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)