Govt issues bonds to recapitalize banks
JAKARTA (JP): The government issued on Friday bonds worth Rp 157.61 trillion (US$19.40 billion) to recapitalize 23 banks and fund its obligations to the central bank.
Minister of Finance Bambang Subianto said the bond issue was an essential step in efforts to rebuild confidence in the banking industry and the country's economy.
"All this is expected to have a positive impact on the restoration of the Indonesian economy," he said at a press conference.
Bambang said the total recapitalization cost of the country's banking sector was estimated at Rp 351.62 trillion, but the bond issues for nine other private banks (including seven nationalized in March) and the seven state banks totaling Rp 244.8 trillion would be made in stages in the future.
The government issued two types of bonds worth Rp 103.83 trillion to recapitalize the 23 banks.
The first consists of floating-rate bonds worth Rp 95.15 trillion, with the interest rate linked to Bank Indonesia's 3- month SBI promissory note rates and with a maximum maturity of 15 years from the date of issue.
"But for now, the bonds are issued in 16 series with maturities of between 3 to 10 years," Bambang said, adding that the interest rate would be paid on a quarterly basis.
The second consists of fixed-rate bonds worth Rp 8.68 trillion also with a maximum maturity of 15 years.
"For now, we issue two series of fixed-rate bonds with maturity of 5 years and 10 years, carrying a fixed coupon rate of 12 percent and 14 percent respectively, and paid every six months," Bambang said.
The bonds were injected as government equity participation in the recapitalization of the 23 banks, aimed at boosting their capital adequacy ratios (CAR) to a minimum 4 percent level for the 11 private banks, and 8 percent for the 12 provincial development banks. The banks will receive fresh cash derived from the bond coupons.
CAR is the ratio between capital and risk-weighted assets.
Most Indonesian major banks have been technically bankrupt, with negative capital, due to huge bad loans and negative interest rate spreads.
The other bonds are index-linked bonds worth Rp 53.78 trillion, with an interest rate of 3 percentage points above the inflation level, and with a maximum maturity of 20 years. The interest is payable every six months.
The index-linked bonds were issued to repay Bank Indonesia loans, provided under the government deposit guarantee scheme, to depositors and creditors of the 48 banks closed in 1998 and 1999.
Bambang said the government planned to allow a secondary market for the bonds but will have to wait until January 2000 because of concerns over the so-called Y2K computer problem.
Bambang said the floating-rate bonds would be used to boost the banks' CAR levels from the negative territory to the zero level, while the fixed-rate bonds would be used to lift the CAR level from zero to the minimum (4 percent) requirement level.
The 11 private banks are the publicly listed Bank Internasional Indonesia (BII), Bank Lippo, Bank Universal, Bank Danamon, Bank Tiara and Bank PDFCI, and non-listed Bank Central Asia (BCA), Bank Bukopin, Bank Prima Express, Bank Artha Media, and Bank Patriot.
Publicly listed Bank Bali was also expected to be recapitalized on Friday, but Bambang said the bond issue for the bank was delayed pending the due diligence study conducted by Standard Chartered Bank, which has injected $56 million for a 20 percent interest in the bank.
Bambang added that the bond issue for publicly listed Bank Niaga was waiting for the result of negotiations with potential foreign investors.
The government nationalized Bank Danamon, Bank Tiara, Bank PDFCI and Bank BCA in August 1998, making the government responsible for their recapitalization at a cost of Rp 80.47 trillion.
In the case of the other seven banks, the government initially planned to only finance up to 80 percent of the recapitalization costs, while the remaining 20 percent was expected to come from the bank owners.
But as recapitalization costs soared due to persisting negative spread problems -- meaning the bank pays higher interest rates on time deposits than it earns from lending rates -- bank owners were unable to provide the compulsory 20 percent cash requirement.
The recapitalization costs of the seven banks plus Bank Bali totaled Rp 24.5 trillion, up from an earlier estimate of more than Rp 14 trillion.
Bank Indonesia deputy governor Subarjo Joyosumarto said earlier on Wednesday that the government had also to finance the bulk of the additional recapitalization costs of the larger banks.
He pointed out that the government injected 90 percent of the recapitalization funding of BII, Bank Lippo, and Bank Universal, and 83 percent of the funding for Bank Bali.
Bambang said the government had to pay the extra cost because it had been decided early on that bank recapitalization was crucial for restoring the banking sector and the economy to a sound footing.
"We have decided from the outset to be firm on this recapitalization measure," he said to quell criticisms of the higher-than-estimated recapitalization cost. (rei)