Bank Recapitalization, Bank Performance and Real Sector Lending: An Analysis of Indonesia’s Economic Recovery from the Crises of 1997-1998

224 Pages Posted: 18 Jul 2020

Date Written: September 29, 2007


This study examines the impact of banks’ recapitalization on the performance of banks and the effectiveness of real sector lending in Indonesia. The study was based on the recapitalization bonds issued by the Indonesian government as part of the program to restructure and revitalize the Indonesian-banking sector following the economic crisis that occurred in 1997-1998. The genesis of the crisis that knocked Indonesia over was triggered by the contagion-effect. It started with the downfall of the Thai Bath on 2 July 1997. The crisis in Indonesia could be placed in the third-generation model of crisis which focuses on how the banking sector might cause a currency crisis. To stabilize the economy and recover the society’s confidence, the government took action to stabilize the banking system. The banking recapitalization and restructuring program was formalized under the Indonesian Banking Restructuring Agency. The bank recapitalization was by the injection of government bonds totaling up to IDR430.4 trillion to 36 banks. This was considered as “too big or too important to fail.”

This study’s findings (from the empirical analysis of the performance of all recapitalized banks after the capital injection in 1999 and 2000) showed that generally, the performance of banks has significantly improved. Starting from one year, through to five years post-recapitalization, the analysis indicated that the recapitalization had no impact in lowering the provision of non-performing loans, costs-income ratio, and growth of the loan to deposits ratio. This condition made the performance of banks seem to be better, but, from the macro-economic point of view, the ‘good performance’ was an illusion. It caused the recapitalized banks to have as their dominant assets the recapitalization bonds and Bank Indonesia’s Certificates.

The effectiveness of banks’ recapitalization to real sector lending was proven to be diverse among the different groups of banks. The behavior of banks concerning changes in economic fundamentals remained static, even with capital injection, except for the growth of loans in the regional banks. Based on the individual sectors, four sectors showed stagnant or negative growth. On the whole, the fiscal cost of the recapitalization program could not directly help in accelerating the economic recovery from the crisis, contrary to the Claessens, Klingebiel, and Laeven (2001) research findings that a package of specific resolution measures can help accelerate the recovery from such crisis with significant fiscal costs.

The implications from both internal and external banking were found to be many and varied. Of course, as long as the recapitalization bonds gave higher gains than those from the other portfolio of the banks, the banks preferred to hold and maintain the bonds as a source of interest income that has no risks and which hides behind the argument of maintaining their capital adequacy ratio (CAR). Again, the bank's disinter-mediation reduced the effectiveness of monetary policies during the crisis and in the post-crisis period in Indonesia.

We wish to recommend that the periphery of the real sector be expanded to make the banks the engines of growth. We strongly recommend that the central bank should institute sanctions against banks, which keep large amounts of un-disbursement loans. Such banks should be encouraged in the first place to link these funds to the investment prospects in the economy to increase the role of the recapitalized banks in the economic recovery process. To encourage and accelerate the development of the various sectors such as agriculture sector, mining sector, electricity, water & gas sector, and trade, hotel & restaurant sector. We recommend that the government and the central bank should periodically announce the regulations and lending targets for the different sectors.

Keywords: Bank Recapitalization, Credit Crunch, Credit Rationing, Reel Sector Lending

JEL Classification: G01, G21, G28

Suggested Citation

Simatupang, Batara, Bank Recapitalization, Bank Performance and Real Sector Lending: An Analysis of Indonesia’s Economic Recovery from the Crises of 1997-1998 (September 29, 2007). Available at SSRN: or

Batara Simatupang (Contact Author)

STIE Indonesia Banking School ( email )

Jl. Kemang Raya No. 35
Jakarta, ID DKI Jakarta 12730


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