Paid-up capital of banks

From Bisnis Indonesia

The Bank Indonesia governor stated on Feb. 10 that the paid-up capital of banks would be Rp 1 trillion at the end of 1998, Rp 2 trillion at the end of 1999, and Rp 3 trillion at the end of 2003.

The regulation for foreign exchange banks is Rp 100 billion in 1999, with a 10 percent capital adequacy ratio (CAR), and Rp 150 billion in 2001, with a 12 percent CAR.

The new regulation is highly startling, although rumors to that effect have been circulating for some time. It was estimated that paid-up capital would be fixed at Rp 500 billion, gradually becoming Rp 1 trillion in consideration of the very difficult monetary conditions. Perhaps Bank Indonesia has not yet considered the following:

1. Paid-up capital of national private banks vary widely, from less than Rp 10 billion to more than Rp 1 trillion for 146 banks.

2. A merger or a consolidation cannot be effected in 10 months, especially when it concerns dozens of banks.

3. The requirements on mergers for banks that have gone public are more complex because the procedure involves the Capital Market Supervisory Agency as well as Bank Indonesia and the Ministry of Finance.

4. The increase of the paid-up capital from Rp 1 trillion to Rp 2 trillion (at the end of 1999) is impossible to realize. Foreign partners are not yet in sight because of the high country risk.

5. If banks fail to meet the requirements they must close, then there will be unrest and no confidence in the government.

6. A compulsory merger or consolidation does not guarantee healthy banks because capital is not the only deciding element.

7. It is said that Bank Indonesia has allocated Rp 50 trillion to help out the liquidity of big banks (Business News, No. 6122/11-2-1998), so if small banks merge with a big bank, the objective of the merger is not attained.

If the decision is irrevocable, the victim will be the Indonesian banking community. This would be very tragic. In 1988, a regulation was introduced stating the paid-up capital was Rp 10 billion. After 10 years, everybody is being choked with a paid-up capital of Rp 1 trillion. Perhaps there will be a new policy after March 1998?

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