Govt has yet to decide on crucial bank merger issue

JAKARTA (JP): Minister of Finance Prijadi Praptosuhardjo said on Thursday that the government had not made any decision on whether to merge weak banks under its control despite a strong warning from the central bank that the banks must be merged before the end of this year or else face closure.

Prijadi said that bank mergers were not easy because of the complexity of banking problems.

"We don't have any plan yet (to merge banks), we're currently checking the condition of each bank ... We have appointed a consultant for this job," he told reporters.

"We don't have any target (for bank merger)," he added.

In addition to four state banks, the government, via the Indonesian Bank Restructuring Agency (IBRA), controls majority ownership in 11 private banks after the government financed the bulk of the cost to recapitalize the banks.

Bank Indonesia Governor Sjahril Sabirin recently said during a hearing session with the House of Representatives Commission IX for financial and development planning affairs that several banks under IBRA, a unit of the finance ministry, would not be able to meet the minimum 8 percent capital adequacy ratio (CAR) requirement by the end of this year.

Sjahril called on IBRA to merge the weak banks with banks that possess a higher CAR to avoid greater expenses incurred to the government.

But Prijadi said that the bank mergers could not be solely based on their CAR condition.

He said that other factors including liquidity and asset size must be considered.

"We will not merge two banks that can not look forward to good synergy," Prijadi said.

"Mergers are actually just one alternative to resolve (the banking) crisis," he added.

Analysts have also said that bank mergers in Indonesia would be difficult due to resistance from founding shareholders and the differing business culture of each bank.

The government, so far, has only managed to merge eight banks, and incorporated them into the publicly listed Bank Danamon, which is majority owned by IBRA. There are currently around 150 banks compared to 238 banks prior to the economic crisis that began in mid-1997.

Banks must meet the minimum 8 percent CAR requirement by the end of this year or risk closure.

The government can always step in to bail out banks which are unable to meet the CAR requirement by recapitalizing the banks again, though this would be politically unpopular because it would require spending more tax-payers money, and economically damaging because it will add an extra burden to the already strained state budget.

The government has injected around Rp 430 trillion worth of bonds to help finance the recapitalization of 27 banks. The state budget covers the interest rate of the bonds.

The current weakening in the exchange rate of the rupiah against the U.S. dollar and the increasing interest rate of Bank Indonesia SBI promissory notes have created problems to certain banks, including those under IBRA control.

The increase in SBI rate has left some banks vulnerable to the spread of negative interest rates, which is seen as one factor eroding banks' capital.(rei)