Government wants fit banks for merger

Government wants fit banks for merger

Berni K. Moestafa, The Jakarta Post, Jakarta

The government plans to improve the condition of five banks
set for a merger this year, by stripping off their bad loans and
replacing them with state bonds to produce a healthy bank.

State Minister of State Enterprises Laksamana Sukardi said on
Wednesday the injection of bonds in exchange for bad loans would
improve the banks' capital adequacy ratio (CAR).

"We'll take out the NPL (nonperforming loans) of each bank and
see what's left. The remaining clean (assets) we'll then
combine," Laksamana told reporters after a hearing with House of
Representatives Commission IX on the state budget and finance.

Called asset stripping, this method ensures that the combined
five banks will not carry over their bad loans to the new bank,
he explained.

He said the government planned to merge Bank Bali, Bank
Universal, Bank Prima Express, Bank Patriot and Bank Arthamedia
by the end of this year.

They are five of 11 banks under the care of the Indonesian
Bank Restructuring Agency (IBRA).

Merging the five banks is deemed necessary to avoid Bank
Indonesia shutting them down due to their low CAR levels.

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

Except for Bank Bali, the other four's CAR levels fall below
Bank Indonesia's minimum level of 8 percent by the end of this
year.

Plans to consolidate the banking sector by merging banks under
IBRA have so far received a cold response.

The World Bank said earlier that forcing weak banks to merge
would delay privatization and produce a large unmarketable bank.

IBRA is in charge of nurturing the 11 banks back to health,
and returning them to the private sector by selling them.

At the peak of the 1997 financial crisis, IBRA took over the
banks after they received state bonds to replace loans turned
soar.

The government injected these bonds, called recapitalization
bonds, to shore up banks' CAR levels to this year's minimum 4
percent requirement.

In total, some Rp 600 trillion (about US$57.41 billion) was
spent in government bonds to bail out the banking sector.

Analysts have warned that merging weak banks would only force
the government to recapitalize them again.

But allowing weak banks to face liquidation could prove
costly, as under a blanket guarantee scheme the government must
cover the banks' third-party liabilities.

Although the government cannot issue another round of
recapitalization bonds, it can reuse old ones, which are called
recycle bonds.

Laksamana said the amount the government must raise in recycle
bonds to cover the five banks' bad loans was being calculated.

He did not name a deadline for injecting the bonds.

This could be a time consuming process, as a due diligence
would likely be performed on the bad loans to determine the exact
amount of recycle bonds needed.