Door closed on mergers to assist ailing banks

Door closed on mergers to assist ailing banks

JAKARTA (JP): The country's banking authorities will no longer
consider merging bad banks with healthier banks as an alternative
to bank liquidation, Bank Indonesia Governor Sjahril Sabirin said
on Friday.

He pointed out that bailing out the badly indebted banks would
only delay the problems and increase the cost of the
recapitalization scheme.

"Merging them was once considered an alternative... but we
then reevaluated and decided that bailing out banks which are too
weak to stand on their feet will only delay matters," he told
reporters on the sidelines of a deliberation of the new central
bank bill with the House of Representatives.

"The cost of bailing them out will be larger (than the cost of
closing them down)," he added.

Chairman of the Indonesian Private Banks Association
(Perbanas) Gunarni Soeworo was reported to have urged the
government on Thursday to force banks with capital adequacy
ratios (CAR) of below minus 25 percent to merge with banks with
CAR of more than 4 percent to prevent massive bank liquidation
and layoffs.

The government has divided the country's more than 200
commercial banks into three categories based on CAR levels.
Category A banks are those with CAR equal to or above 4 percent,
category B banks are those with CAR less than 4 percent and
greater than minus 25 percent, and category C banks are those
with CAR of less than minus 25 percent.

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

President B.J. Habibie told reporters on Thursday that the C
category banks would be closed down on Feb. 27.

Asked to confirm Habibie's statement, Sjahril hesitantly said:
"If the President said so, then it is true."

Sjahril, however, added that the public should not panic as
all deposits are guaranteed by the government.

He also said that the B category banks could also be closed
down if they failed to meet the government bank recapitalization
requirements, including providing 20 percent of the
recapitalization funds in cash.

Under the government bank recapitalization program designed to
bring the CAR level to a minimum of 4 percent by the end of
March, the government has promised to provide up to 80 percent of
the funding by issuing bonds.

For B category banks to join the recapitalization program they
must present a feasible business plan on how to bring the CAR
level to 8 percent by 2001, settle the legal lending limit, bad
loans, and Bank Indonesia liquidity support.

Bank Indonesia director Soebardjo Djojosoemarto said on
Thursday that some 21 privately run banks were under category C,
and 66 were in category B.

The country's seven state banks and 27 provincial development
banks will be recapitalized disregarding their CAR conditions.

Soebardjo also said that majority shareholders of publicly
listed banks had to first come up with the 20 percent of the
recapitalization funds in cash before applying for assistance in
raising the remaining 80 percent. The government would guarantee
to purchase the bonds if no investors were forthcoming.

He also said that the government will have the same rights as
other shareholders in the recapitalized banks. (rei)