They said the move, announced on Friday, took the sector far below the minimum requirement agreed internationally but was necessary in the present circumstances.

Indonesia issued a new ruling lowering the minimum paid-up capital for banks to 150 billion rupiah ($10.7 million), two months after it was revised down as a prolonged currency and economic crisis threatened to drive the once thriving emerging economy into collapse.

The government also sharply cut the capital-adequacy ratio (CAR) to four per cent by the end of 1998, eight per cent by the end of 1999 and 10 per cent by the end of 2000.

The earlier CAR mandated commercial banks to set aside capital equal to eight percent of assets judged to be at risk. This accord was under the auspices of the Bank for International Settlements.

The central bank lowered paid-upcapital to 250 billion rupiah from one trillion rupiah last April. Under the latest ruling, the government still requires new banks to have a paid-up capital of 250 billion rupiah, the 150 billion rupiah figure is only for existing banks.

Analysts said the reduction was necessary because otherwise many banks would fail to make substantial loan loss provisions required by the central bank.

Its quite a relief for us. A prudent lending policy is now rewarded by the government, one chief treasurer said. He said the latest ruling gave all banks the same level playing field and could save healthy small banks because the previous ruling benefited banks with large capital and not banks with prudent banking management.

The continued depreciation of the rupiah, a fall of more than 80 per cent since July last year, along with a contraction in GDP and high interest rates were wreaking havoc in the corporate sector, which in turn strained the financial condition of the some 200 banks.

Its a realistic move. But interm of discipline its another question. It certainly gives us time to breathe, one banking analyst with a European brokerage said. "I think the move has the blessing of the IMF," he said.

But the analyst said he did not know how international rating agencies would response to the move. Indonesian financial institutions were made the pariah of international community as rating agencies rushed to downgrade the country's banking industry into junk status in the wake of economic, financial and political turmoil.

Moodys Investors Service said last month Indonesia was faced with a broadly insolvent banking system and estimated by US standards that 30-75 per cent of the banks loans were or would soon be non-performing.

Analysts said recapitalising the banking industry would be a massive problem despite the lowering of CAR. With a rate of 5,000 rupiah per dollar it might not be a problem. But how do you want to re-capitalise if the rupiah does not stabilise, the European analyst said. A team from theInternational Monetary Fund is currently in Jakarta to review the countrys economic reform programme before the Fund resumes lending.

International lending to Indonesia was halted as political and economic turmoil engulfed the country in May and led to the resignation of president Suharto and his replacement by his vice-president, BJ Habibie.