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)