Bank merger plans may cool off uneasy depositors

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been withdrawn from private national banks and deposited into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)