Govt defends plan for bank recapitalization

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)