Australian economist faults government's bank merger policy

Tantri Yuliandini, The Jakarta Post, Jakarta

An expert from the Australian National University (ANU) has criticized the government's bank restructuring strategy in which weak banks are being merged without first being offered for sale.

Ross H. McLeod, from the economic division of ANU's research school of Pacific and Asian Studies, said on Thursday that with a forced merger the government was not maximizing its revenues and not minimizing its costs.

"... by offering them (banks) for sale, the government would get the best price possible," McLeod said during a seminar organized by the Center for Strategic and International Studies.

He said that the government should allow market forces to decide whether to merge or liquidate the banks.

The government announced earlier this week that it would merge four banks under the control of the Indonesian Bank Restructuring Agency to avoid closure and is part of the overall banking sector restructuring strategy.

The legal merger of Bank Bali, Bank Universal, Bank Prima Ekspress, and Bank Patriot is expected to be completed this year. Only Bank Bali has a capital adequacy ratio (CAR) of more than 8 percent. The central bank has required banks to have a minimum CAR level of 8 percent by the end of this year or risk closure.

CAR is the ratio between capital and risk weighted-assets. The higher the CAR the healthier the bank.

Analysts said that the government would still have to recapitalize when the banks merged or merge them with a much stronger bank in order to survive Bank Indonesia's tough requirements.

However, issuing bonds to recapitalize the new merged banks will not be a popular policy as it would only create a new burden on tax payers.

The government has issued some Rp 430 trillion worth bonds to help finance the recapitalization of several banks including the four above. The government is supposed to eventually divest its ownership in the banks to help recover the bailout costs.

The bank merger measure is also seen as a further step for the government to consolidate the domestic banking industry by creating fewer but stronger banks.

McLeod disagreed with this logic.

"In reality smaller banks have performed better during the crisis than bigger banks," he said, citing that from the government's classification in 1999, some 73 banks that did not need government bailouts (the so-called A category banks) had an average market share of 0.07 percent each.

The other 84 banks in existence prior to the crisis were more than seven times larger, but have now all been either closed, nationalized or recapitalized with government funding.

"Where is the logic that Indonesia will be better with a number of larger banks?" McLeod asked.

Bank Danamon president Arwin Rasyid said that McLeod's theory was "pretty on paper" but was not applicable in practice.

He said that in the present conditions, even if the banks were put up for sale, there may not be any takers.

"How can we sell banks when all its bonds are at fixed rates ... nobody would be such a fool ... because if calculated at market value there would be a depreciation of the bonds' value by between 15 percent to 20 percent, which could erase all the capital in the recapitalized bank," Arwin said on the sidelines of the seminar.

He said that McLeod's analysis should not be taken at face value because his perspective was "very simplistic" whilst the actual conditions were "not as simple".

McLeod said that in the event of few or no buyers, the government could consider negative bids and pay "contractors" to clean up the mess.

"The government could say to the private sector, to other banks, this bank is a problem for me how much do I have to pay you to take this problem away from me? That's what a negative bid is," he said.

If the government could pay contractors to take over the bank and its liabilities at a lesser cost, then it should, he said.

"There are all these possibilities which just haven't been considered by the government ... there's no way the government could have known with certainty that (merger) was the best option without offering them for sale," McLeod added.