regulate unhealthy banks so that they do not
burden the country's economy, Bank Putera Multikarsa president
Masyhud Ali said yesterday.

Masyhud said the newly modified rules on bank soundness,
issued on April 30, were more comprehensive than the previous
rules but in some ways were also looser and did not stipulate
follow-up actions for unhealthy banks.

"Still, the new rules do not set a deadline. If a bank is
classified as unhealthy, should it be allowed to operate
forever?" Masyhud asked.

"Such an unhealthy bank should be given a deadline. If it
fails to meet the deadline to improve its soundness, it could be
liquidated or sold to new investors, or whatever," he told
journalists.

Indonesia has 239 commercial banks, most of which were
established after major banking deregulation in 1988 which
allowed investors to establish commercial banks with paid-up
capital of only Rp 10 billion (US$4.1 million at the current
rate).

Some of the newer banks have run into trouble, but only a few
have been declared insolvent. Some of the insolvent banks, like
Bank Susila Bhakti and Bank Intan, have been transferred to new
investors.

Other banks, such as Bank Pacific, Bank Yama and Bank Uppindo,
are still under public scrutiny and in the process of being
acquired by new investors.

Negotiations between existing shareholders of ailing banks and
potential investors are sometimes very tough as the shareholders
often demand too much goodwill funds even though their banks have
practically gone bankrupt.

Masyhud suggested that Bank Indonesia establish a standard
calculation on the assets of unhealthy banks offered to new
investors so that efforts to salvage the banks proceed quickly.

"Therefore, the shareholders of an ailing bank could not
demand unrealistic goodwill funds from new investors. They could
even be forced to pay new investors if their bank has no assets
and only debts," Masyhud said.

"This way, there will be more legal certainty in handling
ailing banks," he said, adding that the new soundness rating
rules would also contribute to legal certainty in the banking
industry.

The central bank recently modified bank soundness rating
rules, focusing on capital (25 percent weighting), assets (30
percent weighting), management (25 percent weighting), earning
(10 percent weighting) and liquidity (10 percent weighting) --
better known as CAMEL ratios.

Banks that meet all the CAMEL requirements will be given 100
points. And each CAMEL ratio is given a maximum 100 points, all
of which are then multiplied by its weighting to arrive at the
total CAMEL score.

A bank which achieves 81 points to 100 points is classified as
sound, while those which achieve 66 points to 80 points, 51
points to 65 points, and zero to 50 points are classified as
moderately sound, less sound and unsound or unhealthy
respectively.

Masyhud praised the rules for being more straightforward in
assessing a bank's soundness because the rules no longer relate a
bank's performance in small business loans and export loans with
its soundness.

But the new rules, he said, were still too lax considering
that a bank which totally violated the legal lending limit and
net open position on foreign exchange could still be classified
as a sound bank provided it met all CAMEL requirements.

The central bank will deduct five points to 10 points from
banks which violate legal lending limits and deduct up to five
points from banks which violate the net open position.

Masyhud said the new rules tightened the capital requirements
of commercial banks but relaxed requirements on loan-to-deposit
ratios.

"In this case, Bank Indonesia is quite fair. It allows banks
to expand, but it requires them to strengthen their capital
base," Masyhud said.

Under the new rules, Bank Indonesia requires all banks to have
a capital adequacy ratio of 8 percent. Otherwise they will be
classified as less sound.

But Bank Indonesia allows banks to have a loan-to-deposit
ratio of below 115 percent. But to achieve full points, banks
must have a maximum loan-to-deposit ratio of 90 percent.
Previously, banks had to have a ratio of below 110 percent.
Otherwise, they would have got zero points. (rid)