Recapitalization 'to be successful'

JAKARTA (JP): Bank Indonesia Governor Sjahril Sabirin said on Thursday that the owners of 15 private national banks had pledged to recapitalize their banks with their own resources.

"This means they will not have to join the government's bank recapitalization program in order to meet the minimum capital requirement of 4 percent," Sjahril told the House of Representatives.

He added that the owners of six other banks had committed themselves to injecting fresh money in order to be eligible to join the government recapitalization program.

"These bank owners are very enthusiastic... so we're optimistic about the success of the program," he said at a hearing with the House Commission VIII on finance and the state budget.

Under the government bank recapitalization 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 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.

Bank Indonesia director Soebardjo Djojosoemarto said that the 15 banks had submitted business plans, which were being evaluated by the government credit evaluation committee.

"The evaluation will last for two weeks, and if the plans are considered viable enough, the banks will be given one month in which to inject fresh money," he told reporters on the sidelines of the hearing.

He explained that of the country's 208 commercial banks, 10 foreign banks would not join the recapitalization program, and 34 joint venture banks would also use their own resources for the recapitalization step.

He said that the remaining 164 banks had been audited.

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.

There have been worries that the recapitalization program may not go as planned due to various reasons including the inability of many banks to provide the 20 percent financing amid current tight liquidity conditions.

There is also speculation that the government is divided over whether to pursue the recapitalization program as scheduled or delay it until the overall economic conditions improve, as this week's announcement on the details of the recapitalization program has been delayed.

"We can't postpone this program. The risk is too big even with only a one month delay," Sjahril told the legislators.

He pointed out that a delay would kill whatever confidence still remains in the economy. There would not be any economic recovery without recapitalizing the banks.

He said that final details were currently under preparation, and the government would make the announcement this month, possibly next week.

Separately, chairman of the Indonesian Private Banks Association (Perbanas) Gunarni Soeworo said on Thursday that the association had not asked President B.J. Habibie to delay the recapitalization program. She was speaking to reporters after meeting the President.

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

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.

Asked whether the authority would further close down banks failing to be recapitalized, he said: "There are always possibilities of further bank closures."

But he added that such an option would be the last resort after persuading the banks to take some measures including the merger alternative.

Meanwhile, Standard & Poor's said in a statement on Thursday that even as the government proceeded with its banking recapitalization program, the apparent near-term target of a 4 percent CAR for the sector would still leave the country's banking industry in a weak capital position compared to regional and international benchmarks.

It said that at the end of September 1998, the equity-to- assets ratio of the Indonesian banking industry had fallen to 1.23 percent, adding that non-performing loans-to-total loans were expected to reach 65 percent at the end of this year. (rei)