Foreigners to buy into banks after elections

JAKARTA (JP): Foreign financial institutions are expected to go on a buying spree of the country's banks after the June 7 general election, according to Bank Indonesia director Subarjo Joyosumarto.

"There will be a lot of foreigners buying into the local banks after the elections. We must be ready," he said.

Subarjo said the opening up of the banking sector would eventually result in foreigners controlling 20 percent of banking interests, through joint-venture operations and branches, compared to the current 7 percent.

Under the new banking law, foreigners are allowed to almost wholly control a bank, with up to 99 percent ownership.

"I don't see a problem with foreigners controlling local banks as long as the banks become healthy," Subarjo said, dismissing concerns that the central bank's liberalization policy was contrary to nationalism.

"But we expect at least one local professional to sit on the board of directors and another one on the board of commissioners."

The government is planning to recapitalize nine private banks by providing up to 80 percent of the funding, while the remaining 20 percent must come from the bank owners or investors.

The recapitalization program is designed to lift banks' capital adequacy ratio (CAR) to a 4 percent minimum level.

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

The United Kingdom-based Standard Chartered Bank recently clinched a landmark deal to buy 20 percent of Bank Bali to finance the 20 percent portion of the bank's recapitalization funding requirement.

Standard Chartered, the first foreign bank to participate in the recapitalization program, plans to inject at least US$56 million into Bank Bali.

The total recapitalization cost for the nine banks was estimated at some Rp 34 trillion ($4.35 billion).

But the government plans to divest its 80 percent investment in the recapitalized banks within five years.

Bank Bali officials have said that Standard Chartered was planning a majority stake in the local bank.

Subarjo said the bonds to finance the bank recapitalization would be launched next week. He declined to provide details, saying that discussions on the bond issue had not been finalized.

There have been indications foreign investors are returning to the crisis-hit economy, following positive early economic indicators. But a successful general election will determine whether foreign capital flows fully resume.

The landmark general election will be the first multi-party election after more than 32 years under the rule of former president Soeharto.

The government will also issue bonds to finance 100 percent of the recapitalization funding of 11 private banks now under the control of the Indonesian Bank Restructuring Agency (IBRA).

The government's bank restructuring program has so far resulted in the closing of 64 private national banks and two Indonesia-foreign joint-venture banks.

The government plans to recapitalize the country's seven state banks and 12 of the 27 provincial development banks.

Subarjo said foreigners could not buy into the provincial development banks or state banks.

The total recapitalization cost of the domestic banks is estimated at Rp 500 trillion.

The government has yet to disclose plans for 74 private banks which will require recapitalization because they are recording a CAR level higher than 4 percent.

Subarjo said the government was planning to encourage the banks' debtors to come to the negotiation table to restructure their loans.

He said the 74 banks had total problem loans of Rp 73.7 trillion, including Rp 3.5 trillion in the bad loan category. (rei)