Higher interest rates could bleed banks

Higher interest rates could bleed banks

JAKARTA (JP): The country's major banks expressed fear on
Tuesday that they could suffer financial bleeding again due to
negative spread problem if domestic interest rates continued to
increase.

In a working meeting with the House of Representatives
commission IX on state budget and finance, bankers called on the
government and the central bank to help resolve the problem.

Some legislators feared that the problem could lead to a worst
scenario of a second banking crisis if the rising interest rate
continued unchecked.

"If the SBI interest rate continues to move upward ... it has
the potential to create negative spread or losses to BRI," said
president of the state-owned Bank Rakyat Indonesia (BRI) Rudjito,
referring to the Bank Indonesia SBI promissory notes.

Rudjito said that the negative spread problem would occur
because the bank's recapitalization bonds carried a fixed
interest rate of around 12.5 percent, as against the current SBI
rate of 14.75 percent.

The assets of most of the recapitalized banks are dominated by
government recapitalization bonds which carry variable and fixed
interest rates.

Negative spread occurs if the interest income of a bank is
lower than its interest cost.

"Bank Danamon currently doesn't suffer a negative spread
problem. But if the central bank's benchmark interest rate
continues to increase it can create negative spread because most
of our recapitalization bonds carry fixed interest rates," said
Arwin Rasyid, president of Bank Danamon, a major nationalized
bank.

"The costs of fund of Bank Danamon currently range between 10-
12 percent. Since around 70 percent of our interest income comes
from government bonds, of which some 65 percent carry a fixed
interest rate, the upward trend in domestic interest rates is
quite a serious threat to Bank Danamon," Arwin added.

Bank Indonesia is under pressure to allow the interest rate of
SBI notes to further increase amid the anticipated inflationary
threat from the government plans to raise fuel prices in April.

Bank Indonesia's Senior Deputy Governor Anwar Nasution hinted
on Monday a further rise in interest rates amid the weakening of
the exchange rate of the rupiah against the U.S. dollar due to
ongoing political instability, ethnic violence in Central
Kalimantan, and uncertainty over relations with the International
Monetary Fund.

"Stable political and security conditions are very important,"
said president of the giant state-owned Bank Mandiri E.C.W.
Neloe.

Bankers hoped the current problem would not lead to another
banking crisis which would cost the government dearly as it would
have to recapitalize the banking sector again or close down most
major banks.

"A second bank recapitalization would be tragic. I hope this
doesn't have to happen because the cost would be huge," Neloe
said.

The government has issued around Rp 430 trillion (US$45
billion) worth of bonds to help finance the recapitalization
program of major domestic banks.

President of the state-owned publicly listed Bank Negara
Indonesia (BNI) Saefuddin Hasan said that to avoid a second
banking crisis, the rupiah must be stable in order to allow
interest rates to go down.

"We hope the legislature will help (to create political
conditions) so that the rupiah doesn't continue to decline and
interest rates don't have to increase," Saefuddin said.

"Otherwise, the pessimistic scenario of a second (bank)
recapitalization could materialize," he added.

"If the time deposit rate remains at the current level of
between 15-16 percent, there's hope (for us) to survive," he
said, adding that if Bank Indonesia increased its interest rate
again, BNI would try maintain its deposit rate to avoid negative
spread.

Banks, however, have already designed measures to help avoid
the negative spread problem. The measures include exchanging the
fixed-rate bonds with the so-called "stapled bonds" carrying a
combination of lower and higher interest rate of around 16.5
percent, or swapping the bonds with bank debts already
restructured by the Indonesian Bank Restructuring Agency (IBRA).

IBRA has planned to allocate around Rp 10 trillion in
restructured debts this year to be exchanged with bank
recapitalization bonds. The restructured debt carries an interest
rate much higher than the fixed-rate bonds.

But Danamon's Arwin urged IBRA to allocate up to Rp 50
trillion this year.

He said Bank Danamon planned to swap around Rp 3 trillion
worth of current loans at IBRA with the bank's recapitalization
bonds. (rei)