Mar'ie suggests liquidation of ailing banks

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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