BI stratifies banking industry into 4 categories

JAKARTA (JP): Bank Indonesia has proposed that the country's overcrowded banking industry be regrouped into four strata in a bid to help restructure the ailing sector.

Bank Indonesia senior deputy governor Anwar Nasution said on Tuesday that commercial banks with strong capital, management, networks, skill and information technology should be developed to become the backbone of the country's banking sector that could compete in the international market.

"This group of banks must not only be able to compete at home but also overseas," Anwar said during a hearing with the House of Representatives commission IX for financial and development planning affairs.

He said that banks with a "sufficient level" of the above qualities could be grouped into a "national bank" category that would be expected to play the role of financial intermediary in the local market.

He said that banks with only limited capacity in terms of capital and the other qualities should be directed to operate only in provincial or district areas.

He said that the last category was a smaller group of banks that would operate only in rural areas.

Anwar said that reshaping the national banking industry was crucial to supporting the recovery of the country's economy.

He explained that the domestic banking industry had been plagued with structural problems including, a huge number of banks catering for the same market, most banks having moderate assets and capital, being insufficiently competitive, and other structural problems, such as weak human resources and IT technology.

"On the other hand, regulation and policy in the banking industry will be implemented uniformly," he said.

"Stratification opens the opportunity for banks to reposition themselves into the relevant category either via mergers, acquisitions, consolidation or divestment so that in the end the number of banks will be in line with the needs of the economy," Anwar said.

Although the number of banks dropped greatly from 238 before the financial crisis that started in the middle of 1997 to 149 currently, experts have said that the total number is still too high. Consolidating the banking sector has been one of the key items in the country's economic reform agenda.

Most of the country's private banks are under the supervision of the central bank, while 11 private banks are under the management of the Indonesian Bank Restructuring Agency (IBRA), a unit of the Ministry of Finance. The agency was given controlling ownership in the 11 banks following the government bailout in 1998 and 1999.

IBRA earlier said that it planned to develop four banks into "core banks", each having a large amount of capital and market, in a bid to restructure and consolidate the banking industry.

The agency said that two of its banks and two state-owned banks were qualified to become core banks that would have assets of more than Rp 100 trillion (US$9 billion) each, offering an extensive range of banking products and services, and equipped with solid banking technology.

Under the agency's proposal, the core banks could acquire smaller and weaker banks without having to face the risk of deterioration in their capital adequacy ratio (CAR), the ratio between their capital and risk-weighted assets.

IBRA also said that medium-sized banks with total assets of Rp 10 trillion to 50 trillion could be developed into special banks, focusing on a particular market niche.

The consolidation of the domestic banking industry could also help avoid the government from having to spend more in recapitalizing ailing banks.

The government has decided that all banks must be able to meet the minimum 8 percent CAR requirement by the end of this year. But as the banking environment continues to deteriorate, there has been concern that some banks might not be able to meet the CAR requirement and the government might be forced to recapitalize them once again.

The government has issued more than Rp 430 trillion worth of bonds to help finance the recapitalization of some 27 banks. The state budget covers the interest on the bonds.(rei)