RI bank moves a positive step: S&P

JAKARTA (JP): Indonesia's latest bank restructuring move was a positive step and marked the effective nationalization of the banking sector, Standard and Poor's said Tuesday.

But more recapitalization is needed, the New York-based rating agency has said in a statement, a copy of which was made available here.

"Standard & Poor's views the commencement of Indonesia's bank recapitalization exercise as positive, although additional recapitalization remains necessary," it said, referring to the government's decision on Saturday to close 38 banks, nationalize seven more and recapitalize nine others.

"The decision to close 38 banks, while nationalizing seven others is commendable in that it addresses the need to shut down nonviable banks while preventing significant disruption to depositor confidence, which was what occurred in the November 1997 closure of 16 banks."

The agency noted that the impact of the weekend bank restructuring move would be "substantial" as those banks accounted for 18 percent of the country's banking industry assets.

It also noted that the nine banks to be recapitalized by the government currently controlled some 10 percent of total assets, the 38 closed banks held 5 percent and the seven nationalized banks had 3 percent.

Referring to the politically controversial decision to take over rather than close seven of the sick banks on the grounds that they had extensive branch networks, Standard and Poor's said it "may have been the optimal choice" given the 1997 bank run.

The nationalization of the seven banks and recapitalization of the other nine implied that the government would have direct and indirect majority control over 75 percent of the banking sector.

"The recapitalization exercise also marks the effective nationalization of the Indonesian banking sector," it said.

Recapitalizing the banking sector was the best available choice for the government as the industry suffered a negative capital adequacy ratio (CAR) of 12.9 percent at the end of 1998.

CAR is the ratio of equity to risk-weighted assets.

"While a positive development, the current recapitalization exercise fails to replenish the sector's risk-weighted capital adequacy ratio position to the regulatory 8 percent level prevailing before Indonesia's economic crisis," the agency said.

The government aims to boost the nine banks' CAR to 4 percent after their recapitalization is completed. The government will provide 80 percent of the recapitalization funds, while the bank owners have to come up with the remaining 20 percent.

"The government's near-term goal of 4 percent CAR is inadequate given the operating risks facing banks in Indonesia," Standard & Poor's said.

On the 73 banks listed by the government as qualifying to survive on their own because they were able to meet the four percent CAR, Standard and Poor's said although they appeared to meet the mandatory requirements "it is likely that such banks will need to partake of the government's recapitalization exercise in the near term." (rid)