Mar'ie suggests liquidation of ailing banks

JAKARTA (JP): Minister of Finance Mar'ie Muhammad said yesterday the government would not hesitate to liquidate ailing banks to strengthen the banking industry in the face of financial liberalization in the region.

Speaking to journalists at the House of Representatives, Mar'ie said the government had the legal right to liquidate ailing banks, as stipulated in the government regulation on bank liquidation.

Problem banks, if allowed to continue operating, could hinder the sound growth of the banking industry, Mar'ie said.

"It is like a car breaking down in the middle of the street. If not cleared, it will hinder traffic flow. So, for those ailing (banks), please move aside or be put aside," Mar'ie said.

When asked if the government dared risk a domino effect by liquidating ailing banks, Mar'ie retorted: "What should we be afraid of? That's the rule. We must uphold the rule."

The government issued a ruling last December on bank liquidation, which authorizes the finance minister to revoke the license of an ailing bank with the central bank's recommendation. After a bank license is revoked, the bank, as a limited liability company, would be liquidated.

Bank liquidation is the last alternative taken after efforts to salvage a problem bank fails. Efforts to bail out ailing banks include the provision of liquidity credits and technical assistance, merger with other banks and tie up with new investors.

Since the announcement of the liquidation ruling, many bank analysts have speculated that the central bank would liquidate a number of problem-ridden banks.

Indonesia is believed to have a number of ailing banks which are still in operation. The InfoBank monthly magazine, for instance, reported in its February issue that at least 11 commercial banks were in serious problems and were liable to liquidation.

Bad loans at the country's commercial banks are still at a staggering level, totaling Rp 10.4 trillion (US$4.32 million) at the end of November, of which Rp 7.07 trillion belonged to the seven state banks.

Bank Indonesia Governor J. Soedradjad Djiwandono, however, has repeatedly dismissed such speculation, saying that liquidating a bank in Indonesia is too risky, considering a possible domino effect.

"Too big to fail," Soedradjad argued.

To improve the competitiveness of local banks in the face of liberalization, Mar'ie said the government would continue to encourage local banks to merge with each other to strengthen their capital.

The government has also promised to provide tax incentives for merged banks.

In order to compete, Mar'ie suggested that local banks improve their sound banking practices besides strengthening their capital.

Despite their weak capitalization, Indonesian banks would not be marginalized even under regional financial liberalization if they were sound and efficient, Mar'ie said.

"Our yardstick should not be the size but the soundness. Large but rotten banks, what for? It's better to have small or medium but sound banks," Mar'ie said.

A number of local bank executives have warned that the weak capitalization of Indonesian banks would inhibit them from competing in other ASEAN countries.

At their meeting in Phuket, Thailand, last week, ASEAN finance ministers reaffirmed their commitment to further liberalizing their financial and service sectors. However, no date has been set for the liberalization. (rid)

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