Bank mergers

In normal economic conditions there are four goals if a company or bank decides to merge with other companies or banks. First, to make the total assets bigger so as to enable them to compete with the established institution peers. Second, to increase their performance which will create a sound company or bank. Third, to expand their market share. And fourth, to diversify their market.

Taking into consideration that in the last 15 months Indonesia has experienced monetary and economic turmoil, the foregoing four goals cannot be considered valid anymore. The merger of national banks will only create banks with relatively small total assets, especially if we compare them with banks elsewhere in ASEAN. The second goal may be achieved though, but only temporarily. The merged banks which in the beginning will free from nonperforming loans (NPL), will fall ill by the end of 1999, as long as Indonesia is not free from the monetary and economic crisis as well as corruption, collusion and nepotism.

Neither will the third goal be achieved due to the extent of the NPL. The market share of the merged banks, that should have been sizable, will only fall to the pre-merger status quo level. As to the fourth goal, the addition of the market segments will still rely on each bank that merged. Consequently, if the merger is forced the outcome will be far from optimum and will only cut the number of existing banks.

In the past six months the Indonesian banking industry has suffered from severe bleeding. The bleeding in this context is the negative spread resulting from the high cost of money (plus or minus 35 percent) compared to the interest (plus or minus 20 percent).

If we see from the asset side, the income from interest has declined sharply as debtors in the real sector have generated only very small profits to pay the interest combined with the decrease of their purchasing power.

As for the liabilities side, banks should honor their obligations to depositors to pay interest of 65 percent annually (for one month deposits).

It can be concluded that mergers will be beneficial if the national economic conditions show signs of recovery. Therefore, the first priority should be given to the effort to bring down the deposit interest rate to a more reasonable level (20 percent to 24 percent per annum), strengthening the rupiah to Rp 7,500 to Rp 8,000 against the U.S. dollar and minimizing corruption, collusion and nepotism.

In these conditions the banking industry will be able to regain its positive spread and the real sector will also be able to generate sufficient profit which in turn will enable them to pay interest as they can produce goods at a reasonable price and the purchasing power of the people will gradually grow.

Based on a temporary prediction, it is expected that this condition will be reached within the second half of 2000, i.e. the stability of the politics will be back on track after the newly elected president is legalized by the People's Consultative Assembly and the new cabinet installed in early 2000.

SETYOBUDI TARIADI

Jakarta