Recapitalization program should be selective: Sri

JAKARTA (JP): The government should select only banks with strong prospects to join its recapitalization program which aims to create a strong banking system, economist Sri Mulyani Indrawati suggests.

That way, Sri said at a panel discussion Tuesday night, the government could reduce the number of banks from some 200 now to less than 30.

Sri warned that if the government proceeded with its current plan to help recapitalize most of the existing banks, it would be too costly for the country.

"Considering our budget constraints, we should select banks with really good prospects to join the recapitalization program. Otherwise, we would only create more problems," Sri told the discussion hosted by the Indonesian Editors Club.

Bank Indonesia Sjahril Sabirin, also a panelist, contended that the central bank decided to help recapitalize most of the existing banks because recapitalization would be less costly than bank liquidation.

When a bank is closed and liquidated, he said, the central bank is required under the current blanket guarantee scheme to settle all the bank's obligations to third parties, especially depositors.

"Therefore, we have encouraged those banks not eligible for the recapitalization program to inject fresh funds to be eligible," he said.

The bank recapitalization program is an essential part of the country's bank restructuring measures, which are seen as a precondition for the country's economic recovery.

Under the program, the country's commercial banks are divided into three categories based on their capital adequacy ratio (CAR) conditions.

CAR is the ratio between equity capital and risk-weighted assets.

Banks with a CAR of at least 4 percent fall into category A, which means that they do not have to join the recapitalization program.

The government has required all banks to meet the minimum 4 percent CAR requirement by the end of this year.

Banks with a CAR of between minus 25 percent and less than 4 percent come under category B, which makes them eligible to join the recapitalization program.

Banks with CAR below minus 25 percent come under category C, which means that they must inject fresh capital to reach category B in order to be eligible.

The government plans to provide up to 80 percent of the financing needed for the recapitalization, while the remainder has to be provided by the bank owners.

Funding would remain a critical point, Sjahril said. The government had considered various options of funding, including those from foreign borrowing. The government finally decided to fund the recapitalization program by issuing bonds as it would not create inflationary effects.

The state budget would fund only the interest payment on the bonds to be issued for financing the 80 percent recapitalization funding as pledged by the government, he said.

He declined to disclose the interest costs, but said that as a comparison, Thailand had allocated 3 percent of its GDP for the interest payment.

Rizal Ramli of the Econit advisory group, another panelist, warned that if the government was too hasty in its recapitalization program, it could again be forced to recapitalize the same banks two years later.

He argued that in the current negative spread situation, where banks pay more to depositors than they earn from debtors, recapitalization would only prolong the life of insolvent banks. The negative spread would eat up the newly injected capital.

Sjahril responded that the central bank would work hard to continue cutting interest rates to turn around the current negative spread to positive.

He pointed out that benchmark interest rates of its one-month promissory notes (SBIs) had declined significantly in the last three months.

One-month SBIs dropped to 37.86 percent per annum on Wednesday from 42.42 percent the previous week and over 70 percent in early September. (rid)