Recap bonds blamed for sluggish bank recovery

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.