Thu, 21 Jan 1999

Recapitalization of banks a deceptive measure

The government plans to allocate some Rp 34 trillion (US$4 billion) for interest on bond payments in its recapitalization of banks, most of which are on the brink of collapse. Economist Kwik Kian Gie analyses the measure through the booking of the funds in the banks' balance sheets.

JAKARTA (JP): Banks record their equities, comprising paid-up capital and retained profits, as well as the funds of their depositors, on the right (liabilities) side of their balance sheets. The left side of the sheets is used to record the banks' assets with descriptions of their spending.

When banks gain significant profits, they generally distribute part of them as dividends to their shareholders and retain the remainder for the expansion of their capital. But if they suffer losses, they reduce their equities to offset the deficits.

Due to the severe economic crisis, substantial increases in problem loans, misutilization of funds and/or violations of the regulations concerning legal lending limits, all domestic banks, both state-owned and privately-owned, are suffering from huge losses. The losses are so huge that they have caused their equities to run into deficit.

Because many depositors no longer trust their banks, they have withdrawn their savings, demand deposits and time deposits, making the banks face financial difficulties as they cannot, in return, ask their borrowers to repay their debts immediately. Many of the debtors have even failed to meet the schedules of their debt payments. Such a condition has forced Bank Indonesia, the central bank, to inject large sums of money into the banks in the form of liquidity support loans.

Part of such liquidity support assistance has then been used by many banks to offset the deficits of their equities. This means that those banks have practically become the cashiers of Bank Indonesia because its loans have replaced the equities of their original shareholders and at the same time the savings of their depositors.

After mulling the matter over for months to ensure the survival of the domestic banks, the government, assisted by foreign consultants, has finally reached its conclusion as to the "best way" to solve their problems -- recapitalization.

According to the government, it plans to issue bonds to finance a bank recapitalization program amounting to over Rp 257.7 trillion but participating banks will only be injected with cash from the annual interest payment on the bonds.

Finance Minister Bambang Subianto said recently that the government would spend Rp 34 trillion on interest payments for the banks in 1999/2000. Only Rp 18 trillion of the amount would come from the state budget, while the other Rp 16 trillion would come from the sales of the banks' assets.

Under the recapitalization measure -- if approved by the House of Representatives (DPR) -- the banks will make records in their balance sheets as if they have bought bonds from the government and the government, therefore, will have to pay interest to them.

This is just "make-believe" because the government will not have to inject fresh funds into the banks but they will be able to use the so-called bonds to increase their equities to meet requirements on the capital adequacy ratio (CAR).

A question can then be raised as to who will then own the banks, the government or the original shareholders. Now that the government has confiscated all the assets of the banks, their ownership has moved to the government.

Because the banks will put a record of the bonds on the left (assets) side of their balance sheets, they will have the right to receive interest payments from the government. This is strange as the banks will earn "real" interest payments from their "make- believe" bonds.

Actually, the government can impose an easier, more transparent way of book keeping for the banks. Their equities can be left negative but their record may be put on the left (assets) side of the sheets. The original place for equities on the right (liabilities) side can be occupied by "operational loans" which will be provided by the government in amounts required by the banks. Such loans will help the banks operate conveniently without having to issue "bonds".

But the government surely will not accept such a proposal that which would make it very easy for the people to monitor the health of the banks.

The government, instead, will prefer to adopt a method that will make it difficult for the common people to monitor the state of health of the banks. In order to understand their financial conditions, people will have to first understand the real meaning of the "bonds" and distinguish between the interest incomes and the fresh funds injected by the government.

So, the government has paid US$3,000 per day to each of its foreign consultants for the production of policies that can cover up the real condition of the banks.