BI warns banks to up CAR or face the ax

BI warns banks to up CAR or face the ax

JAKARTA (JP): Bank Indonesia (BI) senior deputy governor Anwar
Nasution warned on Tuesday that private banks with a capital
adequacy ratio (CAR) of less than 4 percent would risk closure if
they failed to improve the level by the end of this month.

Anwar said bank owners would have to find the financial
resources by themselves because the government would no longer
provide assistance.

"If they could not meet the 4 percent CAR requirement, there's
no other choice (than to close them). That's the rule," he said
on the sidelines of a gathering of central bank officials and the
domestic banking community.

"The bottom line is that banks with no potential should be
closed down." However, he cautioned the public not to panic
because deposits at all domestic banks were guaranteed by the
government.

He declined to name the banks with CAR levels below the
minimum requirement.

Anwar was referring to institutions among the 74 private banks
which survived the first wave of closures as the banking crisis
deepened in 1998.

Bank Indonesia deputy governor Subarjo Djojosumarto said late
last year that eight banks had a CAR below the 4 percent level.

It is the ratio between a bank's equity capital and risk-
weighted assets.

The government has closed down 66 private banks and
nationalized 13 since the financial crisis started in the middle
of 1997.

It has also sponsored the recapitalization of seven major
private banks to boost their CAR to the 4 percent level.

Up to 80 percent of recapitalization costs for the banks were
funded through government bonds.

The government allowed 74 banks, popularly called "A" category
institutions, to continue operation without having to join the
government recapitalization program because their CAR was above
the 4 percent level.

But many believe some of the A category banks continue to
suffer weakening capital due to the problem of negative interest
rate spread last year.

Meanwhile, Bank Indonesia Governor Sjahril Sabirin said that
the central bank did not need to be recapitalized because its
capital level was still sufficient.

"There's no problem with Bank Indonesia's capital condition,"
he said, noting its capital as of May 1999 was Rp 2.7 trillion.

By law, the government must inject funds into the central bank
should its capital fall below Rp 2 trillion.

Finance minister Bambang Sudibyo said earlier that the
government would recapitalize Bank Indonesia in March following
an audit report which indicated the central bank might be
insolvent after it channeled some Rp 164.5 trillion in liquidity
support to ailing banks in 1998.

But Sjahril said the central bank's financial condition was
solid because the government issued bonds to cover the liquidity
support.

According to the leaked audit report by the Supreme Audit
Agency, Bank Indonesia may have violated procedures in disbursing
Rp 80.25 trillion in liquidity credits to commercial banks.

Bank Indonesia earlier said the amount in question was Rp 51.7
trillion.

Sjahril again denied the fund discrepancy and said the massive
liquidity support injected by the central bank was an unavoidable
policy to keep domestic banks afloat and rescue the economy.

"Without the liquidity support, we would no longer have banks
today," he said.

Sjahril blamed several government officials for making an
issue of the liquidity support.

President Abdurrahman Wahid has urged the House of
Representatives to dismiss Sjahril due to possible procedural
violations in the channeling of the liquidity support.

House leaders have said that Sjahril could only be dismissed
if there was a crime committed.

Sjahril has repeatedly said that he would not resign under
pressure.

He also claimed that the central bank was successful under his
leadership in strengthening the value of the rupiah to the U.S.
dollar and stabilizing the domestic monetary condition.

Speculation has put Anwar and another Bank Indonesia deputy
governor, Dono Iskandar, as the government's top preferences to
replace Sjahril.

Anwar and Dono declined to comment. (rei)