Recap banks will suffer if interest rates rise: IBRA

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)