Condition of local banks still fragile, senior analyst says

Condition of local banks still fragile, senior analyst says

JAKARTA (JP): Some of the 74 A-category banks which had a
relatively stronger capital condition early in the year have now
suffered either a negative or insufficient capital adequacy ratio
(CAR) due to a continuing "negative environment," said a senior
banking analyst.

Rijanto Sastroatmodjo said on Friday that the CAR level of
about half of the 74 banks might have already dropped to below
the minimum 4 percent level requirement.

"The fate of this group of banks is still uncertain and very
fragile amid the (economic) condition which remains unable to
provide a positive support for their operation," he told a
seminar on the prospects of national banks.

Rijanto said the banks would either have to merge themselves
or have their owners inject fresh money to help the banks stay
afloat.

He added that the group of banks could not yet be expected to
resume lending to the real sector.

A-category banks are privately owned banks which do not have
to join the government's bank recapitalization program because
they had a CAR level of more than 4 percent. The banks had an
average CAR level of more than 10 percent when their status was
announced in March this year.

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

The government closed 38 private banks with a CAR level of
less than minus 25 percent in March, and decided to recapitalize
nine banks which had a CAR level between minus 25 percent and
plus 4 percent.

Rijanto said the CAR condition of the A-category banks
continued to deteriorate since the announcement of their status
in March due to the negative interest rate spread problem that
plagued the industry for many months amid the high interest rate
environment.

Most of the country's banks have put their funds on Bank
Indonesia's short-term promissory notes (SBIs) to reduce lending
risks. But this has caused a negative spread to their interest
earning position as the interest rates of their time deposits are
much lower than the rates offered by the SBIs.

Rijanto said although interest rates had now gone down sharply
to levels which should provide banks with a positive spread, the
A-category banks remained in difficulty as they were plagued with
huge non-performing loans (NPLs).

He said that unlike the NPLs of the recapitalized banks or
nationalized banks, those of the A-category banks were not
transferred to the Indonesian Bank Restructuring Agency (IBRA).

"IBRA doesn't bail out the NPLs of the A-category banks,"
Rijanto said.

IBRA is expected to absorb more than Rp 230 trillion in NPLs
from seven private banks, seven state banks and 13 nationalized
banks, all of which would be recapitalized by the government to
allow them to have a clean balance sheet and to resume lending
once they were recapitalized.

Rijanto said it would be impossible to expect the A-category
banks to resume lending over the next six to 12 months.

"These banks can't be expected to resume lending except on
program loans," he said, referring to the heavily subsidized
government loans which are channeled through a selected group of
banks.

The central bank has allowed its benchmark interest rate to
drop significantly from more than 35 percent in the beginning of
this year to a current level of 13.80 percent, in the hope to
push down the bank lending rate to an affordable level for the
real sector.

State banks have almost completely stopped lending to the real
sector since last year when the economy fell deeper into its
worst economic crisis in three decades.

In its latest Memorandum of Economic and Financial Policies
(MEFP) to the International Monetary Fund (IMF), the government
said Bank Indonesia (BI) was expected to complete an evaluation
of the 74 A-category banks by July 31.

"By that date, it is envisaged that all owners, managers and
directors of these banks who failed the fit and proper test will
be removed, and former controlling shareholders who failed the
test will fully divest their holdings," the MEFP document said.

It also said that by July 31, BI would also complete its
review and discussion of an individual bank's financial soundness
and business plan.

It added that corrective programs to deal with unviable
business plans would be established, where necessary, with
individual banks by September 30.

"Through this process, and regular supervision, BI will ensure
that private banks remain solvent," the document said.

Rijanto also said that many of the foreign joint venture banks
operating in the country were facing a similar fate as the A-
category banks.

"Several joint venture banks also have the same problem," he
said, adding their local partners were in financial difficulties
to provide their share of fresh money to increase the CAR level.

Based on the December 1998 due diligence audit conducted by
the central bank, out of 32 joint-venture banks in Indonesia, 15
banks posted a CAR level of equal or more than 4 percent, and 17
banks had a CAR level below 4 percent.

Bank Indonesia closed down two joint-venture banks including
Bank Indovest and Bank LTCB in April because their owners failed
to recapitalize the banks. (rei)