On banks in critical state

On banks in critical state

When Bank Indonesia announced on June 30, 2002 that Bank IFI
and Bank CIC were put in the category of banks under special
monitoring because their CAR slid below 8 percent, many parties
believed they would be handed over to the Indonesian Bank
Restructuring Agency (IBRA) to be either frozen or merged with
other banks also controlled by IBRA.

This situation shows that Bank Indonesia's system of control
and development is yet to be effective. A drop in a bank's CAR
shows lowering quality of its productive assets. The quality of
productive assets can worsen because of several reasons,
externally or internally.

Externally, a bank depends too much on expensive funds, i.e.
deposits. This bank, for example, relies on Bank Indonesia's
promissory notes (SBI). When the SBI interest drops, the
rentability of the bank drops, too.

Another reason is that the banks themselves, especially
delinquent ones, cash in on the government's cheap funds extended
through various loan schemes. They make use of these funds for
commercial loans to their customers.

One important thing is that Bank Indonesia must take action
against those involved in irregularities to ensure that all
banks, as institutions of trust, truly have the public's trust.

A bank can always get out of its crisis as long as its
management works professionally. In this context, all parties -
Bank Indonesia, the bank management and the public - must perform
their respective functions professionally and properly. -- Bisnis
Indonesia, Jakarta