Policy on bank capital falls short: Analysts
Policy on bank capital falls short: Analysts
JAKARTA (JP): The government's decision to ease bank capital
requirements will not be enough to solve the country's banking
problem, analysts say.
Pande Raja Silalahi, an economist at the Centre for Strategic
and International Studies (CSIS), said Saturday that the
authorities must increase banking transparency to make sure the
supervision mechanism works.
"The problem with our banking system is its poor control
mechanism," he said, pointing out that transparency was important
to ensure that banks gradually improve their poor capital levels.
"We don't want to create a moral hazard, in which every time a
bank goes bust the government has to come to the rescue."
The decision to slash the minimum capital adequacy ratio (CAR)
requirement to 4 percent will not solve the real problem in the
domestic banking industry, concurred Lin Che Wei, a regional
banking analyst at SocGen Global Equity.
He said the lowering of the CAR requirement would only reduce
the amount of capital a bank must hold, but would not solve the
domestic banking industry's poor capital levels which would have
trouble coping with a bank run or covering a large amount of bad
loans.
"It's like allowing an athlete with high blood pressure to
participate in a marathon," he said.
He added that foreign banks would not wish to do business with
domestic banks under the new minimum CAR requirement, which is
lower than the internationally accepted standard of 8 percent.
"I think foreign banks would only make deals with certain
banks they feel comfortable with," Pande said.
Minister of Finance Bambang Subianto announced last week that
existing banks were no longer required to have a minimum paid-up
capital of Rp 250 billion (US$16.12 million) by the end of this
year.
The banks, however, must meet minimum CAR requirements of 4
percent by the end of this year, 8 percent by the end of 1999 and
10 percent by the end of 2000.
The previous CAR requirements were 8 percent by the end of
1998, 10 percent by the end of next year and 12 percent by the
end of the following year.
Bambang said the decision was part of a concerted effort to
speed up the restructuring process of the country's ailing
banking sector.
Pande said the decision to lower the CAR requirement might
have been prompted by the government's criteria that banks with a
CAR lower than 5 percent should come under the supervision of the
Indonesian Bank Restructuring Agency (IBRA), which is already
heavily burdened with 45 ailing banks on its hands.
"If the government continues with the high CAR requirement,
more banks will be taken over by IBRA," said former Bank
Indonesia director I Nyoman Moena.
He said it was realistic to cut the CAR requirement due to the
crisis, as long as the government could make sure that the
requirement would be increased over time.
He added that a Rp 250 billion minimum paid-up capital
requirement was unrealistic, pointing out that in many cases,
eight banks would have to merge to meet the level.
"This would be a hard task, because it takes forever to even
merge two banks," he said.
Lin said that in order to revive the banking sector, the
government must allow weak banks to go bust because it was no
longer possible to bail them out.
"The government must focus its limited resources on healthy
banks so that the central bank can lower current high interest
rates," he said.
He explained that high interest rates were needed to attract
deposits to the banking system but lower interest rates were
needed to help debtors repay loans.
Interest rates in Indonesia have soared due to Bank
Indonesia's tight monetary policy to curb inflation and stabilize
the rupiah's exchange rate against the U.S. dollar.
The high interest rate environment, however, has created
various difficulties, including an increased rate in problem
loans, which the central bank says have already jumped to 25
percent in April compared to 10 percent in the same period last
year. (rei/das)