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)