New funds help banks evade closure

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)