Govt defends plan for bank recapitalization

JAKARTA (JP): The government on Wednesday defended its costly bank recapitalization program, saying that it was necessary to revive the crippled economy.

State Minister of National Development Planning Boediono warned that the process of economic recovery would stall if the banking system could not function properly due to a lack of capital.

"Bank recapitalization is the key for our economy to grow again," Boediono told journalists before a meeting with President B.J. Habibie.

Echoing Boediono's statement, Minister of Finance Bambang Subianto on Tuesday evening warned of a new economic "disaster" if the recapitalization program was abandoned.

"Let's say we don't do it, what would happen then? Maybe you can ask yourselves, what would happen? There would be a disaster," Bambang said at a breaking of the fast meal at his office.

He argued that if all problem banks had to be closed, the remaining banks would not be able to service all business activities. If that happened, business transactions would fall in number, unemployment would rise and inflation would soar, he said.

Moreover, if all problem banks were forced to close, the government -- under its blanket guarantee scheme for bank depositors and creditors -- would have to find even greater funds to pay the closed banks' depositors and creditors.

"That's horrifying, isn't it?"

"So, we don't have much choice. We can either go ahead with it (the recapitalization program) or not. It depends on the people, we will do what the people want."

"If we don't do it, will the situation improve? No. The situation will get worse. But if we go ahead and do it, will the situation improve? Not definitely. It could either improve or get worse.

"It depends if we can do it prudently or not. If we do it prudently, I'm sure the situation will improve. But if it is dogged by corruption, collusion and nepotism, then it is doomed to failure."

Bambang then went on to promise that the government would exercise prudence during the process of bank recapitalization.

He said that economic recovery in Indonesia would not be possible without bank recapitalization and pointed out that banks would not be able to restructure domestic corporate debts unless they received fresh capital.

By the end of this month, Bambang said, the government would complete recapitalizing the state Bank Rakyat Indonesia, 15 provincial development banks and a number of private banks.

"By the end of this month, these banks will be able to begin restructuring their corporate debts. We will then move to recapitalize other banks," he said.

The government has said it plans to recapitalize at least 70 banks at a total cost of Rp 257.5 trillion (US$43.3 billion). The new capital will help the banks towards a minimum capital adequacy ratio of 4 percent, as required under law.

The capital adequacy ratio is the ratio between equity capital and assets.

Under the plan, the government will provide up to 80 percent of the funds required for recapitalization, while bank owners will be responsible for securing the remaining 20 percent.

The government will fund the recapitalization program by selling bonds to Bank Indonesia.

Interest due on the bonds during the 1999/2000 financial year has been placed at Rp 34 trillion. Rp 18 trillion of this sum will be funded out of the state budget and the remaining Rp 16 trillion raised through the sale of assets belonging to problem banks taken under government control.

Economists and members of the House of Representatives have said the scheme is too costly given the financial difficulties endured by the nation since the latter half of 1997.

On Tuesday, the House asked the government to scale back state budget funds earmarked for the recapitalization program.

However, Bank Indonesia governor Sjahril Sabirin said on Wednesday that the government was unlikely to back down and would insist that the program should go ahead unchanged. This, he said, was because the program would be ineffective if it was underfunded.

If the government set aside a "half-hearted" amount of money to recapitalize the banks, the program could fail altogether, he said.

"It's like business. If a business needs 100 of something but we only give 25, then it will fail," he told journalists after a meeting with the chairmen of House Commission VIII for budget and finance.

Sjahril said that the government expected to earn a return on the program after three years.

"In time, the economy should improve and the share prices of banks should rise. Then we will make a profit by selling them," he said.

Sjahril said he was confident that the House would eventually approve the budget for the recapitalization program.

"I am optimistic that the House will approve it because it is the best way forward." (rid/das/prb)