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.