Merging banks under duress<\/p>\n
The government has become notorious for its foot dragging and,
\nsometimes, even outright inaction with regard to the reform
\nmeasures that are badly needed to generate a sustainable economic
\nrecovery.<\/p>\n
The latest case in point is the consolidation of the private
\nbanks that were nationalized in 1999. The government has finally
\ndecided to merge five banks as four of them are not likely to be
\nable to achieve the minimum capital adequacy ratio (capital
\nagainst risk-weighted assets) of 8 percent by the December 31
\ndeadline.<\/p>\n
But why was that measure taken only two months before the
\ndeadline? Was the government's monitoring and supervisory ability
\nso ineffective that it could not have known as early as June that
\nthose banks had no chance of achieving the minimum CAR level?<\/p>\n
The consequence of the hurried measure is that the merger is
\nnow being completed under duress, rather than being a
\nconsolidation directed by market forces.The enforced process will
\ncertainly impose more costs on the government while its outcome
\nis not likely to be as favorable as what a market-driven merger
\nwould produce.<\/p>\n
Moreover, a merger process is never an easy and smooth
\nexercise even though the five banks -- Bank Universal, Bank Bali,
\nBank Patriot, Bank Prima Express and Bank Artha Media -- are
\nmajority or entirely owned by the government and are all medium-
\nsize retail banks. Since a merger is by its nature a
\nconsolidation process, it requires massive layoffs and the
\nclosure of redundant branches to achieve maximum efficiency, not
\nto mention the initial complications inflicted upon the clients
\nof those banks.<\/p>\n
Fortunately, though, the announcement of the merger did not
\ncause any jitters among depositors because all five of the banks
\nare either majority or entirely-owned by the government and, most
\nimportantly, the blanket guarantee for bank depositors and
\ncreditors is still effective.<\/p>\n
In any case, since a merger, though rather late, is still much
\nbetter and less shocking than outright closure, the government
\nshould make the most of the consolidation.<\/p>\n
Even though some analysts initially estimated that the merger
\nof the five banks, which had combined assets of Rp 28 trillion
\n(US$2.6 billion), would create a new bank with a CAR of 10-11
\npercent, significantly higher than the minimum 8 percent, the
\ngovernment should see to it that the capital standard of the new
\nbank is based on a strict asset classification.<\/p>\n
Most crucial in ensuring high asset quality is the application
\nof tough standards in loan classifications. The latest
\nexperiences with the closure of Unibank due to widespread bad
\nloans and the second recapitalization of Bank International
\nIndonesia that cost the government another Rp 2 trillion to Rp 3
\ntrillion, point to the unreliability of the asset classification
\nsystem applied in the banking industry.<\/p>\n
Lenient loan classifications are able to conceal weak assets
\nonly for a short time, and these low-quality assets are like a
\ntime bomb that could explode even at the slightest downward shift
\nin the economy. It is therefore most imperative to rid the new
\nbank entirely of doubtful and bad loans so that its non-
\nperforming loans will be cut to a maximum 5 percent, as mandated
\nby the end of next month.<\/p>\n
In fact, given the persistently high risks to be encountered
\nby banks in view of the weakening economy and the downward trend
\nin the rupiah exchange rate, the government, if necessary, should
\ninject additional capital to bring up its CAR to at least 12
\npercent, the level now applied in most Asian countries. Simply
\nachieving the minimum 8 percent CAR, particularly if the asset
\nclassification system was based on questionable standards, would
\nonly put the new bank on the verge of again falling below
\nacceptable standards. Moreover, a minimum capital standard will
\nnot make the bank attractive to private investors and this will
\ncertainly hinder its privatization, which should, after all, be
\nthe next compulsory stage of its consolidation.<\/p>\n
No less important is the kind of corporate image to be created
\nfor the new bank, and this involves the selection of the
\nsurviving entity from among the five banks. But since Bank Bali
\nand Bank Universal are the largest of the five, certainly one of
\nthem will eventually emerge as the surviving entity. That does
\nnot, however, mean that the highest CAR (Bank Bali with more than
\n15 percent) is the key prerequisite for becoming the merger
\nleader, especially in view of the tarnished image of Bank Bali
\nunder the so-called Bank Bali scandal in 1999 that derailed its
\nacquisition by Standard Chartered Bank.<\/p>\n
Since the corporate image of the new bank should appeal to its
\nmarket segment, that is small and medium-scale enterprises, Bank
\nUniversal, well known for its good corporate governance
\npractices, and good track record in that sector, could emerge as
\nthe surviving entity.<\/p>",
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"sponsor": "Okusi Associates",
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