Government warned against delay in BII rights issue

Government warned against delay in BII rights issue

Dadan Wijaksana, The Jakarta Post, Jakarta

A greater amount of tax payers money would be needed to salvage
ailing Bank Internasional Indonesia (BII) if the government's
planned bailout measure was delayed, a senior official of the
bank warned.

BII official Halim Sutanto said on Friday that the delay would
inflate the size of the bank's rights issue (the issuing of new
shares).

"Delays in the (rights issue) plan would likely require a
larger financial commitment from the government. The longer it is
the more expensive that would be," BII official Halim Sutanto
told The Jakarta Post.

He declined to give an estimate, but Reuters said that the
size of the rights issue could increase to Rp 4.3 trillion from
the original plan of around Rp 3.9 trillion (US$430 million).

The issue has been seen as the best mechanism available to
save BII. Under the plan, the government via IBRA, which controls
75 percent of the publicly-listed bank, would become a standby
buyer for the new shares. The government would use "recycled
bonds" to finance the share purchase. Recycled bonds are
government bonds which have been redeemed from recapitalized
banks.

But the government must first obtain the approval of the House
of Representatives to exercise this plan. IBRA is expected to
meet with the House in the middle of this month after legislators
end their month-long recess. The rights issue is expected in
June.

Through the rights issue mechanism, BII will obtain fresh cash
or government bonds to boost its capital adequacy ratio (CAR) to
between 8-12 percent from minus 47 percent late last year.

Bank Indonesia's minimum CAR requirement is 8 percent.

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

There has been concern that lengthy debate by legislators,
amid calls for the government to shut the bank instead, would
cause a delay in the rights issue plan.

The government through IBRA injected about Rp 21 trillion
worth of bonds in the late 1990s to recapitalize BII.

But after a couple of years, the bank's CAR dropped again due
to two reasons.

First, the government has declined to guarantee its interbank
loans worth Rp 1.1 trillion. BII could not collect the loans
because the related banks had been closed down. The government is
meant to cover the obligation of closed banks under the blanket
guarantee scheme, but IBRA ruled that the interbank loans were
ineligible for the guarantee scheme.

Second, BII has deferred taxes amounting to Rp 900 billion,
which according to a Bank Indonesia ruling cannot be treated as
capital.

Meanwhile, Bank Indonesia Governor Sjahril Sabirin said that
BII should be rescued because closing it down would be costlier.

He said: "If (BII is) closed down, the government would have
to cover all the bank's obligations which amounts to a very huge
sum, as stated in the blanket guarantee funds.

"We therefore prefer for it to be rescued than closed down,"
Sjahril told reporters on Friday.

Under the blanket guarantee scheme, the government is required
to cover all obligations of a closed bank, including its third
party liabilities.

Last year, BII's third party liabilities amounted to Rp 26.8
trillion.