Wed, 31 Mar 1999

Govt will avoid closing more banks: BI director

JAKARTA (JP): Financial authorities will try to avoid closing more banks because existing banks can no longer cover the country's economic activities, a central bank executive said here on Tuesday.

Bank Indonesia director Subarjo Joyosumarto said the recent closure of 38 banks resulted in an 18 percent drop in the availability of banking services.

He said the drop in banking services was larger than the 13 percent decline in the country's gross domestic product last year, meaning some 5 percent of the country's economic activities were left without banking services.

"That's why we will try to avoid closing more banks," Subarjo said on the sidelines of a banking seminar.

He added the government would encourage stronger banks to acquire branches of the closed banks to bridge the gap in the availability of banking services.

The government closed 38 local banks on March 13 as part of its massive restructuring of the banking industry. The government also took over seven banks and included nine banks in its recapitalization program.

Seventy-three other local banks have a sufficient level of capital to continue operating without joining the recapitalization program.

Some analysts fear the government will close more banks if the owners of the nine banks in the recapitalization program are unable to raise their 20 percent of the funding required for recapitalization by the April 21 deadline, or if the owners of the other existing banks fail to pass the government's fit and proper test.

Subarjo said the government would not close the nine private banks in the recapitalization program because they were considered among the country's healthy banks.

"The worst-case scenario would be the government was forced to take over more banks."

The nine banks in the recapitalization program include publicly listed Bank Lippo, Bank Niaga, Bank Internasional Indonesia, Bank Universal and Bank Bali.

Subarjo added the government also would try to avoid closing any of the 73 banks not in the recapitalization program. These banks still are required to pass a fit and proper test to ensure they will be able to maintain their level of capital.

Central bank governor Sjahril Sabirin said the owners of the nine private banks in the recapitalization program had guaranteed their ability to provide their 20 percent of recapitalization funding.

However, he said that for joint venture banks, foreign shareholders had to come up with fresh funds for recapitalization by April 21 or risk having their banks closed.

Joint venture banks are not allowed to join the government's bank recapitalization program in which the government provides up to 80 percent of the required recapitalization funds.

Sources earlier said a number of joint venture banks could face closure because their foreign shareholders were reluctant to inject fresh funds into the banks.

Subarjo said the recapitalization program had resulted in the gradual improvement of macroeconomic indicators, including the strengthening of the rupiah against the US dollar.

He said improvements in the macroeconomic condition would create a conducive environment for a much awaited cut in domestic interest rates.

"I think the time is ripe for interest rates to decline."

He added, however, that a cut in interest rates should be "done carefully" because it would affect the rupiah's exchange rate and inflation.

He also said the central bank would lower the interest rates of government-guaranteed bank time deposits.

The interest rate on the central bank's benchmark one-month SBI promissory note is now 37.60 percent, down from over 40 percent two weeks ago. (rei)