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.