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.