Bank mergers

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