BI should do more to merge banks: Analysts

BI should do more to merge banks: Analysts

Urip Hudiono, The Jakarta Post, Jakarta

Although mergers between private banks are indeed up to the
owners, experts are saying that Bank Indonesia (BI) could -- and
should -- do more to encourage them, in order to create a
stronger banking industry consisting of financially fit banks
only.

Economist Aviliani from the Institute for the Development of
Economics and Finance (Indef) said that the central bank could
use information obtained from its regular monitoring of the
country's banks, to identify which banks have the need or
potential to merge.

"BI can then proactively facilitate meetings between the
banks' management and owners to discuss the possibility of a
merger," she told The Jakarta Post on Sunday.

Aviliani, however, said that BI need not provide incentives,
or loosen its capital adequacy ratio (CAR) and non-performing
loan (NPL) requirements for newly merged banks.

BI currently sets a minimum CAR of 8 percent and a maximum NPL
of 5 percent. CAR is the ratio between a bank's capital and
risk-weighted assets such as lending, while NPL is the ratio
between loans which have turned sour and total outstanding
credit. The higher the CAR and the lower the NPL, the healthier
the bank.

In some cases, a merger may result in a lower CAR or a higher
NPL.

In its grand design for the country's future banking industry,
dubbed the Indonesian Banking Blueprint (API), the central bank
has required all banks to have a minimum capital of Rp 100
billion (US$11.7 million) by the year 2010, which can be achieved
either by merging or other capital-raising measures.

Last week, BI's senior deputy governor, Anwar Nasution,
mentioned that several private and state-owned banks have
expressed to the central bank their intentions of merging.

Of the private banks, Anwar mentioned Bank CIC, Bank Pikko and
Bank Danpac as already having obtained permission two years ago
from the central bank to merge. A merger of the three banks would
result in a new bank with some Rp 9.24 trillion in assets.

Similarly speaking, Bank Negara Indonesia (BNI) analyst Ryan
Kiryanto said that the central bank should also identify and
encourage possibilities of mergers which not only created banks
with stronger capital, but also banks which would be better
players in the industry.

"Banks which are strong in corporate banking, for example,
could be paired up with banks which are strong in retail
banking," he said.

Contrary to Aviliani, however, Ryan said that BI should
provide certain incentives for newly merged banks to encourage
other banks to pair up as well.

"BI could grant a grace period for their CAR and NPL for a
year or so, until they finished restructuring their assets, debts
and credit, whose standings might have changed due to the
merger," he said.

Ryan also suggested that the central bank take forceful
measures in merging banks, particularly those it has monitored
and have inadequate capital and poor management.

"BI should not hesitate in ordering them to merge with other
banks or simply shut them down, if their owners cannot provide
more capital," he said.

Concerning the common reluctance of shareholders towards
mergers, which Aviliani also admitted, Ryan suggested that the
controlling stakeholder hold a special shareholder meeting to
decide on any corporate action according to its interest,
including that of a merger.

In the cases of Bank CIC, Bank Pikko and Bank Danpac, the
controlling shareholder, Chinkara Capital Limited, has failed on
numerous occasions to finalize the merger between the three banks
due to objections from other shareholders. The Bahama-based
investor currently has a 66.6 percent share of Bank Pikko, 54.9
percent of Bank Danpac and 16.7 percent of Bank CIC.