Experts criticize IBRA's plan on BII's rights issue

Experts criticize IBRA's plan on BII's rights issue

Dadan Wijaksana, The Jakarta Post, Jakarta

Debates on whether or not the government should yet again use
taxpayers' money to bail out Bank Internasional Indonesia (BII)
have intensified just as the Indonesian Bank Restructuring Agency
(IBRA) has prepared a rights issue plan for the ailing bank.

Banking analysts Drajat Wibowo and Anthony Budiawan shared the
same opinion that any rescue plan should not put an additional
burden on the state budget.

Their remarks follow a decision on Monday by the Financial
Sector Policy Committee (FSPC) to approve the BII rights issue
plan.

FSPC groups senior economic ministers and has the final say on
the country's bank and corporate restructuring program.

IBRA is expected to meet with the House of Representatives
later this month to seek approval for the proposal. If
legislators reject the proposal, the government might have to
close the bank.

Under the rights issue plan, the publicly listed bank would
offer new shares to raise some Rp 4.33 trillion (US$466 million)
to boost its capital adequacy ratio (CAR) to between 8 percent
and 12 percent from minus 47 percent at the end of last year.

CAR is the ratio between capital and risk-weighted assets.
The higher the ratio, the better the bank's condition.

The original estimate for the size of the rights issue was set
at Rp 3.9 trillion. There is no clear explanation yet as to why
the cost for the BII bailout has increased.

The government, through IBRA, will act as a standby buyer for
the rights issue. It will use bonds to purchase all the shares in
case other investors decline to exercise their rights, which
analysts said would be the likely case. IBRA now controls 75
percent of the bank, which suffered a net loss of about Rp 4
trillion last year.

Purchasing the BII shares, however, will put an even greater
burden on the already-strained state budget as it would cover the
interest rate of the bonds.

IBRA has argued that bailing out BII would cost less than
liquidating the bank, which was once the financial flagship of
the Sinar Mas Group conglomerate, because a liquidation
alternative would force the government to also cover the
obligations of the bank to its third parties, which last year
stood at Rp 26.8 trillion, as a consequence of the government
blanket guarantee scheme.

But Drajat criticized this argument.

"They've always convinced us that once they lend a hand to the
bank, then that's it, the problem is over. But are we sure about
this? They said the same thing when they first injected the
recapitalization bonds," Drajat said on Tuesday on the sidelines
of a one-day seminar on recap bonds.

He pointed out that when the government first injected about
Rp 6.6 trillion worth of bonds to recapitalize the bank in 1999,
it argued that closing it down would cost the government up to Rp
13 trillion.

But as it turns out, the government has injected a total of Rp
21 trillion worth of bonds to help BII stay afloat, he explained.

The rights issue plan would increase the total cost of the
bailout, and there was no guarantee that the bank would turn
healthy to allow a full recovery of the bailout cost.

However, Drajat also said that if the government was to close
BII, then it did not have to fully cover all the obligations of
the bank as depositors' money could be transferred to healthier
banks, while obligations to affiliated parties could be dropped
from the blanket guarantee scheme.