No bank closures this year: BI

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BI: no bank closures this year

Berni K. Moestafa The Jakarta Post Jakarta

Bank Indonesia assured reporters on Monday that no banks would be closed down by the end of the year, as all had met their minimum capital to asset ratio requirements.

"All banks have met the eight percent CAR level, according to the reports that we have received," Bank Indonesia Senior Deputy Governor Anwar Nasution told reporters during a seminar on privatization held by the business consultancy firm CastleAsia.

Anwar was referring to the Capital Adequacy Ratio, which rates a bank's health by measuring its risk-weighted assets, foremost loans, against its capital.

The higher a bank's CAR level is, the more it can provide in capital to cover loans that are at risk of turning bad.

Except for some banks that had been placed under the care of the Indonesian Bank Restructuring Agency (IBRA), others were healthy, Anwar added.

As for next year, he said the central bank had yet to decide whether to hike the CAR requirement to 12 percent, which is an international standard level.

According to him, the CAR level should grow in line with the expansion of a bank's operation.

Raising CAR levels requires banks to either inject more capital, or restructure non-performing loans to lower their risk.

But raising CAR levels again would not be easy, because capital was scarce and loan restructuring was progressing slowly.

Even banks with an eight percent CAR level are not out of the woods yet, as loans' risks can increase rapidly. Unless capital is injected to offset the rise in risk, CAR level will drop.

In July, the central bank said nine banks were at risk of closure this year because of their weak CAR level.

Failure to comply with the minimum CAR requirement could lead to either merger, or liquidation.

However, banks are given up to six months to improve their CAR levels before either of the two steps are taken.

But for the government closing banks could be a costly option.

Its blanket guarantee scheme require the government to cover the banks' third party liabilities.

That had been among the reasons why the government injected faltering banks with recapitalization bonds in the wake of the 1997 financial crisis.

For now, five banks under IBRA are known to be at risk of owning a CAR of below eight percent this year. To avoid their liquidation, the government is hoping to merge the banks.

Turning to non-performing loan (NPL), Anwar said this year's target of five percent was not obligatory, though it might become next year.

Non-performing loans are those in which debtors have missed their interest and principle payments by more than 90 days.

The NPL ratio then measures a bank's NPL against its total loans.