Government not to force banks to merge, Prijadi says

JAKARTA (JP): Finance minister Prijadi Praptosuhardjo said on Thursday the government would not force domestic banks to merge to create a stronger industry but would instead let the market forces decide.

"We'll not force banks to merge ... The merger of banks will be based on market forces," Prijadi told a seminar on banking.

"I will study all the messages coming from the market," he added.

Prijadi did not elaborate.

The government via the Indonesian Bank Restructuring Agency (IBRA), a unit under the finance ministry, has the majority ownership in 11 large private banks after they had been recapitalized or nationalized.

The banks under IBRA includes the publicly listed Bank Central Asia, Bank Internasional Indonesia, Bank Lippo, Bank Universal, Bank Niaga, Bank Bali, Bank Danamon and nonlisted Bank Artha Media, Bank Prima Express and Bank Patriot.

The recapitalization program brings the banks' capital adequacy ratio (CAR) to more than four percent. CAR is the ratio between capital and risk weighed assets.

The banking authority has decided that all banks must have a minimum CAR level of eight percent by the end of next year.

But as the banking environment continue to remain unfavorable with a weakening currency and rising interest rates, some banks are facing difficulties meeting the tough CAR requirement. Merging weak banks with strong banks is one alternative to resolve the problem. The other alternative is finding strategic investors to provide fresh capital to weak banks.

Forcing the banks to merge would also be difficult, particularly if the founding shareholders resist.

Head of IBRA's bank restructuring unit Subowo Musa said the agency was still studying the various alternatives to help banks meet the new CAR requirement.

Subowo said merging the low CAR banks with higher CAR banks was one alternative but he also said the agency would not force the merger process.

"We have plans to merge the (IBRA) banks, but we'll not force it... We'll discuss it with the (founding) shareholders first," he said at the same seminar.

Bank Indonesia also earlier said that it would not force the merger of smaller banks under its supervision.

Bank Indonesia banking supervision senior official Siti Fadjriah said it was likely that most of the banks would be able to meet the eight percent CAR requirement by the end of next year and that only around 10 banks might not be able to meet the requirement.

Central bank and government officials have said that banks which do not meet the CAR requirement would not be recapitalized by the government.

Launching a second recapitalization program would reduce confidence in the banking industry.

The government has just completed its costly bank recapitalization and restructuring program by issuing more than Rp 640 trillion worth of bonds.

Indonesia currently has some 160 banks. The government plans to cut down the number of banks to 15 "core banks" and 20 "focus" banks" in three years time.

IBRA is preparing the blueprint for shrinking the country's large banking industry.

The government is also planning to end its blanket guarantee system in the banking sector, replacing it with a deposit insurance system by the end of 2004.

Under the blanket guarantee system, the government guarantees all obligations of closed banks. The program was launched in 1998 when confidence in the domestic banking industry was dwindling. (rei)