Bank merger plans may cool off uneasy depositors

JAKARTA (JP): The plan of several private national banks to merge their operations is expected to persuade nervous depositors from pulling out their money from domestic private banks, bankers have said.

"It's cooling off," said an official at Bank Dagang Nasional Indonesia (BDNI) yesterday, referring to the previously high level of withdrawals at private national banks, as depositors fled to foreign or state banks following the meltdown of the rupiah and the November liquidation of 16 banks.

"That may be true. The bleeding may have subsided," said senior banker I Nyoman Moena. He said the public had started to realize that mergers could help create stronger banks.

However, the BDNI official said such positive reaction might only be temporary. "It may be a short-term response. Confidence will be back only if the rupiah stabilizes against the greenback."

Another private bank official who declined to be named agreed. He said if the rupiah continued to fall, many banks would technically go bankrupt even if they merged into an entity with combined equity capital of Rp 5 trillion.

"If the rupiah stays below 5,000 to the U.S. dollar, banks' overseas debt will wipe out even such a large capital base," he said.

Yesterday, Spot rupiah fell to another uncharted territory of 11,700 in Jakarta market during lunch break yesterday before recovering to close at 11,500/11,800, against the opening of 10,000/10,500 in the morning.

However, Moena said the decline in confidence did not directly affect the volatility of the rupiah.

"A bank's dollar liabilities must not surpass its dollar assets. Bank Indonesia (BI) is strict about this," he said.

He said to regain public confidence in domestic private banks there had to be a solid and professional management team installed at the new merged banks.

The flight to foreign banks started when banks provided up to a 70 percent annual time deposit rate in September during tight monetary conditions which were imposed to contain the free fall of the rupiah.

Medium domestic banks only set a maximum interest rate of about 50 percent at the time, much higher than 25 percent to 35 percent offered by large domestic banks.

Following the closure of the 16 banks, depositors panicked even more and placed their money into foreign and state banks.

No figures have been available on the amount of money that has been withdrawn from private national banks and deposited into foreign and state banks.

In December last year, Widigdo Sukarman, president director of state Bank Negara Indonesia (BNI), admitted the publicly listed bank received about 93,000 new depositors as a result of the bank liquidations.

BNI was one of the state banks appointed to help refund part of depositors' money in the liquidated banks.

State banks Bank Rakyat Indonesia (BRI) and Bank Dagang Negara (BDN), which were also involved in the refunding process, were also believed to enjoy the windfall. BRI refunded about Rp 4.5 trillion and BDN Rp 3.5 trillion.

"There's a strong likelihood the money was redeposited back into those banks," said an industry watcher. Even BNI's Wididgo said last year in a TV interview, "For safety reasons it's best for them to deposit the money at BNI."

BI's report said last year that between July and September an average of Rp 2 trillion entered foreign banks each month.

Following the official announcement of a merger plan by Bank Internasional Indonesia, BDNI and three smaller banks on Monday, several other banks have expressed similar plans.

Thomas Suyatno, head of the advisory board of the Federation of Private Domestic Banks, said at least 50 banks would merge into about 12 institutions by June.

Sources in the banking industry said many banks would have to be pressured by Bank Indonesia to merge.

Part of the reason is the liquidity problem as many depositors have lost confidence in domestic private banks and have held on to their money instead of depositing it in foreign or state banks.

The scarce liquidity has caused many banks to fail to meet the central bank's 5 percent reserve requirement and to service their clearing obligation.

"Since the central bank prefers not to let the banks go under during the current situation, BI has lent them special facilities," a BI source said.

"The incentive is attached to a merger proposal," he said. Top banking officials are currently in a marathon decision to formulate their merger schemes.

Meanwhile, the Finance Ministry yesterday issued a new tax incentive for banks to be merged. A 10 percent income tax on gain from the reevaluation of assets can be paid in a 5-year installment.

The new ruling was intended to help the merged banks in improving their capital. (08)