IBRA plans to develop four 'core banks'

IBRA plans to develop four 'core banks'

JAKARTA (JP): The Indonesian Bank Restructuring Agency (IBRA)
plans to develop four "core banks" with strong capital and large-
scale business in a bid to establish a strong banking industry.

IBRA chairman Edwin Gerungan said on Wednesday that the core
banks would consist of two state-owned banks and two private
banks under the agency's supervision.

"Two banks under IBRA have the potential to become core
banks," Edwin said in presentation material distributed during a
hearing with the House of Representatives commission IX for
financial and development planning affairs that was also attended
by Finance Minister Prijadi Praptosuhardjo, and Bank Indonesia
top officials.

He did not name the banks. But of the 11 private banks under
the control of IBRA, publicly listed Bank Central Asia (BCA) and
Bank Danamon are considered the largest in terms of assets, and
they have strong capital.

Of the country's four state banks, Bank Mandiri and Bank
Rakyat Indonesia (BRI) are considered to be the largest. Bank
Mandiri plans to go public later this year, and the government
has also planned to privatize BRI in the future.

Edwin said that the plan to form the core banks was part of
the agency's proposal to consolidate the domestic banking sector
and to create strong national banks.

Although the government has closed down some 70 banks since
the financial crisis started in the middle of 1997, the remaining
149 are still considered too many.

IBRA is an agency of the finance ministry, established in
early 1998 with a mission to help restructure the banking sector.
The agency's mandate, which includes selling off all government
shares in IBRA banks, will end in 2004.

Under the IBRA scheme, the total assets of the individual core
banks would reach more than Rp 100 trillion (US$9 billion),
offering an extensive range of banking products and services both
to retail and corporate customers, and equipped with solid
banking technology.

IBRA deputy chairwoman for bank restructuring Felia Salim said
that one of the core bank candidates already had assets of around
Rp 100 trillion, while the three other banks had assets of
between Rp 50 trillion and Rp 100 trillion.

Felia said that under the IBRA proposal, the core bank
candidates could acquire weaker and smaller banks to increase
their assets, without the risk of a deterioration in their
capital adequacy ratio (CAR).

A bank's CAR is the ratio between its risk-weighted assets and
capital. The higher the latter, the more secure is the bank's
financial position.

"Only a few banks under IBRA have a strong balance sheet and
sufficient scale, the rest are relatively weak and face serious
structural problems," the IBRA document said.

The agency said that this group of smaller banks could be
merged with the core banks as they did not have strong enough
balance sheets to make acquisitions in their own right.

Bank Indonesia deputy director for banking research and
supervision Djoko Sarwono said that there were around eight banks
that might not be able to meet the year-end minimum 8 percent CAR
requirement, including five IBRA banks. He declined to name
them.

Banks which fail to meet the minimum CAR requirement risk
being closed down.

The remainder of the 11 IBRA banks are publicly listed Bank
Internasional Indonesia, Lippo Bank, Bank Universal, Bank Bali,
Bank Niaga, and non-listed Bank Bukopin, Bank Artha Media, Bank
Prima Express, and Bank Patriot.

Under the IBRA banking consolidation proposal, medium-sized
banks with total assets of between Rp 10-50 trillion could be
developed into special banks focusing on a particular market
niche.

"The banking consolidation currently being handled by IBRA
could result in a stronger banking system," Edwin said.

He added that the program would also rescue the smaller and
weaker banks, and avoid a second government recapitalization
program.

The government has issued around Rp 430 trillion worth of
bonds to finance the country's largest ever bank recapitalization
program.

But as the banking environment and macroeconomic situation
continue to worsen, some banks are facing capital deterioration
that may force the government to spend more of the taxpayers'
money to recapitalize them.

Djoko said, for instance, that recapitalizing the five banks
that might fail to meet the year-end CAR requirement would cost
some Rp 8.3 trillion, but closing them down would cost the
government more than Rp 17 trillion, because the government would
have to cover the obligations of the closed banks, particularly
third-party deposits, as a consequence of the government bank
deposit guarantee scheme. (rei)