The Bank of Israel will extend credit to the troubled Industrial Development Bank so as to allow it to implement a recovery plan, Prime Minister Ariel Sharon, Finance Minister Silvan Shalom and the governor of the Bank of Israel, David Klein, decided yesterday.

The credit will be extended for an interim period only and the bank's management will draft a recovery plan within 30 days, the three decided. In addition, the central bank and the government will set up a team to plan the privatization of the bank.

The meeting was also attended by the treasury's accountant general, Nir Gilad, the supervisor of banks, Yitzhak Tal, and the Industrial Development Bank chairman Ra'anan Cohen, who just last week left his seat in the Knesset as a Labor MK to take the job.

Shalom said budget constraints made it impossible for him to inject any capital into the bank.

Yesterday's meeting came after the bank, which has NIS 640 million in equity, announced that it expected to post a NIS 100 million loss in the second quarter. The loss stems from substantial provisions for at-risk debts in connection with loans to the faltering Peled-Givony group, Gad Zeevi and other clients. The bank also announced that its capital adequacy ratio would be 11 percent - far below the 15 percent required by the central bank.

While all other banks must maintain a capital adequacy ratio of 9 percent, Industrial Development Bank is required to keep a 15 percent ratio because it is highly politicized, the ownership is divided between the government and the three biggest commercial banks, its salaries are the highest in the sector (NIS 28,000 a month on average), and in the last few years, it has established a bad track record of extending credit to those rejected by the other banks.

Consequently, Industrial Development Bank has become a high-risk asset, and the 15 percent ratio was designed to hedge these risks. But the requirement did not help.

Under the current situation, with no reason to expect any improvement soon, Supervisor of the Banks Yitzhak Tal is concerned that unless the government takes the reins now, the bank might collapse. While the collapse of Trade Bank a few months ago did not send a shockwave through the banking sector, if Industrial Development Bank falls, the repercussions will be severe.

The bank handles NIS 4 billion for institutional investors, NIS 7.9 billion for the state and NIS 788 million for other banks. Since the bank exceeded the capital adequacy ratio it is allowed, it cannot extend any new loans. Compounding the problem is the recession: No new deposits are being made and some of the institutional investors that have deposits with the bank, such as mutual funds and insurance companies, are counting the days until they can withdraw their money.

Klein was actually considering more extreme measures than those decided on yesterday. He was planning to appoint an administrator to run the bank. An administrator removes management authority from an institution's managers and shareholders and would prevent the bank from accepting new deposits or extending new loans, effectively shutting it down. This was recently done with Trade Bank, in which an embezzlement five times the size of the bank's equity was revealed. Industrial Development Bank's situation is by no means this dire, but it is on a slippery slope.

Appointing an administrator is a major step for the Bank of Israel. If this measure is implemented in two Israeli banks, it would reflect very badly on the banking system as a whole, and the supervisor of banks in particular.

Ostensibly, the best solution is to privatize the bank. However, this is not so simple, since there are six different types of bank stocks. Before any privatization takes place, all different stocks have to be made equal - a complicated and time-consuming legal maneuver. The best alternative is, therefore, to sell the bank's loans to other banks.