Recap bonds blamed for sluggish bank recovery

The Jakarta Post, Jakarta

What once was the savior of the banking sector from collapse is now a ball and chain to its recovery, as analysts blamed the recapitalization bonds for Bank Indonesia's (BI) move to maintain all major banks under its tight supervision.

Bank Indonesia Governor Sjahril Sabirin said large banks like Bank Central Asia, Bank Danamon and all state-owned banks, had been placed under the central bank's intensive supervision.

"Their condition is nothing to worry about," he told reporters.

Bank Indonesia is closely supervising the operation of large recapitalized banks consistent with a new ruling it issued last December.

Sjahril said these banks needed BI supervision because the collapse of just one of them, could drag the entire banking sector down with it.

Yet the ongoing supervision again highlights how frail the country's banking sector remains some four years after the government bailed them out.

Around Rp 430 trillion (about US$43 billion) worth of recapitalization bonds were used to keep banks afloat when the financial crisis swept the country in 1997.

Now banks appear reluctant to return these bonds for fear of a collapse, according to economist Dradjad Wibowo of the Institute for Development of Economics & Finance (INDEF).

Without interest earnings from the recapitalization bonds and BI promissory notes, Dradjad said, banks would have suffered a negative spread loss of Rp 34 trillion last year.

He said replacing the bonds with productive loans however was imperative to turn around the banking sector, lest it would remain fragile and require the continued central bank supervision.

Banks normally earn more on interest rates from lending than on the coupon rates from the government bonds.

Bankers have argued that they had to retain the recapitalization bonds amid low demand for new loans.

But Dradjad said a retention of the recapitalization bonds was actually a disincentive for banks to expand by new lending.

"The trouble with new loans is that they add new risks, whereas recap bonds carry zero risk," he explained.

Tubagus Feridhanusetyawan senior economist at the Centre for Strategic and International Studies agreed, saying banks' earning structure would remain poor if they continued to rely on bonds.