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)