Bank mergers easier on paper than done: Experts

Berni K. Moestafa, The Jakarta Post, Jakarta

The government's plan to push ahead with the consolidation of the banking industry was long overdue, an expert said, but warned its implementation must follow tight scrutiny to avoid ending up with fewer yet bigger sick banks.

Senior banker I Nyoman Moena said the government should be careful in selecting the banks it plans to merge.

"Bigger doesn't mean better," Moena said over the weekend.

He was commenting on the government's announcement last week to merge banks under the Indonesian Bank Restructuring Agency (IBRA).

Among IBRA's tasks is to restructure banks that were surrendered to the agency due to adverse financial conditions.

"If by merging the government only hopes to reduce the number of banks, that's fine. But I'd say it's not worth the cost of merging them," Moena went on.

According to him, a merger is almost certain to ensue mass layoffs. And based on the experience of merging the four state banks that today make up Bank Mandiri, additional costs may arise to recapitalize them, he added.

The government has injected recapitalization bonds into banks in exchange for their bad loans, which IBRA has taken over.

This has amounted to Rp 430 trillion (US$40.48 billion) in recapitalization bonds, with interest payments of some Rp 61 trillion to be made this year.

Criticism has begun to increase on the effectiveness of the expensive bailout, as many of the recapitalized banks remain sick.

Analysts said most banks now relied on interest payments from government bonds instead of investing in new loans.

This mainly rests on the reluctance of banks to channel new loans over fears they could turn sour again amid a still sluggish economy.

Separately, economist Arif Arryman of the Advisory Group in Economics, Industry and Trade (Econit) likened the merger of banks to a marriage that needed much consideration.

"They must fit together. It's not easy to find banks that share the same core business, provide synergy and whose employees can work together," Arif said.

But Arif added that consolidating the national banking sector was inevitable.

"We have too many banks given the size and dimension of our economy. Not only are they many, but they're also sick, lacking in capital and assets," Arif said.

In his estimation, the government could come up with a legal framework or a blueprint of the future national banking sector by the end of the year.

Economist Dradjad H. Wibowo said the merging process should not be forced on banks at too short a notice.

He said the lack of preparations during the merger process could turn into costly mistakes.

Dradjad said finalizing one or two mergers next year would send a strong signal of the government's commitment to reform the banking sector.

Data from Bank Indonesia shows that 149 banks were operating in Indonesia as of June 2001. This amount should come down to around 20 banks, comprising strong banks and those able to reach out to the regions, Dradjad added.