New funds help banks evade closure

JAKARTA (JP): Bank Indonesia Governor Sjahril Sabirin confirmed on Friday that the owners of two ailing banks provided fresh funds in a bid to meet the minimum 4 percent capital adequacy ratio (CAR) requirement.

Sjahril said he did not know if the provision of funds met the CAR, which is the ratio between capital and risk-weighted assets.

"Today they injected capital... But I'll have to check it on Monday," he said prior to a meeting with the House of Representatives Commission IX on banking and the state budget.

Sjahril declined to name the banks.

Bank Indonesia warned earlier this month that owners of eight banks should improve their CAR by Jan. 20 or run the risk of closure.

Two of the banks, however, failed to meet the deadline.

The eight banks are part of the 74 private banks, generally known as "A category" banks, which were not closed down by the government in 1998 when the banking crisis deepened because they managed to maintain a CAR level better than 4 percent.

The government has closed 66 private banks and nationalized 13 since the crisis started in the middle of 1997.

It also sponsored the recapitalization of seven major private banks.

However, it vowed to no longer provide financial assistance to recapitalize the A banks because of the lack of financing resources.

The CAR of the A banks deteriorated in 1999 as the negative interest rate spread problem persisted throughout the year.

A bank theoretically suffers a negative spread problem if the interest rate it charged for its loans is less than the interest it paid for time deposits. However, most Indonesian banks place their funds in the central bank's low interest promissory notes instead of channeling them into loans. Many banks consider the extension of loans to the country's weak industrial sector to be too risky. (rei)