Recap banks will suffer if interest rates rise: IBRA

JAKARTA (JP): A number of recapitalized banks may suffer from liquidity problems once again if domestic interest rates rise above the current level, Chairman of the Indonesian Bank Restructuring Agency (IBRA) Edwin Gerungan warned on Tuesday.

Edwin said that recapitalized banks holding a large portion of fixed interest rate bonds could suffer a negative spread problem as a result of rising interest rates.

Negative spread problems occur when the bank does not earn enough interest income to pay the interest earned by depositors.

"If interest rates continues to increase, this group of banks will suffer a negative spread problem again," he told the House of Representatives commission IX on state budget and finance during a hearing session.

"We expect that interest rates will not go too high," he added.

Edwin did not name the banks that he claims to be vulnerable.

Separately, head of IBRA's bank restructuring unit Soebowo Musa said that the group of banks prone to the rising interest rate included the publicly listed Bank Niaga, Bank Bali and Bank Danamon.

"But until now, it (the net interest margin) is still positive," he said.

Soebowo said that according to the agency's calculation, the banks might suffer negative spread if interest rates increased to more than 15 percent.

He said that negative spread could cause financial losses to the banks which in turn would also affect their capital adequacy ratio (CAR).

The government injected a massive Rp 430 trillion (US$45 billion) worth of bonds into some 27 recapitalized banks in an attempt to lift their CAR levels above the minimum 4 percent requirement.

Some of the bonds carry a fixed interest rate of 12 percent, while some carry a variable interest rate linked to the interest rate of Bank Indonesia's SBI promissory notes.

But Edwin said that the banks which were recapitalized late last year held a greater portion of fixed rate bonds.

The benchmark interest rate of the one-month SBI notes is currently at 14.80 percent.

Bank Indonesia deputy governor Miranda Goeltom has said that it would be difficult for the central bank to guide the interest rate lower amid the unstable domestic political environment.

"Until the political condition is stable, the SBI rate will remain flat at the current level," Miranda said.

Bank Indonesia will hold its weekly SBI auction today.

Separately, Edwin repeated that the government decision to provide a guarantee for the Sinar Mas Rp 12 trillion debt to the publicly listed Bank Internasional Indonesia (BII) was made to prevent the bank from the risk of closure and to protect government investment in the bank.

"BII is a good bank," he said, pointing out that BII was the sixth largest bank in the country with some 2 million depositors and third party funds valued at Rp 26 trillion.

"There are already investors from Taiwan and Australia interested (in buying) BII," he said.

BII was founded by Sinar Mas, but the government now owns a 57 percent stake after injecting more than Rp 6 trillion worth of bonds to recapitalize the bank.

The policy guaranteeing the Sinar Mas debt to BII had been criticized by legislators.

Under the policy, Sinar Mas must provide collateral valued at 145 percent of its debt plus a personal guarantee to IBRA.

But Edwin said that IBRA was still requesting that Sinar Mas founder, Eka Tjipta, also provide his personal guarantee. Under the existing plan, the personal guarantee would only be provided by his sons.

Sinar Mas also owes some US$12 billion in overseas debt to various investor groups. (rei)