House approves conversion of bonds in four banks

House approves conversion of bonds in four banks

Dadan Wijaksana, The Jakarta Post, Jakarta

The House of Representatives finally approved on Monday the
government proposal to convert some of the fixed-rate bonds in
four banks into variable-rate bonds to avoid banks suffering yet
more financial trouble.

Under the policy, 22.5 percent of bonds held by Bank Rakyat
Indonesia (BRI) would be converted into bonds carrying variable
interest rates linked to the benchmark rate of Bank Indonesia SBI
promissory notes.

The conversion would also be applied to 95 percent of bonds
retained by Bank Tabungan Negara (BTN), 40 percent of bonds in
Bank Niaga and 50 percent of bonds in Bank Bali.

BRI and BTN are state-owned banks, while Bank Niaga and Bank
Bali have been nationalized by the government.

The government injected the bonds in the late 1990s to finance
the recapitalization of the banks.

Currently, BRI and BTN hold Rp 29 trillion (US$2.9 billion)
and Rp 13.8 trillion worth of bonds, while Bank Niaga and Bank
Bali obtained Rp 9.4 trillion and Rp 5.3 worth of bonds,
respectively.

But most of the bonds carry a fixed interest rate of 12
percent.

Since Bank Indonesia's benchmark rate has been hovering at
between 16 percent and 17 percent for the past year, the banks
holding fixed-rate bonds had been suffering negative spread,
which if continued could lead to more financial trouble.

Other banks recapitalized by the government received bonds
carrying variable rates.

Amid the current economic difficulties and uncertainties, most
banks have been reluctant to channel lending to the business
sector and have relied on the interest of government bonds as a
source of revenue.

"The House approves this conversion scheme because we can
understand how important it is, as a way of consolidating our
banking sector as a whole," Paskah Suzzetta said, during the
final hearing session with the government.

Paskah also confirmed the move would cause an additional
burden of some Rp 432 billion (US$43.2 million) to the state
budget.

The state budget covers the interest rate of the bonds.

The government has said the conversion scheme was crucial to
help the banks improve their financial performance.

Improvement in the country's banking sector could well result
in larger credit expansion for the real sector, which will in
turn accelerate economic growth.

The House approved replacing bonds held by BTN and BRI with
variable rates, on the grounds that these banks have had a good
track record in channeling most of their credit to the public.

In the case of Bank Bali, both the government and the House
agreed that steps need to be taken to put the bank in better
financial shape prior to its planned merger with four other small
banks.

As for Bank Niaga, a conversion was seen as necessary, not
only to improve its financial condition, but also to serve as
sweeteners in its divestment process for investors.

Meanwhile, it was also revealed in the hearing that the
government had allocated around Rp 3 trillion in cash to ensure a
smooth process for the planned merger of five banks including
Bank Bali, Bank Universal, Bank Artha Media, Bank Prima Express,
Bank Patriot.

The fund is currently deposited at the central bank under
account number 519.

Elsewhere, Chairman of the Indonesian Bank Restructuring
Agency (IBRA) I Putu Gede Ary Suta said that the agency would
seek the approval of the House this month for the planned sale of
several banks this year including Bank Danamon, Bank Lippo, Bank
Internasional Indonesia and the bank resulting from the above
merger process.