Indonesian banks 'need $15b in fresh capital'

JAKARTA (JP): Indonesian banks urgently need US$15 billion in fresh capital to cope with the sharp depreciation of their assets due to the rupiah's free fall, rating agency Standard and Poor's said yesterday.

In a statement, it said that the serious economic slide -- caused by the rupiah's precipitous fall against the U.S. dollar -- was leading to a rise in borrower defaults, impairing the value of bank assets.

Consequently, nonperforming loans for Indonesia's banking sector were forecast to account for more than 20 percent of total loans in 1998, highlighting the urgent need for banks to recapitalize and replenish provisions for loan loss.

"Recapitalization is becoming crucial for Indonesian banks. Standard and Poor's estimates that the cost of recapitalization for the industry will amount to about $15 billion," the U.S.- based agency said.

"Given the scarcity of private-sector capital in Indonesia, recapitalization funds must be sourced either from the Indonesian government or foreign investors."

When the exchange rate was still Rp 3,000 to Rp 4,000 per dollar, the agency said Indonesian banks would be able to sustain, albeit with some discomfort, the expected rise in problem loans.

"However, at current rupiah rates of substantially above 5,000, the nonperforming assets blowout will deplete the capital strength of most Indonesian banks," it said.

Currency dealers said spot rupiah dropped to an all-time low of 10,500 against the U.S. dollar in the Jakarta market yesterday, a 75 percent drop from 2,450 in early July 1997.

If Indonesian banks adequately recognize such problem assets in their accounts, Standard and Poor's said, the necessary loan provisions would cause the majority of more than 200 commercial banks to report losses this year.

"This likely loss implies that the capital position of the Indonesian banking industry is weaker than that reported," the agency said.

Banks that have suffered serious capital depletion, to the extent that they are technically insolvent would, under normal circumstances, be able to continue operating provided they had sufficient liquidity.

"However the tight liquidity situation prevailing in Indonesia precludes the option for many banks," it added.

Standard and Poor's also announced the placing of a "B+" long- term rating on Bank International Indonesia (BII) for credit watch with negative implications, after the bank announced a merger with four other banks.

"The negative credit watch placement primarily reflects the risks associated with the integration phase of the acquisition, which is magnified by the unrelenting period of volatility in the Indonesian banking sector," the agency said in a separate statement.

"Standard and Poor's does not expect resolution of the credit watch placement until approval for the acquisitions is granted by regulators and shareholders."

BII said Sunday that it had signed a memorandum of understanding with Bank Dagang Nasional Indonesia (BDNI) to merge their operation into one entity, which was later joined by Bank Tiara Asia, and unlisted Bank Sahid Gajah Perkasa and Bank Dewa Rutji.

The proposal is subject to approval from the monetary authority as well as from the shareholders of the five banks.

BII, with total assets of Rp 23 trillion as of last September, was currently the highest rated private bank in Indonesia which, relative to its domestic peers, reflected the bank's above- average asset quality, capitalization and profitability.

"Integration difficulties, however, could have an adverse affect on BII's financial profile, while could reflect unfavorably on its credit standing," it said. (rid)