Large private banks come short on funds

JAKARTA (JP): Bank Indonesia deputy governor Subarjo Joyosumarto said on Tuesday owners of large private banks were unable to come up with the 20 percent cash requirement to recapitalize their banks due to ballooning funding needs.

He said the government would inject more than 80 percent of the necessary funding to recapitalize the banks.

"The government will end up controlling more than 80 percent of the banks, but only in large banks. The smaller banks can afford to provide their 20 percent portion."

Under the country's bank recapitalization program, bank owners were supposed to come up with at least 20 percent of the recapitalization cost, with the government saying it would finance the remainder.

However, the government later said it would support additional funding needs due to the inflated recapitalization cost.

The government planned earlier to provide up to 80 percent funding for the recapitalization of eight private banks, including the publicly listed Bank Lippo, Bank Internasional Indonesia, Bank Universal, Bank Bali, Bank Niaga and non-listed Bank Bukopin, Bank Artha Media, Bank Prima Express and Bank Patriot.

But Biank Niaga owners were unable to provide the 20 percent recapitalization funding, prompting the government to take over the bank.

Based on a due diligence audit made at the end of last year, the recapitalization cost for the nine banks was initially estimated at Rp 21 trillion.

But persisting negative interest rate spread, resulting from the higher interest rates given to depositors by the banks compared to the interest rates charged for their lending, had inflated the recapitalization cost to Rp 34 trillion.

Subarjo did not specify the exact number of the remaining eight private banks unable to provide the additional recapitalization cash requirement to maintain the 20 percent funding portion.

Bank Universal, for instance, said on Monday that its majority shareholder, PT Astra International, could not come up with the inflated Rp 1 trillion necessary to meet the 20 percent recapitalization funding needs.

As of December 1998, Astra had submitted Rp 477 billion or 20 percent of the recapitalization needs on the basis of its condition.

"Smaller banks like Bank Patriot have been able to provide the 20 percent funding portion," he said, referring to the non-listed banks.

Subarjo said that although the government would have to provide recapitalization funding greater than the 80 percent initially expected, it was a necessary cost needed to fix the economy.

"We have to cough up more funding. This is the cost needed to recover our economy," he said.

The recapitalization program is designed to lift the banks capital adequacy ratio (CAR) to the minimum 4 percent level. CAR is the ratio between capital and risk-weighted assets.

In addition to the nine private banks, the government would provide 100 percent financing for the recapitalization of seven state banks, and 11 banks which were taken over. The government would also provide 80 percent financing for the recapitalization of 12 provincial development banks.

The total cost of the recapitalization program is expected to be larger than the initial estimate of Rp 300 trillion.

The government will issue bonds to finance the recapitalization program.

Subarjo said the bonds issue for the recapitalization of the nine private banks would begin this week.

The bonds will carry two kinds of interest rates: fixed rate and market rates linked to the interest rate of the 3-month Bank Indonesia SBI promissory note. The variable rates will be applied to lift bank's CAR from the negative territory to the zero level, and the fixed rate to raise the CAR from zero to the minimum 4 percent level.

Subarjo said the Indonesian Bank Restructuring Agency was expected to clinch a deal with a foreign investor next month to buy at least 20 percent of Bank Niaga.

He said foreign investors which have expressed strong interest in buying into Bank Niaga were ABN Amro Bank, GE Capital, New Bridge Capital and Global Alliance.

Subarjo said foreign investors were expected to go on a massive buying spree of the country's banking industry after the June 7 general election.

"If the elections run smoothly, investors will come in much earlier," he said.

The U.K.-based Standard Chartered Bank recently bought 20 percent of Bank Bali, the first foreign foray into local banks since the financial crisis started in 1997. (rei)