Recapitalization program should be selective: Sri
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)