Let bad banks die
Let bad banks die
What a knotty bind our nation has tied itself up in. Amid the
seemingly relentless waves of rioting, positive announcements
about key economic indicators such as the strengthening of the
rupiah, rising exports and declining inflation look hollow and
meaningless. With most people now harboring an increased sense of
foreboding about potentially explosive political conflicts in the
run-up to the general election -- scheduled for May or June --
economic instruments seem irrelevant until credibility is
restored to the country's discredited legal, financial and
political institutions.
True, the recovery of confidence ultimately cannot be
separated from the successful transition to a more open and
democratic political system which has the broad support of the
populace. But delaying vital economic reforms until after the
election might devastate the economic fundamentals so much that
the new government will be brought down by a total economic
collapse.
Hence, we welcome the steadfast stance on the part of Bank
Indonesia (the central bank) regarding the bank recapitalization
deadline as a strong signal that the government is really serious
about restoring the moribund banking industry to a sound footing.
Nothing else in the real sector of the economy will move unless
commercial lending, at present virtually at a standstill,
resumes.
Bankers' demand for the rescheduling of the deadline for
meeting the 4 percent capital adequacy ratio (CAR) that is due on
Jan. 31 seems utterly unreasonable. Postponing the
recapitalization process means prolonging the current breakdown
in financial intermediation and impeding the economic recovery.
The recapitalization scheme announced by Bank Indonesia on
Sept. 29 remains the best, workable option to bail out the
largely insolvent banking industry. Injecting four rupiah in
public money for every one rupiah in fresh capital put up by bank
owners to recapitalize their banks, as the central bank plans to
do under the scheme, is the most credible alternative for
shareholders to revive their banks and, at the same, still
maintain their ownership.
All other options, such as issuing new shares and debt
instruments, which are viable financing avenues in normal times
are now impossible under the depressed economic conditions.
Mergers are also out of question because most banks already have
negative equity and merging banks is always extremely capital
intensive.
If shareholders are not able or willing to recapitalize their
banks under the scheme -- which has in fact been criticized as
too generous because it is open to banks with CARs as low as
minus 25 percent-- one may question both the seriousness of the
bankers and the benefit of salvaging such banks.
The recapitalization scheme may require hundreds of trillions
rupiah in taxpayers' money if the results of the banks already
examined by international auditors are any guide to go by.
Preliminary audit reports show that only about 3 percent of the
80 banks already audited have CARs of above 4 percent. This means
that more than 70 of the banks will have to be recapitalized
using public money. The audit results of other banks currently
under due diligence are unlikely be very different.
Not all of the banking woes can be blamed on the bank owners.
There are banks which have always held firmly to good practices
and prudential rules and yet are now mired in mountains of bad
credits as the impact of the depressed economy takes its toll.
Even the best of the banks have seen their capital base
devastated by the almost 70 percent fall in the rupiah's value
against the American dollar.
But many other banks, notably the largest ones which mostly
belong to conglomerates, are facing financial distress mostly of
their own making. Their bad loans have been caused mainly by
unscrupulous lending to their own business groups in violation of
the prudential regulations.
The economy will never recover without the restructuring of
the banking industry. That is why the government is willing to
use public money to subsidize the bank recapitalization. Another
backtrack on this vital front would delay the return of
confidence to the banking industry, and hence further squeeze the
blood supply to the local economy.
We think the government should remain committed to its
decision to complete the recapitalization program as scheduled.
The central bank should be prepared to let distressed banks die
if their owners are not willing to put up fresh capital. What is
the point of spending taxpayers' money to save all the banks that
already have massive negative equity.
Moreover, there is no need for massive public misapprehension
because the systemic risks of such a firm measure have been
minimized since the government provided a blanket guarantee for
all third-party deposits in local banks.