Doubt lingers over bank recapitalization

Doubt lingers over bank recapitalization

JAKARTA (JP): Experts have expressed doubt over the country's
costly bank recapitalization program, because the huge amount of
money required for the program might be difficult to obtain.

Director of publicly listed Bank Niaga, Arwin Rasyid, said on
Wednesday that both foreign and local investors had no incentive
to invest in the beleaguered banking industry.

He added that expecting a significant amount of money from the
government was equally impossible.

"So we have to be realistic that not all the banks can be
saved," he told reporters on the sidelines of a seminar on
investment prospects.

Finance Minister Bambang Subianto announced last week that
more than Rp 257.5 trillion (US$34.33 billion) would be required
to recapitalize 70 commercial banks so that they are able to meet
the minimum 4 percent capital adequacy ratio (CAR) by the end of
1998.

Bank owners will have to provide 20 percent of the financing
required, while the government will cover the remaining 80
percent by bond issues.

Arwin said that bank owners would be required to come up with
more than Rp 50 trillion in cash, around 10 percent of the more
than Rp 500 trillion third party funds in the banking sector, for
the recapitalization program.

"It is still a big question mark whether the bank owners will
be interested (in the recapitalization program)," he said,
pointing out that keeping the money in a high interest time
deposit was much more alluring.

He added that bank owners were like other businessmen
suffering severe cash flow problems.

"Foreign investors also won't be interested in entering
Indonesian banks," Arwin said, pointing out the political
uncertainty and lack of incentive.

He explained that foreign investors would demand a very high
return from their investment in the country's banking sector,
which is seen as a high risk sector amid the negative spread
problem in the industry.

Arwin also said that the price of the bonds' coupon rates
would be a key factor in enticing foreign investors.

Minister Bambang said that some Rp 15 trillion would be
allocated in the 1999/2000 fiscal budget to cover the cost of the
interest rates, suggesting that the coupon rate would be less
than 10 percent.

Arwin said that the realistic coupon rate for the banking
sector would be around 22 percent to 23 percent given the fact
that local debtors were still able to repay a lending rate of 35
percent, and assuming that the government could push down time
deposit interest rates to 30 percent, thus enabling the reduction
of the average cost of money to around 20 percent.

He added that a very low time deposit rate might trigger a
purchase of the U.S. dollar.

He stressed that with a lack of financing ability, it is
better for the government to be realistic with its bank
recapitalization program.

"It's better to have 20 strong banks than 70 banks in average
condition," he said, adding that the government should prioritize
salvaging banks with large networks, particularly the state banks
that could help revive the sector.

He was not impressed by the government announcement that 54
banks had a CAR level of more than 4 percent, because they are
mostly newly established small banks which play minor roles in
the economy.

Separately, former finance minister Fuad Bawazier said the
recapitalization program would not solve the banking sector's
problems, which he said resulted from chronic mismanagement and a
lack of supervision from the authorities.

He said at a seminar in Semarang on Tuesday that bank
liquidation was a better alternative. (rei/har)